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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 28, 1999
REGISTRATION NO. 0-26355
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A
AMENDMENT NUMBER 3
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
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eUNIVERSE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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)
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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
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Item 1 Business.................................................... 1
General Development of Business............................. 1
Description of the Business................................. 2
Web Sites of eUniverse...................................... 4
Domain Names, Patents and Trademarks........................ 7
Operations and Technology................................... 7
Year 2000 Readiness Disclosure.............................. 9
Sales and Marketing......................................... 10
Competition................................................. 12
Employees................................................... 13
Facilities.................................................. 14
The Company's Strategy and Plans............................ 14
Recent and Pending Acquisitions............................. 17
Item 2 Financial Information....................................... 19
Selected Financial Information.............................. 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Liquidity and Capital Resources............................. 23
Results of Operations -- Year Ended March 31, 1999 vs.
1998...................................................... 24
Item 3 Properties.................................................. 27
Item 4 Security Ownership of Certain Beneficial Owners and
Management................................................ 27
Item 5 Directors and Executive Officers............................ 29
Item 6 Executive Compensation...................................... 32
Item 7 Certain Relationships and Related Transactions.............. 36
Item 8 Legal Proceedings........................................... 36
Item 9 Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters.................... 37
Item 10 Recent Sales of Unregistered Securities..................... 41
Item 11 Description of Securities................................... 43
Item 12 Indemnification of Directors and Officers................... 44
Item 13 Financial Statements........................................ 46
Item 14 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 46
Item 15 Financial Statements and Exhibits........................... 46
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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. The Reorganization was an arms
length transaction between unrelated parties.
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 with a fair market value of $7,275,000) to
acquire CD Universe, Inc. ('CD Universe'). This was an arms length transaction
between unrelated parties. 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:
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66.1% 33.9%
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Directors and Executive Officers of the Company as a Other Non-Affiliated
group (See 'Item 4. Security Ownership of Certain Shareholders
Beneficial Owners and Management' at page 26
herein)
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eUniverse, Inc.
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<CAPTION>
100% 100% 100% 100% 80%
---- ---- ---- ---- ---
<S> <C> <C> <C> <C>
Entertainment CD Case's Gamer's The Big
Universe, Inc. Universe, Inc. Ladder Inc. Alliance, Inc. Network, Inc.
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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. CD Universe, an acquired
subsidiary of the Company, has been in the music and video sales business since
April 1997. The Big Network, Inc., another acquired subsidiary of the Company,
has been in the interactive games business since early 1998. Neither the Company
nor any of its subsidiaries has ever 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. The Company has used 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.
Additionally, the Company plans to build an affiliate network of
third-party entertainment and retail Web sites which would license the LivePlace
community-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') as of June 30, 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
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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.16)
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 only begun to realize material advertising
revenues. 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 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 an 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 has a customer base of over 1.5 million registered members based on
its own records. This customer base may allow the Company to attract artists who
are interested in broadly distributing and promoting their music. The Company
currently creates its own proprietary content for
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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
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 that list 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 that 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
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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.
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 the assets of Green Willow International Corp.
('Green Willow') including MegaDVD.com (www.megadvd.com). MegaDVD.com, was
founded in June 1997 and had, at its acquisition, a customer base of 3,000
registered users. The acquisition of the assets of Green Willow provided the
Company with additional management resources and expertise necessary to
effectively promote its online video store. The domain name www.MegaDVD.com
takes customers to the Company's Video Universe online store.
We believe that the market for DVD products represent an excellent growth
opportunity and the addition of MegaDVD.com expands the Company's customer base
for video products and, augments the Company's management in this product
category. However, the Company's growth rate in DVD products may not match the
overall industry growth rate.
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
sells to customers a selection of single- and multi-player games and provides
links to the Company's other web sites, featuring the web sites 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 that receives over 1.2 million
unique monthly visitors and 20 million impressions per month. Gamer's Alliance
has aggregated a collection of sites covering several platforms, game genres and
topics. The Gamer's Alliance Network spans over fifty (50) sites, including
GA-Source, GA-Sports,
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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 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 role playing games 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
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 take advantage of 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
suite of multi-user, Web-based software modules. The core module of LiveSuite,
LivePlace, takes the form of a 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 through
a common user interface. LivePlace is designed to integrate into 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.
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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, 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
cduniverse.com
videouniverse.com
gamesuniverse.com
gagames.com
megadvd.com
casesladder.com
aoe2.net
cavenews.com
dknation.com
ga-rpg.com
gasource.com
Bignetwork.com
Play4prizes.com
Liveplace.com
Livestore.com
Livesuite.com
goldenbearsden.net
nfscheats.com
nfs4.com
wcw-meyhem.com
gp500.net
gasource.net
ga-source.com
ga-source.net
ga-strategy.com
highheatbaseball.com
messiahpress.com
metalgear.net
myth2.com
ionrpg.com
ga-sports.com
coursedepot.com
grandprix2.com
highheatbaseball.com
maddencentral.com
simracingnews.net
the-fastlane.com
nflfever.com
Live-store.com
Shop-Live.com
Shop-Live.net
online-alchemy.com
Gamelets.com
nhl2K.com
sanitybycain.com
voodoo3.net
wrestling-games.com
experience3d.com
frontofficefootball.com
frontofficefootball.net
frontofficefootball.org
3dracing.net
rallychamp.com
afflicted.net
ctimes.net
indy3d.net
ta-k.com
prey.net
war3.com
eqrealms.com
acrealms.com
mygamelobby.com
Big-network.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', 'Play4Prizes' and 'Gamer's Alliance' and
intent-to-use trademark applications for 'LiveSuite' and 'LivePlace' with the US
Patent and Trademark Office. The Company is in the process of filing service
mark applications for 'megaDVD' and 'funone.com' 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.
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 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
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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 system is flexible enough to
allow new product lines to be integrated, such as Games Universe which was 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 connected to the internet via a high speed connection.
CD Universe 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 commercially available, licensed technologies for
its website hosting and database functions. 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 customer queries with full
logging of requests ensuring top of the line customer service. Servers are
co-located with Exodus Communications, Inc. under an annual contract.
GAMER'S ALLIANCE
Gamer's Alliance utilizes commercially available, licensed technologies for
its website hosting and database functions. 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. The website servers are
co-located with Valuenet, its Internet service provider, which provides a high
speed internet connection without contract. Gamer's Alliance has developed
several proprietary web-based applications that increase the efficiency of
administering servers and web sites. This allows users to customize certain
Gamer's Alliance web-sites to only display news, previews, reviews, and
interviews, 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
Big Network 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 high speed, high capacity connection to the Internet
and full redundant security.
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The Big Network multiplayer gaming system and the Big Network LivePlace
instant messaging system are built on a proprietary Java client-server system.
The system is capable of supporting thousands of simultaneous users. Because the
system is written in Java, it is portable and can run on any machine supporting
Java, including Sun Solaris, most Windows platforms 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 computer equipment at its Wallingford
facility is Y2K compliant or has taken the steps to update any portions that
were not compliant. The Company is currently completing an audit of its
equipment at other locations to determine the extent to which they are
compliant. We expect the audit and all actions required to ensure compliancy to
be completed by early December 1999. 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 minor programming changes to
correct. All internally developed software at all divisions is believed to be
Year 2000 compliant, however a full audit is underway using commercially
available development tools that are designed to detect Year 2000 issues and
will be completed by early December 1999. We expect all of these systems to be
compliant before the Year 2000.
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 and video
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.
During December, we have sent letters to our major suppliers requesting
their status related to the Year 2000 issue. We have only received responses
related to our telephone and security systems. We will be telephonically
contacting those suppliers who have not responded to confirm their readiness for
Year 2000 during the final week of 1999. We have developed alternative sources
of supply for all lines of products sold. Additionally, we have determined that
we will not be placing orders for products on January 1, 2000 and will not until
January 3, 2000. Prior to placing our orders, we will be contacting those
suppliers to ensure their capability of fulfilling these orders.
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<PAGE>
eUniverse is also conducting an analysis to determine the extent to which
any non-information technology systems, e.g. any equipment with embedded chips,
are Year 2000 compliant. We have determined that non-information technology
systems will not be affected by the Year 2000 issue.
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.
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. These plans consist principally of
having teams of problem resolution staffers on call during non-working hours to
respond to site downtime issues or failures. 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 cash
resources on Year 2000 compliance. The Company does not expect to expend any
significant amount of cash 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 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 network of over 65,000 partner sites, allowing
them to easily become CD Universe Partners through its proprietary technology.
With this technology Partners use the LinkShare tools to easily establish the
links to CD Universe 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. Under the arrangement
CD Universe will share a small percentage of the revenues generated through
these new partners with Linkshare. The Company also plans to develop strategic
partnerships with other media partners that
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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 Mpath to act as exclusive agent for the sale and provision
of advertisements on all of the Company's Web sites. The Agreement calls for
MPath to make guaranteed advances to the Company in anticipation of projected
advertising revenues generated for the Company. This figure will increase if the
Company generates increased traffic. Actual revenues may vary from the advances
during the term. The agreement provides for Mpath to remit additional amounts
earned, but there is no provision for the Company to repay advances except in
the event of early termination by the Company. 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. Over the two years the Company will
receive $2,080,000 in advances.
The Company has done limited marketing through September 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 and Gamer's Alliance have minimal 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 plans a more extensive public relations and advertising program
in the coming three months in conjunction with the launch of a new corporate
website. The Company has contracted with Antenna Group, Inc., an Internet public
relations company, to help in creating new branding and promotional materials.
The 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. Under the one year contract with Antenna, the Company
will issue stock valued at $70,000 for the initial 3 months of services and make
cash payments of $270,000 for the final 9 months. The shares to be issued total
11,475 and the price per share is determined by the average closing price at the
time of signing.
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 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.
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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
MARCH 31, 1997 MARCH 31, 1998 MARCH 31, 1999
-------------- -------------- --------------
<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 primarily 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. Valley Media operates without a
long term contract other than periodic purchase orders. Purchases are made under
open credit terms. 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 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,
Amazon.com., Buy.com, Blockbuster.com and ColumbiaHouse.com. CD Universe is
substantially smaller than these online stores. In addition, the Company
competes with traditional music retailers, as well as megastores, mass
merchandisers, consumer electronics stores and music clubs.
With respect to online sales of video and DVD products, there are numerous
competitors. The larger competitors include those same music retailers listed
above and also include DVDExpress.com, Reel.com, DVDempire.com, Amazon.com and
Buy.com.
The primary competitive factors in providing music, video, DVD 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
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<PAGE>
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, DVD 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.
Within the Company's interactive segment, Case's Ladder was virtually alone
in the arena of providing player ranking and ladders. However, recently, other
game networks such as MSN Zone and Yahoo!, who previously provided online game
playing formats, have begun their own ranking services.
In the interactive entertainment field, competition among 'news and
content' gaming websites can be divided into two main categories: networks and
individual gaming sites. On the network level companies compete to build either
the largest, high quality, or thorough network in order generate the most
advertising revenue possible. On the individual gaming site front, Webmasters
attempt to create the most popular individual website (by unique visitors,
banner impressions, content, graphical quality, etc.) that covers a specific
segment of the computer/console gaming industry.
While numerous small gaming networks exist, those generating less than 2-3
million page views per month, there are mainly five large gaming networks that
indirectly compete with Gamer's Alliance, Inc. in some fashion: IGN, UGO, Game
Fan, Future Games Network ('FGN'), and Game Spy Industries. Based on estimations
on the amount of page impressions per month of the competition, Gamer's
Alliance, Inc. is significantly smaller than both UGO and IGN, similar in size
to Game Fan and Game Spy Industries, and larger than FGN.
Gamer's Alliance differs from the competition in its approach of developing
most new sites internally. This strategy allows Gamer's Alliance to enter new
gaming segments quickly with a high quality website.
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, Martin Hamilton, Vice President
and Chief Technical Officer, William R. Wagner, Chief Financial Officer, James
Haiduck, Vice President of Sales, Charles Beilman, Vice President, Special
Projects, 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
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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.
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's lease
with respect to this facility expires in June 30, 2002 and has no provisions for
renewal. 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 5,350
</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
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<PAGE>
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 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. For example, 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 and the
Company can increase revenues from advertising, sponsorships and promotions. 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 through its LivePlace applet,
newsletters and multiple community sites, helping them exploit the capabilities
of the Internet as an advertising medium. In addition, the Company plans to
expand its e-commerce initiatives through additional storefronts, such as the
addition of Games Universe, the introduction and promotion of interactive
entertainment software, 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.
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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 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 on 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
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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.
RECENT AND PENDING 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 with a fair market value of $10.00 per share. The
consideration paid was based upon negotiations between the parties to determine
the valuation of the shares 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). This was an arms length transaction between unrelated
parties. 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. These
options were cancelled on September 15, 1999 and repriced. New options totaling
510,000 were issued on September 15, 1999 at an exercise price of $6.00. The
options granted to Messrs. Westall, Hilts and Rusnak vest as follows: 1/12 of
the optioned shares vested on December 16, 1999, and 1/12 of the total number of
optioned shares will vest on the first day of February, June, September and
December thereafter until September 16, 2002.
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.
In an arms length transaction between unrelated parties, as of June 30,
1999, the Company acquired all of the outstanding shares of Gamer's Alliance,
Inc., a Missouri corporation based in Bridgeton, Missouri. The consideration
paid was based upon negotiations between the parties to determine the valuation
of the shares issued. 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 with a fair market value of $1,000,000. The Company may
make contingent payments to the sellers of up to an aggregate of 97,656
additional shares of the Company's common stock over a period of five calendar
quarters through June 30, 2000, 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.
17
<PAGE>
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') in exchange for 1,440,000 shares of
Common Stock at an exchange ratio of .4359937. The fair market value of the
Company's Common Stock issued to BNI shareholders was $8,820,000. The three
largest BNI shareholders, Stephen Sellers, Michael Sellers and John Hanke (the
'Majority Shareholders') entered into an Agreement and Plan of Reorganization
with the Company. The other participating BNI shareholders entered into Stock
Exchange Agreements with the Company (collectively, the 'Big Network
Agreement'). With the assistance of the Majority Shareholders, who have agreed
to cause the remaining BNI shareholders to participate in the transaction, the
Company intends to acquire the remaining 20% of BNI's outstanding shares over
the next six months. The transactions under the Big Network Agreements were arms
length transactions between unrelated parties. 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.
PROPOSED ACQUISITION OF FALCON VENTURES, INC.
On December 16, 1999, the Company entered into a letter of intent with
Take-Two Interactive Software, Inc. ('T2') and a wholly owned subsidiary of T2,
Falcon Ventures Corp. ('Falcon'). The letter of intent contemplates the
following transactions (collectively, the 'Transactions'):
1. Subject to the execution of a mutually agreeable stock purchase
agreement on or prior to January 31, 2000, T2 will purchase 400,000 shares
of Common Stock at a purchase price of $5.00 per share for an aggregate
purchase price of $2 million. The valuation of the shares of Common Stock
is based upon the market price of the Common Stock at the time of execution
of the letter agreement.
2. Subject to the execution of a mutually agreeable Agreement and Plan
of Reorganization on or prior to January 31, 2000, the Company will
purchase all of the outstanding shares of Falcon from T2 in exchange for
310,000 shares of Common Stock. The transaction is an arms length
transaction with a fair market value of $1,550,000.
3. Subject to the execution of a mutually agreeable cooperative
advertising plan agreement, the Company will grant to T2 an option to
purchase up to an additional 200,000 shares of Common Stock at an exercise
price of $5.00 per share exercisable until June 1, 2000.
The closing of the Transactions are conditioned upon completion of the
following no later than January 30, 2000:
(a) The Company must obtain the approval of the Transactions from 75%
of the number and value of its Preferred Shareholders;
(b) T2 must obtain the approval of its lender;
(c) execution of a definitive Stock Purchase Agreement by the parties
providing for the purchase of 400,000 shares of Common Stock by T2;
(d) execution of a definitive Agreement and Plan of Reorganization by
the parties providing for the acquisition of Falcon by the Company;
(e) execution of a cooperative advertising agreement by the parties;
(f) The Company must obtain clearance of all SEC comments on its Form
10 Registration Statement by January 30, 2000 and the Company must continue
to be listed on the OTC Electronic Bulletin Board;
(g) there will not have occurred a material adverse change in the
financial or business condition of the Company or Falcon;
(h) satisfactory completion of each party's due diligence
investigation of the other parties; and
(i) each one of the Transactions is contingent upon the closing of the
other one.
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, 1998 and
1997, and the Company's unaudited financial information presented as of
September 30, 1999. The results presented for the years ended March 31, 1999 and
1998 are those of CD Universe, Inc., the predecessor of eUniverse. The results
presented for the year ended March 31, 1997 are those of the CD Universe
division of Prime Software, Inc. The current year's unaudited results represent
the consolidated operations of eUniverse, including its predecessor, CD Universe
(from April 1); and the results of the acquired companies -- Case's Ladder (from
June 1), Gamer's Alliance (from July 1) and Big Network (from September 1) for
both the current quarter and the six months ended September 30, 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.
eUNIVERSE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999
---- ---- ----
CD UNIVERSE
<S> <C> <C> <C>
Revenue............................. $ 1,844,903 $2,181,259 $ 3,879,857
Cost of goods sold.................. 1,376,728 1,794,498 3,036,569
----------- ---------- -----------
Gross profit........................ 468,175 386,761 843,288
Operating expenses:
Marketing and sales............. 585,456 279,956 1,022,182
Product development............. 414,864 56,311 495,878
General and administrative...... 914,565 131,885 1,686,999
Amortization of goodwill and
other intangibles............. 567,120 42 889,839
Stock-based compensation........ 71,250 -- 83,125
----------- ---------- -----------
Total operating expenses............ 2,553,255 468,194 4,178,023
----------- ---------- -----------
Operating loss.............. $(2,085,080) $ (81,433) $(3,334,735)
----------- ---------- -----------
----------- ---------- -----------
Nonoperating income (expense)
Interest and dividend income.... $ 31,947 $ 201 $ 38,996
Interest expense................ (355) -- (355)
Loss allocated to minority
interest...................... 16,438 -- 16,438
Other........................... -- -- --
Income taxes.................... -- -- --
----------- ---------- -----------
Net income (loss)........... $(2,037,050) $ (81,232) $(3,279,656)
----------- ---------- -----------
----------- ---------- -----------
Basic income (loss) per common
share............................. $ (0.13) N/A $ (0.22)
----------- ---------- -----------
----------- ---------- -----------
Basic weighted average common shares
outstanding....................... 15,317,723 N/A 14,592,274
<CAPTION>
CD UNIVERSE
SIX MONTHS ENDED
------------- ------------------------------------------
SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31,
1998 1999 1998 1997
---- ---- ---- ----
CD UNIVERSE DIVISION
OF PRIME
SOFTWARE, INC.
<S> <C> <C> <C> <C>
Revenue............................. $4,299,444 $ 8,851,713 $5,685,211 $1,675,815
Cost of goods sold.................. 3,588,676 7,550,289 4,709,528 1,433,766
---------- ----------- ---------- ----------
Gross profit........................ 710,768 1,301,424 975,683 242,049
Operating expenses:
Marketing and sales............. 524,561 1,182,529 812,156 199,455
Product development............. 156,814 332,534 147,973 117,542
General and administrative...... 181,736 193,368 151,399 117,206
Amortization of goodwill and
other intangibles............. 84 170 170 --
Stock-based compensation........ -- -- -- --
---------- ----------- ---------- ----------
Total operating expenses............ 863,195 1,708,601 1,111,698 434,203
---------- ----------- ---------- ----------
Operating loss.............. $ (152,427) $ (407,177) $ (136,015) $ (192,154)
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Nonoperating income (expense)
Interest and dividend income.... $ 310 $ -- $ -- $ --
Interest expense................ -- -- -- --
Loss allocated to minority
interest...................... -- -- -- --
Other........................... -- 1,013 (15,797) --
Income taxes.................... -- -- -- --
---------- ----------- ---------- ----------
Net income (loss)........... $ (152,117) $ (406,164) $ (151,812) $ (192,154)
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Basic income (loss) per common
share............................. N/A $ (0.04) N/A N/A
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Basic weighted average common shares
outstanding....................... N/A 11,250,993 N/A N/A
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
CD UNIVERSE,
CD UNIVERSE DIVISION OF
--------------------- PRIME SOFTWARE
SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31,
1999 1999 1998 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash and cash equivalents.............. $ 2,294,045 $ 11,335 $ 267,214 $19,558
Working capital (deficit).............. 1,921,010 (783,204) (309,854) 25,586
Total assets........................... 29,674,830 (520,346) 494,164 32,086
Total shareholders' equity............. 28,676,509 556,976 (150,812) 32,086
</TABLE>
19
<PAGE>
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 that appear elsewhere in this report. The
results for both the current quarter and six months reflect the consolidated
operations of eUniverse, including CD Universe, the predecessor company, Case's
Ladder (from June 1), Gamer's Alliance (from July 1) and Big Network (from
September 1) along with results for the corporation established in connection
with the acquisitions of MCA and those identified above. Results for the
comparable periods in 1998 include only those of CD Universe. 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.
RESULTS OF OPERATIONS -- QUARTER AND SIX MONTHS ENDED SEPTEMBER 30, 1999 VS.
1998
NET SALES
Net product 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 service sales include membership, sponsorship and
advertising revenues.
<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
---- ---- -------- ---- ---- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales
Products................... $1,585 $2,181 (37%) $3,550 $4,299 (17%)
Services................... $ 260 $ -- 100% $ 330 $ -- 100%
</TABLE>
For the quarter ended September 30, 1999, product revenues declined as a
result of increased competition in the online music retailing markets and the
continued effect of a shutdown in one of the company's larger partners whose
customers had previously contributed approximately 5% of net sales. The
shutdowns at the company's partner have been resolved and CD Universe
relationships with this partner are stabilized. No further negative impact is
foreseen for either sales or results of operations due to this issue.
Additionally, the Company experienced higher than average downtime in its CD
Universe website availability along with other technical difficulties that made
it more difficult for customers to place orders on that site. We have contracted
with outside consultants and substantially changed site stability as well as
enhancing customers' ability to order online. We are continuing to make further
improvements in both of these areas. The decrease was partially offset by an
increase in advertising revenues, which had a positive effect on gross margins.
For the six months ended September 30, 1999, the 17% decline in product revenue
was the result of the current quarter performance and the earlier impact of a
shutdown in one of the Company's larger partners that reduced first quarter
sales by 4%. Net sales attributable to acquisitions include all sales of
services. Advertising and membership revenues from our acquisitions amounted to
$260 thousand during the quarter and $330 thousand for the six months, compared
to no revenues for the prior year. We expect that advertising revenues will
continue to grow as a result of our emphasis in this area as well as realizing
the full period effect of the acquisitions to date.
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.
20
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
---- ---- -------- ---- ---- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gross Profit
Products................. $222 $387 (43%) $535 $711 (25%)
Percentage of sales...... 14.0% 17.7% 15.1% 16.5%
Services................. $246 $-- 100% $308 $-- 100%
Percentage of sales...... 94.6% -- % 93.3% -- %
</TABLE>
For the quarter ended September 30, 1999, combined gross profit increased
as a percentage of net sales to 25% from 18% and in absolute dollars to $468
thousand from $387 thousand over the same periods in 1998, reflecting a change
in the mix of revenues to include advertising and membership revenues as noted
above. Gross margins on product sales declined during the current quarter and
year-to-date as a result of increased promotional discounts provided to
customers. Gross margin percentages on advertising revenues of over 90% are
substantially higher than those of the product revenues of 14-17%. The Company
over time intends to expand its product sales 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. Furthermore, the competitive and promotional factors sited above are
expected to have a continuing impact. However, the Company over time will
continue to focus on increasing advertising revenue particularly for Case's
Ladder, Gamer's Alliance and Big Network and thus improve margins.
MARKETING AND SALES
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.
<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
---- ---- -------- ---- ---- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Marketing and Sales.......... $585 $280 109% $1,022 $525 95%
Percentage of sales.......... 31.7% 12.8% 26.3% 12.2%
</TABLE>
Marketing and sales expenses increased during the quarter ended September
30, 1999 due to factors principally related to the acquisitions during the
current year. For the three months, costs in the acquired companies accounted
for $240 thousand of the $305 thousand increase. Payroll increases were $125
thousand and advertising and promotion $107 thousand. Comparatively, costs in
the product segment increased by $25 thousand in payroll and $40 thousand in
processing and fulfillment related costs. For the six months, costs in the
acquired units accounted for $325 thousand of the $497 thousand increase.
Payroll was $150 thousand and advertising and promotion $145 thousand. In
e-commerce there were increases of $65 thousand for payroll and $70 thousand in
fees. Other increases of $67 thousand consisted of minor increases in several
marketing and sales categories. The Company intends to continue 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.
21
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
---- ---- -------- ---- ---- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Product Development........... $415 $ 56 641% $496 $157 216%
Percentage of sales........... 22.5% 2.6% 12.8% 3.6%
</TABLE>
Product development costs increased as a result of increased payroll and
related expense due to inclusion of the results for Case's Ladder, Gamer's
Alliance and Big Network. The $359 thousand increase for the quarter came from
$50 thousand in payroll related costs related to the product segment and the
remainder from increases related to the acquisitions and corporate site
development and integration. Additional payroll in acquisitions added $150
thousand, internet fees $47 thousand and $90 thousand in outside services and
consultants. For the six months cost increase factors were the same as for the
quarter except outside consulting variance which was reduced to $130 thousand.
The company intends to create a tighter structure amongst its sites and design
new sites that will drive increased expenses.
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>
QUARTER ENDED SIX-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
---- ---- -------- ---- ---- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
General and administrative... $915 $132 593% $1,687 $182 827%
Percentage of sales.......... 49.6% 6.1% 43.5% 4.2%
</TABLE>
Increases in G&A costs are primarily attributable to increased
infrastructure costs associated with the Company's expansion efforts. These
include payroll $220 thousand, accounting and legal services $213 thousand and
professional consulting services $218 thousand and other increases of $132
thousand consisted of office supplies and support expense categories. Similarly
for the six months increases included $475 thousand in payroll, $392 thousand in
accounting and legal and $492 thousand in professional services and other
increases of $146 thousand consisted of office supplies and support expense
categories. The company expects G&A costs to continue to increase commensurate
with its expansion plans.
AMORTIZATION OF INTANGIBLES
<TABLE>
<CAPTION>
SIX-MONTHS
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Amortization of intangibles.................. $567 $ -- $890 $ --
</TABLE>
The current period charges reflect the acquisitions of CD Universe, Case's
Ladder, Gamer's Alliance and Big Network, while the results for 1998 reflect a
nominal amount related to CD Universe startup costs. The Company expects M&A
Costs to increase in the third quarter of 1999 and beyond, because the Company
will record a full quarter of amortization expense relating to the acquisitions
of Big Network amounting to $220 thousand. It is likely that the Company will
continue to expand its business through acquisitions and investments, which
would cause Amortization Costs to increase.
22
<PAGE>
STOCK-BASED COMPENSATION
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.
<TABLE>
<CAPTION>
SIX-MONTHS
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Stock-based Compensation..................... $ 71 $ -- $ 83 $ --
</TABLE>
The expenses for the quarter and six months are attributable to the 1999
Stock Awards Plan under which 25,000 shares of restricted common stock were
issued to CD Universe employees that are being amortized over the vesting period
that ends April 14, 2000.
NON-OPERATING INCOME AND (EXPENSE)
<TABLE>
<CAPTION>
SIX-MONTHS
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income.............................. $32 $ -- $39 $ --
Minority interest............................ $16 $ -- $16 $ --
</TABLE>
Interest income increased due to higher cash balances resulting from the
Company's financing activities, principally the April 1999 issuance of $6.8
million in 6% Convertible Preferred Stock ('Preferred) and $0.9 million in
common stock. Minority interest represents the 20% minority shareholders of Big
Network's share of their losses for the period, limited by their investment.
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 INCOME
<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Net (Loss).............. $(2,037) $ (81) $(3,280) $ (152)
Percentage of sales..... (112.6%) (2.9%) (91.4%) (3.5%)
</TABLE>
Net Income/(Loss) attributable to acquisitions include ($582) thousand for
the quarter ended 9/30/99 and nothing for the quarter ended 9/30/98. Net
Income/(Loss) attributable to acquisitions include ($688) thousand for the six
months ended 9/30/99 and nothing for the six months ended 9/30/98.
LIQUIDITY AND CAPITAL RESOURCES
Since April 14, 1999, the Company has satisfied its cash requirements
primarily through private placements of equity securities (including the $6.3
million raised in April of 1999 in exchange of shares of the Company's Series A
6% Convertible Preferred Stock) and cash flow from sales of music CDs and
videos.
23
<PAGE>
Net cash used in operating activities was $2.79 million and $186 thousand
for the six-month periods ended September 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, partially
offset by non-cash charges for depreciation and amortization and merger and
acquisition related costs.
Net cash used in investing activities was $1.2 million and $25.7 thousand
for the six-month periods ended September 30, 1999 and 1998, respectively. In
the six-months, $0.4 million was used for acquisitions, consisting of $1.9
million in cash paid for the CD Universe acquisition, less $1.0 million received
from acquisitions. The remainder was used for purchases of fixed assets.
Investments for 1998 consisted principally of fixed asset purchases.
Net cash provided by financing activities of $6.3 million for the six-month
period ended September 30, 1999 resulted from proceeds relating to the sale of
1.8 million shares of Preferred for $6.3 million, net of financing costs and
$858,447 from sale of 897,835 shares of common stock. See 'Item 10. Recent Sales
of Unregistered Securities.'
As of September 30, 1999, the Company's principal commitments include
obligations for leases amounting to about $180 thousand, annually. See 'Item 1.
Business -- Facilities' on page of the Second Amendment. Continued
acquisitions and investments may also require future capital expenditures.
The Company believes that cash balances of $2.3 million at September 30,
1999 will be sufficient to meet its anticipated cash needs for at least the next
6 months. After the next 6 months, we anticipate that we will need to raise
additional funds to meet our operating needs and the company is in current
discussions with an investment banker, Gerard Klauer Mattison, in connection
with such plans. 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.
RESULTS OF OPERATIONS -- YEAR ENDED MARCH 31, 1999 VS. 1998
For the years ended March 31, 1999 and 1998, the results discussed are
those solely of CD Universe, the predecessor company.
Net Sales
Net sales include the selling price of music and video products sold by the
Company, net of returns, as well as outbound shipping and handling charges.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1999 1998 % CHANGE
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net product sales......................... $8,852 $5,685 56%
</TABLE>
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. At
March 31, 1999 the Company's cumulative customer accounts reached 266 thousand,
compared with 128 thousand at March 31, 1998.
24
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1999 1998 % CHANGE
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross Profit............................... $1,301 $976 33%
Gross Margin............................... 14.7% 17.2%
</TABLE>
For the year ended March 31, 1999, gross profit increased in absolute
dollars but decreased as a percentage of net sales over the same periods in
1998, reflecting a change in pricing needed to remain competitive.
Marketing and Sales
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.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1999 1998 % CHANGE
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Marketing and Sales........................ $1,183 $812 46%
Percentage of sales........................ 13.3% 14.3%
</TABLE>
Marketing and sales expenses increased during the year ended March 31, 1999
due to several factors. Approximately $200 were directly related to costs of
fulfilling customer demand and fees for credit card processing, that vary
directly with product sales. The remaining $170 thousand was due in equal parts
to increases in the Company's advertising and promotional expenditures and in
payroll related costs.
Product Development
Product development expenses consist of payroll and related expenses for
developing and maintaining the Company's Web sites and supporting technology.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1999 1998 % CHANGE
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Product development expense.................. $333 $148 125%
Percentage of sales.......................... 3.8% 2.6%
</TABLE>
Product development costs increased commensurate with the increased sales
activity which required continuous site development. Increases of $40 thousand
occurred in payroll related expense and $90 thousand in contracted services for
programming work. Other increases of $55 thousand consisted of minor increases
in several product development expense categories such as internet fees,
software and supplies.
25
<PAGE>
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................... $193 $151 28%
Percentage of sales.......................... 2.1% 2.6%
</TABLE>
Increases in G&A costs were attributable to increased payroll-related costs
associated with the Company's expansion.
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 Income
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
------------------------------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net Loss.................................. $(406) $(152) 167%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES -- MARCH 31, 1999 VS. 1998
For the years ended March 31, 1999 and 1998 net cash used in operating
activities was $10 thousand compared to cash generated of $393 thousand,
respectively. In 1999 net operating cash flows were primarily attributable to
net losses offset by increases in accounts payable due to growth in product
sales. In 1999, the cash generated was due to growth in accounts payable of $535
thousand, which offset operating losses.
Net cash used in investing activities was $114 thousand and $236 thousand
for the years ended March 31, 1999 and 1998, respectively, and consisted of
purchases of fixed assets.
Net cash used by financing activities of $132 thousand for the year ended
March 31, 1999 resulted from repayments of loans from affiliates, the source of
the financing cash for the prior year.
As of March 31, 1999, the Company's principal commitments included
obligations for leases amounting to about $117 thousand, annually for the next 3
years and a note payable to an officer of $105 thousand.
At March 31, 1999 the Company had cash resources of $11 thousand as
compared to $267 thousand at the same point in 1998. The Company was under
agreement to be acquired by Entertainment Universe at March 31, 1999, which was
consummated on April 14, 1999.
RESULTS OF OPERATIONS -- YEAR ENDED MARCH 31, 1998 VS. 1997
The following discussion compares the results of CD Universe, Inc for the
year ended March 31, 1998 to those of CD Universe, a division of Prime Software,
Inc. for the year ended March 31, 1997, the predecessor.
26
<PAGE>
REVENUES
Revenues for the years ended March 31, 1998 and 1997 were $5.7 million and
1.7 million. Revenues for both periods were derived solely from online sales of
music CD's and tapes. Sales growth of 339% came as a result of general growth
and acceptance of online purchases of merchandise over the Internet.
GROSS PROFIT
Gross profit was $976 thousand and $242 thousand for the two years,
respectively. Growth in profit was due principally to the growth in product
sales which accounted for 80% of the growth, however, margins expanded to 17.2%
from 14.4% as the increased volume allowed the company to purchase products more
effectively. This contributed an additional $158 thousand to profits.
OPERATING EXPENSES
The Company did not separately account for operating expenses in Marketing,
Product Development and Administration, so a meaningful comparison is not
possible. Operating expenses grew to $1,112 thousand in 1998 from $434 thousand
in 1997, an increase of 256%. Fulfillment and database costs which vary directly
with product sales grew by $325 thousand. Partner commissions increased by $65
thousand. Other payroll and related expense grew by $185 thousand, and all other
office expenses increased $85 thousand.
NET INCOME
Net losses improved to $152 thousand in 1998 from $192 in 1997 principally
from the growth in gross margins.
ITEM 3 -- PROPERTIES
See 'Item 1. Business -- Facilities' above.
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>
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1) OWNED(2)
------------------------ -------- --------
<S> <C> <C>
Brad D. Greenspan.......................................... 7,841,000 48.2%
Charles Beilman............................................ 2,425,000 14.9%
Joseph Abrams(3)........................................... 1,581,594(3) 9.7%
Leland N. Silvas........................................... 425,001(4) 2.6%
William R. Wagner.......................................... 16,666(5) *
James Haiduck.............................................. 9,000(6) *
John V. Hanke.............................................. 242,820 1.5%
Stephen D. Sellers......................................... 297,180 1.8%
Gordon E. Landies.......................................... 127,939(7) *
Directors and Executive Officers as a Group................ 11,384,606 69.9%
</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
(footnotes continued on next page)
27
<PAGE>
(footnotes continued from previous page)
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.
28
<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 Vice President, Special Projects and Director
William R. Wagner.................... 51 Vice President, Chief Financial Officer and
Secretary
James Haiduck........................ 36 Vice President, Sales
Martin Hamilton...................... 36 Vice President and Chief Technical Officer
John V. Hanke........................ 32 Vice President, Marketing
Stephen D. Sellers................... 39 Vice President, Business Affairs
Gordon E. Landies.................... 43 Director
Dan Mosher........................... 26 Director
</TABLE>
Brad D. Greenspan, Chairman of the Board of Directors of the Company since
April 14, 1999, at the founding of Entertainment Universe, Inc. In 1997, Mr.
Greenspan founded Palisades Capital, Inc., a private Beverly Hills merchant
bank, and served as its President until March 1999. Mr. Greenspan received a BA
degree in political science/business from UCLA in 1997.
Leland N. Silvas, President and Chief Executive Officer of the company
since April 14, 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.
Martin Hamilton, Vice President and Chief Technical Officer, joined
eUniverse, Inc. on October 25, 1999. Mr. Hamilton was President and Founder of
Soft Tech Data Systems, Inc., a Chicago based application and consulting company
with international client based endeavors which he founded in 1987. During this
time Mr. Hamilton also served as Director of The Orbis Broadcast Group. Soft
Tech Data Systems, Inc. also provided in-depth, broad-based technical consulting
to blue chip companies such as Ross Roy Communications, Comerica Bank and Pepsi
Cola. Prior to Mr. Hamilton's tenure with Soft Tech Data Systems, Inc. he was
responsible for spearheading the Australian Government's Electronic Audit
division. Mr. Hamilton brings a wealth of Internet Technical experience to
eUniverse, Inc. Mr. Hamilton is charged with the responsibility of the strategic
planning and development of all technical areas of the eUniverse, Inc. sites.
Charles Beilman, Vice President, Special Projects and Director of the
Company since October 25, 1999. Between April 14, 1999 and October 25, 1999, Mr.
Beilman was Chief Operating Officer and Chief Technical Officer of the Company's
acquired subsidiary, CD Universe, Inc. 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 14, 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 1, 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
29
<PAGE>
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 1, 1999. Prior to joining eUniverse with the
acquisition of the Big Network, Mr. Sellers was CEO of The Big Network which he
co-founded in December 1997. Previous to that, he was co-founder and CEO of
Archetype Interactive in January 1995 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 in May 1996, he
worked as head of Internet Business Development until August 1997. He has
advised startup businesses in a variety of technology markets. He holds an MBA
from the University of California, Berkeley and a BA from Stanford University.
John V. Hanke, Vice President of Marketing and Site Integration since
September 1, 1999. Prior to joining eUniverse with the acquisition of The Big
Network, Mr. Hanke was co-founder (in December 1997), President and COO of The
Big Network. Mr. Hanke has extensive experience in the design and development of
Internet projects. After joining in December 1995, 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 in May 1996, 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, Berkeley and a BA from the University of Texas,
Austin.
Gordon Landies, Director since July 27, 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.
Dan Mosher, Director since December 7, 1999. Dan Mosher has been the
Manager of Business Development for Webvan Group, Inc. since May 1999. From
January 1998 to May 1999, Mr. Mosher served in the Merger and Acquisitions
Department of the Morgan Stanley Dean Witter Technology Group, an investment
banking firm. From February 1996 to January 1998, Mr. Mosher held several
positions in the Corporate Finance Group of Arthur Andersen, focused on
technology private placements. Mr. Mosher holds a B.S. in Business
Administration from the University of California at Berkeley.
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.
The Audit Committee consists of Messrs. Gordon Landies and Dan Mosher. Both
Mr. Landies and Mr. Mosher are independent directors on our Board of Directors.
The Audit Committee oversees the Company's financial reporting process and
internal controls.
The Executive Committee consists of Messrs. Greenspan and Silvas. The
Executive Committee has authority to exercise all of the powers of the Board of
Directors during the time periods between Board meetings, provided that it shall
not have the power to do any of the following:
1. amend or repeal any resolution of the Board of Directors that by
its terms shall not be subject to amendment or repeal by the Executive
Committee;
30
<PAGE>
2. take any action that, by the statutes of the Company's state of
incorporation governing the Company, may be taken only by the Board of
Directors or the shareholders of the Company;
3. take any action to amend, alter or repeal the Certificate of
Incorporation or By-laws of the Company, as amended;
4. elect any person to fill vacancies on the Board of Directors or
any Committee thereof or remove any person from the same;
5. fix the compensation of any Director for services in any capacity;
6. adopt a plan of merger or adopt a plan of consolidation with
another entity or entities;
7. recommend to the shareholders of the Company the sale, lease,
exchange, mortgage, pledge or other disposition of all or substantially all
of the property or assets of the Company or a voluntary dissolution of the
Company or a revocation thereof;
8. authorize any transaction involving over $3 million of the
Company's revenues;
9. authorize any purchase over $1 million; or
10. take any action prohibited by resolution of the Board of
Directors.
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 63,750 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.
AGREEMENTS CONCERNING ELECTION OF DIRECTOR
In connection with the purchase by E. P. Opportunity Fund, LLC ('E. P.') of
235,000 shares 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 provides that Mr. Greenspan, a majority shareholder of
EUI, will vote his shares for the election of the person nominated by E.P. to
EUI's Board of Directors, giving 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.
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 provides that
Mr. Greenspan and Mr. Beilman, who collectively hold 58.9% of the outstanding
Common Stock, will vote their shares for the election of either Mr. Sellers or
Mr. Hanke, as determined by Messrs. Sellers and Hanke, to the Company's Board of
Directors, giving Messrs. Sellers and Hanke the right to select one of them to
be a Director of the Company during the period that
31
<PAGE>
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. As of April 14, 1999, the Company entered
into an employment agreement with Leland Silvas, Chief Executive Officer and
President. 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 Company may terminate Mr. Silvas'
employment for cause and upon death or disability. Mr. Silvas may terminate his
employment with the Company upon 45 days prior written notice in the event (1)
any duty assigned to Mr. Silvas is inconsistent with his positions and such
assignment continues for ten days; (2) the Company fails to pay for a period of
ten days after the due date any compensation owed to Mr. Silvas; and (3) of any
purported termination by the Company except for cause, death or disability. 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.
The Company issued to Mr. Silvas 200,000 shares of Common Stock of the Company
as partial consideration for entering into a letter agreement with Palisades
Capital, Inc. as of January 21, 1999 in which he agreed to become CEO of the
Company following the acquisition of CD Universe, Inc. and in consideration of
consulting services performed on behalf of the Company prior to the date of the
CD Universe acquisition. The letter agreement was subsequently superceded by the
employment agreement. As additional consideration for his employment, commitment
and consulting services, 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 vest and become exercisable as follows: 91,667 of the options are
immediately vested and fully exercisable on April 14, 1999 and 66,667 options
vest and become exercisable on the 22nd of each July, October, January and April
thereafter through January 22, 2002 or until Mr. Silvas is no longer employed by
the Company. Upon a 50% or greater change in ownership control in the Company or
a disposition of all or substantially all of the assets of the Company, all of
the unvested stock options granted to Mr. Silvas vest immediately. As a member
of the Compensation Committee, Mr. Silvas participates in reviewing his annual
salary and setting his bonus, subject to the review and approval of the Board of
Directors.
As of April 5, 1999, EUI entered into an employment agreement with William
R. Wagner, employing him as Chief Financial Officer of EUI. As of April 14,
1999, the Board of Directors of the Company appointed Mr. Wagner as Vice
President, Chief Financial Officer and Secretary of the Company. Mr. Wagner does
not have a written employment agreement with the Company. 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. As additional consideration for his
employment, Mr. Wagner was granted options to purchase 100,000 shares of Common
Stock at an exercise price of $3.00 under the Stock Option Plan. These options
vest in 1/12 increments every three months beginning July 5, 1999 until the
earlier of April 6, 2002 or until Mr. Wagner is no longer employed by the
Company. On June 15, 1999, Mr. Wagner was granted options to purchase 50,000
shares at an exercise price of $9.50 per share. These options were canceled and
repriced on September 15, 1999. On September 15, 1999 Mr. Wagner was granted
options to purchase 42,500 shares of Common Stock at an exercise price of $6.00
under the Stock Option Plan, which vest and become exercisable as follows:
14,167 one year from September 15, 1999 and 1/12 of the remaining option shares
each quarter thereafter until all 42,500 option shares are vested or until Mr.
Wagner is no longer employed by the Company. Upon a 50% or greater change in
ownership control in the Company or a disposition of all or substantially all of
the assets of the Company, all of the unvested stock options granted to Mr.
Wagner vest immediately. On an annual basis, the Company reviews Mr. Wagner's
performance and other relevant factors relating to salary, and at the time of
such review, his salary may be increased as determined in the sole discretion of
the Compensation Committee of the Board of Directors of the Company.
The Company's acquired subsidiary, CD Universe, Inc., entered into an
employment contract with Mr. Beilman as of October 1, 1998 for an initial period
of three years, subject to termination on ten days
32
<PAGE>
notice, and stipulates an annual compensation of $135,000. On June 15, 1999, Mr.
Beilman was granted options to purchase 75,000 shares at an exercise price of
$9.50 per share. These options were canceled and repriced on September 15, 1999.
On September 15, 1999 Mr. Beilman was granted options to purchase 63,750 shares
of common stock at an exercise price of $6.00 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 170,000 shares of common stock at an exercise price of $6.00 per
share. These options vest as follows: 16,667 vest on the last day of each
January, April, July and October, commencing on October 31, 1999 and continuing
until the first to occur of (i) all 200,000 of said options have vested, or (ii)
Mr. Haiduck is no longer employed by the Company. Upon a 50% or greater change
in ownership control in the Company or a disposition of all or substantially all
of the assets of the Company, all of the unvested stock options granted to Mr.
Haiduck vest immediately. Mr. Haiduck is an at-will employee and, on an annual
basis, the Company reviews Mr. Haiduck's performance and other relevant factors
relating to salary, and at the time of such review, his salary may be increased
as determined in the sole discretion of the Compensation Committee of the Board
of Directors of the Company. Mr. Haiduck's employment contract may be terminated
by either party upon 30 days written notice.
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. Each contract is 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 255,000 shares
at an exercise price of $6.00. These vest in 1/12 increments every three months
beginning December 16, 1999. On an annual basis, the Company reviews each of Mr.
Hanke's and Mr. Sellers' performance and other relevant factors relating to
salary, and at the time of such review, each of Mr. Hanke's and Mr. Sellers'
salary may be increased as determined in the sole discretion of the Compensation
Committee of the Board of Directors of the Company. The Company may terminate
either Mr. Hanke's or Mr. Sellers' employment for cause and upon death or
disability. If the Company terminates either Mr. Hanke or Mr. Sellers other than
for cause, the terminated executive shall be entitled to receive the remainder
of his compensation due under his employment agreement for its initial one-year
term. However, if a registration statement registering any shares of Common
Stock owned by the terminated executive has been filed with the Securities and
Exchange Commission, and such registration statement has become effective prior
to the termination of the executive by the Company without cause, such
terminated executive shall not receive any remaining compensation.
The table below summarizes the compensation to be paid pursuant to
agreements for services to be rendered to eUniverse in all capacities for the
fiscal year ending March 31, 2000. These executives are referred to as the Named
Executive Officers elsewhere in this Prospectus.
33
<PAGE>
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------------------
AWARDS PAYOUTS
------------------------ -------
OTHER ANNUAL RESTRICTED SECURITIES LTIP ALL OTHER
FISCAL SALARY BONUS COMPENSATION STOCK AWARD UNDERLYING PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) OPTIONS # ($) ($)
- --------------------------- ---- --- --- --- --- --------- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brad D. Greenspan .......... 2000 -- 50,000(4) -- -- -- --
Chairman of the Board
Leland Silvas .............. 2000 200,000 (1) 6,307(2) -- 291,668(3) -- --
President, Chief Executive
Officer and Director
Charles Beilman(5) ......... 2000 135,000 (1) -- -- -- -- --
Vice President 1999 77,250 -- 91,711 -- -- -- --
Special Projects and
Director
William R. Wagner .......... 2000 125,000 (1) -- -- 24,999(3) -- --
Chief Financial Officer
Martin Hamilton ............ 2000 100,000 (1)
Vice President
and Chief Technical
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 after December 27, 1999. The same options are shown
in the following table in their vested and unvested entirety.
Note 4: Mr. Greenspan receives non-employee compensation as a consultant to
the Company.
Note 5: The compensation paid to Mr. Beilman in 1999 was paid by CD
Universe to Mr. Beilman in his capacity as Chief Executive Officer and President
of CD Universe. The Company will pay the same compensation to Mr. Beilman in his
capacity as Vice President, Special Projects.
The following table summarizes the option grants to the Named Executive
Officers in the current fiscal year:
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL RATES
NUMBER OF GRANTED TO OF STOCK PRICE APPRECIATION
SECURITIES EMPLOYEES EXERCISE FOR OPTION TERM
UNDERLYING IN FISCAL BASE PRICE EXPIRATION ---------------------------
NAME AND PRINCIPAL POSITION OPTIONS YEAR $/SHARE DATE 5% 10%
--------------------------- ------- ---- ------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Brad D. Greenspan ..................... 340,000(1) 14.0% $6.00 9/15/09 $ 3,502,000 $ 6,766,000
Chairman of the Board of Directors
Leland Silvas ......................... 825,000(2) 28.8% $3.00 4/22/09 $10,972,500 $18,892,500
President, Chief Executive Officer
and Director
Charles Beilman ....................... 63,750(1) 2.6% $6.00 9/15/09 $ 656,625 $ 1,268,625
Vice President
Special Projects, Chief Technical
Officer
and Director
William R. Wagner ..................... 142,500(2) 5.2% $3.00 9/15/09 $ 1,867,750 $ 3,135,750
Vice President, to
Chief Financial Officer and Secretary $6.00
Martin Hamilton .......................
Vice President and
Chief Technical Officer
James Haiduck ......................... 170,000(2) 7.0% $6.00 8/01/09 $ 1,751,000 $ 3,383,000
Vice President Sales
</TABLE>
(table continued on next page)
34
<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL RATES
NUMBER OF GRANTED TO OF STOCK PRICE APPRECIATION
SECURITIES EMPLOYEES EXERCISE FOR OPTION TERM
UNDERLYING IN FISCAL BASE PRICE EXPIRATION ---------------------------
NAME AND PRINCIPAL POSITION OPTIONS YEAR $/SHARE DATE 5% 10%
--------------------------- ------- ---- ------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Stephen D. Sellers .................... 255,000(2) 10.5% $6.00 9/01/09 $ 2,626,500 $ 5,074,500
Vice President,
Business Affairs and Business
Development
John V. Hanke ......................... 255,000(2) 10.5% $6.00 9/01/09 $ 2,626,500 $ 5,074,500
Vice President
Marketing and Site Integration
</TABLE>
Note 1: One third of the options vest and are exercisable one year from the
date of grant. Thereafter, one twelfth of the options vest and are exercisable
each three months until all optioned shares are vested.
Note 2: These options vest and are exercisable as described on page 29. See
'Item 6. Executive Compensation.'
1999 STOCK AWARDS PLAN
The 1999 Stock Awards Plan (the 'Plan') was adopted by the Board of
Directors of the Company on July 15, 1999. The Plan provides for the grant of
stock options, stock appreciation rights ('SARs') and restricted stock
(collectively, 'Awards') with respect to up to 5,000,000 shares of the Company's
Common Stock, $.001 par value ('Common Stock'). Awards under the Plan may be
granted to employees, directors or consultants of the Company or its affiliates,
provided that consultants shall not have provided services in connection with
the offer or sale of securities in a capital-raising transaction.
The Plan is administered by the Compensation Committee of the Board of
Directors ('Committee'). The Committee has the authority, in its sole
discretion, to select participants, to make such awards in such form and amount
it desires, to impose limitations, restrictions and conditions on the awards
granted and the exercise thereof not otherwise inconsistent with the terms of
the Plan, and to interpret the Plan. The selection of Directors as participants
and the terms of their awards are determined, however, by vote of the Board of
Directors as a whole instead of by the Compensation Committee.
The terms of the Plan permit the Committee to make stock option grants
which may be Incentive Stock Options within the meaning of Section 422 of the
Internal Revenue Code or other forms of nonqualified stock options as the
Committee may determine. The exercise price of the options granted under the
Plan is determined by the Committee, provided that the exercise price of
Incentive Stock Options must be at not less than 100 percent of the fair market
value of the Common Stock on the date of grant. The vesting schedule and term of
each option is set by the Committee, provided that the term of Incentive Stock
Options shall not be more than 10 years. Options may be exercised in whole or in
part during the term of the grant in cash, Common Stock with fair market value
on the date of delivery equal to the aggregate exercise price, a combination of
cash and Common Stock, or other consideration determined by the Committee
pursuant to the Plan.
The Plan also permits the Committee to grant SARs, subject to the shares
remaining available under the Plan, on terms and conditions not inconsistent
with the terms of the Plan at not less than 100 percent of the fair market value
of the Common Stock on the date of grant. SARs may be issued in tandem with an
option. The amount payable by the Company must be paid in Common Stock valued at
the fair market value on the date of exercise, cash, or a combination of both.
In addition, the Plan permits the Committee to issue restricted stock on
such terms and conditions as the Committee may determine not inconsistent with
the terms of the Plan.
All awards made by the committee shall be made by written agreement, which
in the case of Incentive Stock Options shall contain such terms and conditions
that are consistent with Section 422 of the Internal Revenue Code. Generally no
award made under the Plan shall be transferable by a participant except by will
or pursuant to the laws of descent and distribution or a qualified domestic
relations order as defined by the Employee Retirement Income Security Act of
1974, as amended. The
35
<PAGE>
Committee has the power to withhold taxes or require participants to remit to
the company such amounts as required to satisfy tax withholding obligations
either in cash or Common Stock or a combination of both.
Awards are subject to adjustment to reflect any changes in the outstanding
Common Stock or other changes affecting shares, including adjustments in the
number of shares available for issuance, shares covered by an outstanding Award,
or adjustments in price that become necessary to prevent a dilution or
enlargement of benefits or potential benefits under the Plan.
The Plan will terminate on April 15, 2009. The Board of Directors or the
Committee may amend or terminate the Plan, provided, however, that such
amendment or termination shall be subject to shareholder approval to the extent
required by law or the rules of any stock exchanges on which the Common Stock is
listed.
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
On September 23, 1999, Arie Grossman, former Vice President of Technology
of The Big Network, Inc. ('TBN'), filed suit in the Superior Court of California
against The Big Network, Inc., the Company and various unnamed individuals
seeking an unspecified amount of compensatory and punitive damages based on
(i) alleged breach of Grossman's employment agreement with TBN, (ii) alleged
breach of an oral agreement among various principals of TBN prior to its merger
with the Company relating to Grossman's salary and stock options and
(iii) alleged breach of an implied covenant of good faith and fair dealing and
fraud in connection with Grossman's salary, stock options and proposed terms of
employment with the Company following the merger with TBN. The Company has a
right of indemnification from the former shareholders of TBN. On December 20,
1999, the parties reached agreement in mediation providing for Mr. Grossman to
receive the equivalent of an additional 55,000 shares of TBN common stock. This
settlement does not affect the aggregate purchase price of shares of TBN common
stock for 1,800,000 shares of the Company's common stock.
On December 9, 1999, The Isosceles Fund Limited, a Bahamian corporation
('Isosceles'), filed suit in the Superior Court of California against the
Company, Brad Greenspan, Gerard Klauer Mattison & Co., Inc. ('GKM') and ten
unnamed individuals seeking damages based on (i) breach of an alleged
subscription agreement between Isosceles and the Company to purchase common
stock of eUniverse, (ii) breach of an implied covenant of good faith and fair
dealing in connection with the alleged subscription agreement, and (iii)
intentional interference with the alleged subscription agreement by GKM and ten
unnamed individuals. With respect to each count of the cause of action,
Isosceles has claimed damages of $1,750,000. Isosceles has also requested that
the court award exemplary and punitive damages, interest, costs of suit and such
other relief as the court may deem fair, just, equitable and proper. The Company
believes the allegations in the complaint are without merit and will defend the
suit vigorously.
The Company is not a party to any other 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.
36
<PAGE>
ITEM 9 -- MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
SHAREHOLDERS AND DIVIDENDS
As of November 19, 1999, there were 16,277,723 shares of common stock of
the Company outstanding or committed to be issued; 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
From April 30 to December 23, 1999, the common stock of the Company was
traded on the OTC Electronic Bulletin Board under the symbol EUNI. On December
23, 1999, the National Association of Securities Dealers ('NASD') amended the
Company's trading symbol with the addition of the letter 'E'. The Company is
currently trading under the symbol 'EUNIE'. NASD recently amended its
Eligibility Rule to provide that all companies listed on the OTC Electronic
Bulletin Board must be reporting companies registered under the Securities
Exchange Act of 1934 (the 'Exchange Act'). The addition of the 'E' to the
Company's trading symbol reflects the fact that the SEC's comments on this
registration statement on Form 10 have not yet been cleared. The 'E' will be
removed after all SEC comments have been cleared.
The market price data provided in the following table includes data for the
Company, MCA and NABCO, Inc. ('NABCO'). Prior to April 23, 1998, the market
prices listed below are for NABCO, Inc., traded under the symbol NBCO. On April
23, 1998, NABCO merged with MCA. The market prices provided in the table between
April 23, 1998 to April 14, 1999 are for MCA, traded under the symbol MCAM.
After the reorganization of EUI and MCA on April 14, 1999, the Company began
trading on the OTC under the symbol MCAMD. The name of the Company was changed
to eUniverse, Inc. and the Company began trading under the symbol EUNI on April
30, 1999. The market price data prior to April 14, 1999 only provides the market
price of NBCO and MCAM. However, the historical information provided in other
sections hereof, pertains to EUI and its acquired subsidiaries, including CD
Universe. As a result, the market information provided below does not relate to
the historical information provided in other sections hereof prior to April 14,
1999.
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, 1997 through September 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 November 30, 1999 was $6.437.
<TABLE>
<CAPTION>
RANGE OF HIGH AND
QUARTERLY PERIOD ENDING LOW BID QUOTATIONS
----------------------- ------------------
<S> <C>
September 30, 1999 (EUNI)................................... $ 5.00 - 9.875
June 30, 1999 (MCAM/EUNI)(5)................................ $ 1.875 - 14.00
March 31, 1999 (MCAM)....................................... $ 5.00 - 18.00(1)(3)
December 31, 1998 (MCAM).................................... $ 0.62 - 25.00(1)
September 30, 1998 (MCAM)................................... $ 2.00 - 5.00(1)
June 30, 1998 (NBCO/MCAM)(4)................................ $ 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)(3)
</TABLE>
- ------------
(1) Quotes reflect a 1 for 20 reverse split of the Company's common stock
effective March 31, 1999.
(2) Quotes reflect a 1 for 20 reverse split of the Company's common stock
effective August 1, 1997.
(3) The stock split occurred prior to the operation of the Company's current
business that commenced upon MCA's reorganization with EUI in April 1999.
(4) NABCO merged with MCA on April 23, 1998. Accordingly, in this quarter, the
market price data from April 1 to April 23, 1998 is for NABCO and from April
24 to June 30, 1998 is for MCA.
(footnotes continued on next page)
37
<PAGE>
(footnotes continued from previous page)
(5) The reorganization of MCA and EUI closed on April 14, 1999. Thereafter, MCA
changed its name to eUniverse, Inc. on April 26, 1999 and its symbol to EUNI
as of April 30, 1999.
SHARES AVAILABLE FOR RESALE
As of September 30, 1999, approximately 15,265,000 shares of the Common
Stock (approximately 94% of the shares outstanding) were restricted shares that
could 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, 509,000 shares will become available on April 1, 2000, an additional
12,475,000 shares will become available on April 14, 2000, an additional 700,000
shares will become available on May 31, 2000, an additional an additional 78,125
will become available on June 30, 2000, and an additional 1,440,000 will become
available on August 31, 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. See 'Item 11.
Description of Securities -- Preferred Stock.' 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 'Item 9.
Market Price of and Dividends on the Registrant's Common Equity and Related
Stockholder Matters -- Registration Rights.'
The Company reserved 5,000,000 shares of Common Stock for future issuance
under our 1999 Stock Awards Plan, the terms of which are described in 'Item
6 -- Executive Compensation.' The Company has granted options to employees and
two advisors to purchase an aggregate of up to 3,774,950 shares of Common Stock
at exercise prices ranging from $3.00 to $9.50. Options representing 233,334 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 671,865 shares of Common Stock at exercise prices ranging
from $2.74 to $2.75 have been issued to an entity 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.
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.
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.
38
<PAGE>
REGISTRATION RIGHTS
REGISTRATION RIGHTS AGREEMENT OF ENTERTAINMENT UNIVERSE, INC.
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'), the Company is required to file a registration
statement under the Securities Act of 1933, covering the resale of Common Stock
issuable upon conversion of the Preferred Stock. The Company timely filed such a
registration statement on Form SB-2 on September 13, 1999 (SEC File No.
333-86959) (the 'Registration Statement'). Additionally, we agreed to use our
best efforts to have the Registration Statement declared effective by
November 15, 1999, and to maintain the effectiveness of the Registration
Statement until all securities covered thereby have been sold. The Company is
not currently paying any liquidated damages to preferred stockholders since,
despite the fact that the registration statement has not yet been declared
effective, the Company continues to use its best efforts to cause it to be
declared effective. The registration statement cannot be declared effective,
however, until all comments on the Form 10 have been cleared with the SEC.
Accordingly, the Registration Statement has not been declared effective and the
Company has not paid any damages to date to such shareholders.
The Registration Rights Agreement sets forth registration obligations of
the Company that, when not met, are events of default by the Company (a
'Registration Default'). A Registration Default occurs: (1) if the Company does
not use its best efforts to have the Registration Statement effective on or
prior to November 15, 1999; (2) if a new Registration Statement or amended
Registration Statement is not declared effective within seven business days of
the three consecutive trading days the Registration Statement does not cover a
sufficient number of shares of Common Stock to effect the resales of a number of
shares of Common stock equal to 200% of the number of shares of Common Stock
issuable to each Subscriber upon conversion of all outstanding Preferred Stock
then eligible for conversion; or (3) if the Registration Statement has been
declared defective and thereafter ceases to be effective or usable for any
reason in excess of 60 days.
In the event of a Registration Default, the Company has agreed to pay
liquidated damages to each holder of Preferred Stock in an amount equal to
$0.036 per share for the first 30-day period, or part thereof, and $0.072 per
share for each subsequent 30-day period, or part thereof, in cash, or at the
holder's option, in the number of shares of Common Stock equal to the quotient
of (x) the dollar amount of the liquidated damages by (y) $3.60 plus accretion
thereon at a rate of 6% per annum on the date of the Registration Default,
accruing daily, until all Registration Defaults have been cured.
If the Company proposes to register any of its Common Stock in connection
with the public offering of such securities solely for cash (other than a
registration relating solely to the sale of securities to participants in a
Company stock plan or a registration on Form S-4 or similar form registering
stock issuable upon a reclassification, a business combination involving an
exchange of securities or an exchange offer for securities of the issuer or
another entity), the holders of Preferred Stock may require that the shares of
Common Stock underlying the Preferred Stock be included in such registration
statement, unless the managing underwriter determines and advises in writing
that the inclusion in the registration statement of all of the securities
proposed to be included would interfere with the successful marketing of the
securities proposed to be registered by the Company on an underwritten public
offering by the Company.
If, during the time that the Registration Statement is effective, the
Company reasonably determines, based upon advice of counsel, that due to the
existence of material non-public information, disclosure of such material
non-public information would be required to make the statements contained in the
Registration Statement not misleading, and the Company has a bona fide business
purpose for preserving as confidential such material non-public information, the
Company shall have the one-time right to suspend the effectiveness of the
Registration Statement for up to 60 days, and no holder of Preferred Stock shall
be permitted to sell any securities pursuant thereto, until such time as such
suspension is no longer advisable.
39
<PAGE>
All fees and expenses incident to the performance of or compliance with the
Registration Rights Agreement by the Company shall be borne by the Company.
Additionally, the Company shall reimburse the holders of Preferred Stock for the
reasonable fees and disbursements, not to exceed $25,000 in the aggregate, of
not more than one firm of attorneys representing the selling holders (in
addition to any local counsel for which reimbursement shall be separate), which
firm, if any, shall be chosen by the majority number of shares of Preferred
Stock of holders (on a fully diluted basis).
Any provision of the Registration Rights Agreement may be amended or waived
by obtaining the written consent of the Company and the Holders of a majority of
the Preferred Stock provided that the amendment treats all holders equally.
REGISTRATION RIGHTS UNDER CASE'S LADDER AGREEMENT
Under the Case's Ladder Agreement the selling shareholders of Case's Ladder
(the 'Case's Ladder Shareholders') have the right to request that their
restricted shares of Common Stock be registered for sale by the Company as part
of any registration the Company files with the SEC for the offering of Common
Stock to the public, to the extent that any other officer or director of the
Company has such registration rights and sale privileges. However, if the Case's
Ladder Shareholders can sell their restricted shares under Rule 144, then they
must do so before exercising their registration rights, which terminate on May
31, 2000. All expenses in connection with any such registration of the Case's
Ladder Shareholders' restricted shares shall be paid by the Company, except for
commissions to brokers or underwriters. The former shareholders of Case's Ladder
have not expressed their intent to the Company to use their registration rights
to register their shares of Common Stock as part of the Company's current
registration statement on Form S-1.
REGISTRATION RIGHTS AGREEMENT WITH BNI SHAREHOLDERS
In connection with the acquisition of BNI, the Company entered into a
Registration Rights Agreement (the 'BNI Registration Rights Agreement') with
each of the shareholders of BNI (the 'BNI Shareholders') participating in the
transaction. The BNI Registration Rights Agreement provides that after September
14, 1999, any BNI Shareholder holding 25% or more of the restricted securities
issued in the acquisition of BNI by the Company has the right to require the
Company to effect a registration of part or all of such shareholder's restricted
securities and allow all other BNI Shareholders the opportunity to register
their restricted shares. The BNI Shareholders, collectively, may request this
registration only once. The Company is obligated to have such registration
declared effective by April 14, 2000. However, the Company may refrain from
filing any registration statement covering the BNI Shareholders restricted
shares (a 'BNI Registration Statement') during the period from the date the
Company files a registration statement covering an offering of the Company's
Common Stock to the public and ending 60 days after the effective date of such
registration statement. Additionally, once each year, the Company may postpone
the filing of any BNI Registration Statement if the Company is involved in a
secondary offering of securities or private placement and if filing of a BNI
Registration Statement would interfere with such financing. The Company will pay
all expenses in connection with the filing of a registration statement
registering the restricted shares held by the BNI Shareholders, except for
underwriting discounts or commissions. The BNI Registration Rights Agreement
terminates on August 31, 2000, unless a BNI Registration Statement has not been
filed or declared effective, in which case the agreement continues until such
time as the BNI Registration Statement has been filed, declared effective, and
is effective for a period of at least 120 days. The former shareholders of BNI
have not expressed their intent to the Company to use their registration rights
to register their shares of Common Stock as part of the Company's current
registration statement on Form S-1.
During the effectiveness of any such registration described in this
'Registration Rights' Section, any shares registered would become freely
tradable without restriction under the Securities Act.
40
<PAGE>
ITEM 10 -- RECENT SALES OF UNREGISTERED SECURITIES
Since its incorporation in February 1999, EUI has issued and sold
unregistered securities in the amounts, at the times, and for the aggregate
amounts of consideration listed below. All such securities were exchanged on a
one-to-one basis with the Company.
1. On March 3, 1999, the Company issued 250,000 shares of Common Stock
for consideration of $250,000 to GKM and certain of its affiliates in a
private offering pursuant to Rule 506 of Regulation D.
2. On March 3, 1999, EUI issued 1,539,000 shares of its common stock
to Joseph Abrams for services provided to the Company with a fair market
value of $48,684.
3. On March 3, 1999, EUI issued 8,061,000 shares of its common stock
to Brad D. Greenspan in connection with the Merger Agreement with a fair
market value of $255,000.
4. On March 3, 1999, EUI 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 and in connection with the
provision of certain consulting services with a fair market value of
$6,036. See 'PRINCIPAL SHAREHOLDERS.'
5. On April 1, 1999, EUI issued 354,000 shares to approximately 10
persons in consideration of public relations, legal and related services
with a fair market value of $229,500 provided to the Company in connection
with various activities, including the Preferred Stock Offering and Merger
with MCA.
6. 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 with a fair market value of $7,275,000.
Charles Beilman is the Chief Operating Officer, Chief Technical Officer and
a Director of the Company. See 'CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.'
7. 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 $6,462,086. 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.
8. 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 common 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.
9. On April 14, 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 $2.74 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 $2.75 per share, which become
exercisable on April 14, 2000 and expire April 14, 2004. GKM's services to
the Company had a fair market value of $1,214,567.
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:
41
<PAGE>
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 to ten unaffiliated individuals.
2. On April 2, 1998 the Company sold 18,750 shares of its common stock
for $3,750 under Rule 504 to five individuals.
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 A. Jay Boisdrenghein 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 for $897,835 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 May 17, 1999, the Company purchased all the assets of Green
Willow International Corp. for a total of 4,605 shares of Common Stock
having a value of $52,500.
2. As of June 1, 1999, the Company purchased 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 with a fair market value of
$7,000,000.
3. On June 15, 1999, the Company issued 25,000 shares of restricted
common stock to employees of CD Universe under the 1999 Stock Awards Plan
valued at the fair market value of $237,500. The awards vest on April 14,
2000, subject to the continued employment of such employees.
4. 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.
5. As of August 31, 1999, the Company purchased 80% of the outstanding
capital stock of The Big Network, Inc. in exchange for 1,440,000 shares of
Common Stock valued at an aggregate price of $8,820,000. The Company
intends to purchase the remaining 20% over the next six months.
6. As of October 1, 1999, the Company purchased all of the assets fo
Funone.com in exchange for 6,987 shares of Common Stock valued at an
aggregate price of $40,000.
Proceeds from the above sales were used for general corporate purposes.
Shares were also issued as consideration in the acquisition of other businesses
and assets. Such business and assets are being used in the Company's current
business operations.
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.
42
<PAGE>
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 40,000,000 shares of preferred stock,
$0.10 par value per share (the 'Preferred Stock'). The following is a summary of
material informaion pertaining to description of eUniverse's capital stock. 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.
COMMON STOCK
As of October 31, 1999, there were 16,277,723 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.
PREFERRED STOCK
On April 14, 1999, EUI concluded its sale of 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. EUI sold
1,795,024 shares of its Preferred Stock 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.
The shares of Preferred Stock have a liquidation preference of $3.60 per share,
which increases at a rate of 6% per annum. Each share of Preferred Stock may be
converted to Common Stock at an initial rate of one share of Common Stock for
each $3.60 of liquidation preference. If the Common Stock's market price at the
time of conversion is less than $3.60 per share, the conversion rate is
determined by reference to such lower price. Because of the variable conversion
rate and the 6% accretion factor, each share of Preferred Stock may be converted
into greater than one share of Common Stock. Prior to any conversion, the
conversion price is adjusted to account for any increase or decrease in the
number of outstanding shares of Common Stock by a stock split, stock dividend,
or other similar event.
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 the liquidation preference
amount described above. 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
43
<PAGE>
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.
At any time after one year from the effective date of the registration
statement registering the Common Stock issued or to be issued upon conversion of
the Preferred Stock, if the closing bid price per share of the Company's Common
Stock is equal to or greater than $16.00, the Company, at its option, may either
automatically convert the Preferred Stock to Common Stock or redeem the
Preferred Stock for cash in an amount per share equal to $3.60 plus accretion
thereon at a rate of 6% per annum, subject to any applicable adjustment (the
'Stated Value').
Holders of the Preferred Stock are entitled to receive 30 days written
notice prior to any liquidation event, and are given an opportunity to convert
their Preferred Stock to Common Stock within the 30-day notice period. Upon the
breach of this provision, the Holders are entitled to (1) immediately convert
any or all of their shares of Preferred Stock to Common Stock; and (2) upon
three days prior written notice and opportunity to cure, have their Preferred
Stock prepaid by the Company for an amount equal to approximately 1.5 times the
Stated Value.
Upon any event of default, each holder of Preferred Stock, at its option,
prior to cure of such default by the Company, may elect to have all or any
portion of its Preferred Stock prepaid by the Company for an amount equal to the
Stated Value multiplied by the greater of: (1) 1.3, or (2) the highest price at
which the Common Stock is traded on the date of the event of default (or the
most recent highest closing bid price if the Common Stock is not traded on such
date) divided by the conversion price in effect as of the date of the event of
default. Preferred Stock holders are entitled to receive additional amounts
equal to interest on the Stated Value up to the highest rate under applicable
law if the default is due to a failure of the Company to convert the Preferred
Stock to Common Stock when required.
Under the Subscription Agreement executed in connection with the purchase
of the Series A Preferred Stock, each holder of Preferred Stock has a right of
first offer to purchase any securities of the Company or any of its
subsidiaries.
Approval of the holders of at least 75% of the Preferred Stock, and at
least 75% of the holders of the Preferred Stock is required to: (1) alter or
change the rights, preferences or privileges of the Preferred Stock or any
securities so as to affect adversely the Preferred Stock; (2) create any new
class or series of stock having a preference over or on parity with the
Preferred Stock with respect to distributions of assets upon liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, or
increase the size of the authorized number of Preferred Stock; or (c) do any act
or thing not authorized or contemplated by the Designation of Preferred Stock
which would result in taxation of the holders of shares of the Preferred Stock
under Section 305 of the Internal Revenue Code of 1986, as amended (or any
comparable provision of the Internal Revenue Code as hereafter from time to time
amended). Dissenting Holders have the right to convert their shares of Preferred
Stock for 30 days prior to the effective date of any amendment.
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.
44
<PAGE>
ARTICLES OF INCORPORATION
Article Twelfth of the Articles of Incorporation of the Company provide as
follows with respect to indemnification of Directors and Officers:
'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.
45
<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
Index to Financial Statements
<TABLE>
<S> <C>
Pro Formas.................................................. F-1 - F-4
eUniverse, Inc. Unaudited Financial Statements.............. F-5 - F-19
Motorcycle Centers of America, Inc. Financials.............. F-20 - F-33
CD Universe, Inc. Financials................................ F-34 - F-45
Case's Ladder, Inc. Financials.............................. F-46 - F-55
The Big Network, Inc. Financials............................ F-56 - F-69
Gamer's Alliance, Inc. Financials........................... F-70 - F-78
</TABLE>
46
<PAGE>
PRO FORMA FINANCIAL INFORMATION
During the six month period ended September 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., the acquisition of
Gamer's Alliance, Inc. and the acquisition of The Big Network, Inc. The details
of the acquisitions are presented in the notes to the September 30, 1999
financial statements presented elsewhere in this registration statement.
The pro forma income statement for the six month period ended
September 30, 1999 reflects the historical consolidated income statement of the
registrant. Pro forma adjustments have been made to give effect to all of the
acquisitions as if they had occurred as of the beginning of the fiscal year
presented (April 1, 1998) and carried forward through the interim period
presented.
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 Motorcycle Centers of America, Inc., 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. Since Motorcycle Centers of America, Inc. and
Entertainment Universe, Inc. had minimal operations, CD Universe, Inc. is
considered to be the predecessor to the Registrant. Entertainment Universe, Inc.
acquired Motorcycle Centers of America in a reverse acquisition, which then
changed its name to eUniverse, Inc. Pro forma adjustments have been made to give
effect to all of the above transactions as if they had occurred at the beginning
of the twelve month period presented.
A summary of the acquisitions is as follows:
<TABLE>
<CAPTION>
TRANSACTION DATE
- ----------- ----
<S> <C>
Entertainment Universe, Inc. acquires CD Universe, Inc...... April 14, 1999
Entertainment Universe, Inc. acquires Motorcycle Centers of
America, Inc. in a reverse acquisition, and the name is
changed To eUniverse, Inc................................. April 14, 1999
eUniverse, Inc. acquires Cases Ladder, Inc.................. May 31, 1999
eUniverse, Inc. acquires Gamers Alliance, Inc............... June 30, 1999
eUniverse, Inc. acquires 80% of The Big Network, Inc........ August 31, 1999
</TABLE>
F-1
<PAGE>
eUNIVERSE
PROFORMA STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS TO
REFLECT
ACQUISITIONS INCOME
CONSOLIDATED FOR THE STATEMENT
INCOME STATEMENT SIX MONTHS ENDED FOR THE
FOR THE SEPTEMBER 30, SIX MONTHS ENDED
SIX MONTHS ENDED 1999 SEPTEMBER 30,
SEPTEMBER 30, ----------------------- 1999
1999 DR CR PRO FORMA
---- -- -- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue...................................... $ 3,879,857 1 50,148 $ 4,089,151
2 143,464
3 15,682
Cost of sales................................ 3,036,569 3 27,688 3,074,396
1 10,139
----------- -----------
Gross profit................................. 843,288 1,014,755
----------- -----------
Marketing and sales.......................... 1,022,182 2 20,143 1,052,450
3 10,125
Product development.......................... 495,878 3 260,910 756,788
General and administrative................... 1,686,999 1 44,271 2,010,408
2 146,082
3 133,056
Amortization of goodwill and other........... 889,839 4 491,050 1,390,895
5 5,556
6 4,450
Stock based compensation..................... 83,125 83,125
----------- -----------
Total........................................ 4,178,023 5,293,666
----------- -----------
Loss from operations......................... (3,334,735) (4,278,911)
Interest income and other.................... 38,996 0 3 1,115 40,111
Interest expense............................. (355) 3 (3,022) (3,377)
Loss allocated to minority interest.......... 16,438 16,438
----------- -----------
Loss before income taxes..................... (3,279,656) (4,225,739)
Income tax expense (benefit)................. --
----------- -----------
Net loss..................................... $(3,279,656) $(4,225,739)
----------- -----------
----------- -----------
Basic and diluted loss per share............. $ (0.22) $ (0.26)
Weighted average shares outstanding.......... 14,592,274 7 1,650,345 16,242,619
</TABLE>
See accompanying notes to pro forma financial statements.
F-2
<PAGE>
eUNIVERSE
PROFORMA STATEMENTS OF OPERATIONS
MARCH 31, 1999
<TABLE>
<CAPTION>
GAMERS
ENTERTAINMENT ALLIANCE
MOTORCYCLE UNIVERSE (INITIAL
CENTERS OF CASE'S (INITIAL PERIOD) PERIOD) THE BIG
AMERICA CD UNIVERSE LADDER FEBRUARY 28, JUNE 1, NETWORK, INC.
YEAR END YEAR END YEAR END 1999 TO 1998 TO YEAR END
DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1999 1998 1999 1998 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenue.............. $ 0 $8,851,713 $378,345 --$ $ 108,347 $ 83,883
Cost of sales........ 0 7,550,289 0 -- 27,087 56,375
--------- ---------- -------- ---- --------- ---------
Gross profit......... 0 1,301,424 378,345 0 81,260 27,508
--------- ---------- -------- ---- --------- ---------
General and
administrative
expenses............ 523,589 1,709,601 394,141 90 78,875 765,430
Amortization......... 0
--------- ---------- -------- ---- --------- ---------
Total............. 523,589 1,709,601 394,141 90 78,875 765,430
--------- ---------- -------- ---- --------- ---------
Loss from
operations.......... (523,589) (408,177) (15,796) (90) 2,385 (737,922)
Loss allocated to
minority interest...
Other income
(expense)........... (57,290) 1,013 0 0 0 1,857
--------- ---------- -------- ---- --------- ---------
Loss before income
taxes............... (580,879) (407,164) (15,796) (90) 2,385 (736,065)
Income tax expense
(benefit)........... 0 0 (1,372) 0 0 0
--------- ---------- -------- ---- --------- ---------
Net loss............. $(580,879) $ (407,164) $(14,474) $(90) $ 2,385 $(736,065)
--------- ---------- -------- ---- --------- ---------
--------- ---------- -------- ---- --------- ---------
Basic and diluted
loss per share
Weighted Average
Shares
Outstanding.........
<CAPTION>
PRO FORMA
ADJUSTMENTS
TO REFLECT
ACQUISITIONS
AS OF MARCH 31, FOR THE YEARS
1999 ENDED WITHIN
-------------------------------- MARCH 31, 1999
COMBINED DR CR PRO FORMA
-------- -- -- ---------
<S> <C> <C> <C> <C>
Revenue.............. $ 9,422,288 $ 9,422,288
Cost of sales........ 7,633,751 7,633,751
----------- -----------
Gross profit......... 1,788,537 1,788,537
----------- -----------
General and
administrative
expenses............ 3,471,726 3,471,726
Amortization......... 8 2,632,561 2,778,128
9 116,667
10 28,900
----------- -----------
Total............. 3,471,726 6,249,854
----------- -----------
Loss from
operations.......... (1,683,189) (4,461,317)
Loss allocated to
minority interest... 11 147,104 147,104
Other income
(expense)........... (54,420) (54,420)
----------- -----------
Loss before income
taxes............... (1,737,609) (4,368,633)
Income tax expense
(benefit)........... (1,372) (1,372)
----------- -----------
Net loss............. $(1,736,237) $(4,367,261)
----------- -----------
----------- -----------
Basic and diluted
loss per share $ (1,736.24) $ (0.27)
Weighted Average
Shares
Outstanding......... 1000 12 16,222,587 16,223,587
</TABLE>
See accompanying notes to pro forma financial statements.
F-3
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
Income Statement, Six months ended September 30, 1999
(1) To record the activity of Gamers Alliance, Inc for the period from
April 1 through June 30, 1999, the date of the acquisition.
(2) To record the activity of Cases Ladder, Inc. for the period from
April 1 through May 31, 1999, the date of acquisition.
(3) To record the activity of The Big Network, Inc. for the period from
April 1 through August 31, 1999, the date of acquisition.
(4) To reflect amortization of goodwill as if the acquisitions had been
consummated at the beginning of the period. Goodwill is being amortized over ten
years from the date of acquisition using the straight line method.
(5) To reflect amortization of customer lists as if the acquisitions had
been consummated at the beginning of the six month period. Customer lists are
being amortized over three years from the date of acquisition using the straight
line method.
(6) To reflect amortization of domain names as if the acquisitions had been
consummated at the beginning of the six month period. Domain names are being
amortized over ten years from the date of acquisition using the straight line
method.
(7) To adjust outstanding shares as if the acquisitions had been
consummated at the beginning of the six month period and the shares issued
pursuant to the acquisitions were outstanding for the entire period.
Income Statement, Twelve months ended March 31, 1999
(8) To reflect amortization of goodwill as if the acquisitions had been
consummated at the beginning of the twelve month period. Goodwill is being
amortized over ten years using the straight line method.
(9) To reflect amortization of customer lists as if the acquisitions had
been consummated at the beginning of the twelve month period. Customer lists are
being amortized over three years using the straight line method.
(10) To reflect amortization of domain names as if the acquisitions had
been consummated at the beginning of the twelve month period. Domain names are
being amortized over ten years using the straight line method.
(11) To record minority interest in loss of The Big Network, Inc.
(12) To adjust outstanding shares as if the acquisitions had been
consummated at the beginning of the fiscal year presented and the shares issued
pursuant to the acquisitions were outstanding for the entire year.
F-4
<PAGE>
eUNIVERSE, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
CD UNIVERSE CD UNIVERSE
SEPTEMBER 30, MARCH 31, MARCH 31,
1999 1999 1998
---- ---- ----
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................... $ 2,294,045 $ 11,335 $ 267,214
Accounts receivable, net of allowances for
doubtfull accounts of $34,175 and $0,
respectively.................................... 212,699 92,938 --
Inventory......................................... 54,199 22,647 23,877
Due from officers................................. -- 157,569 1,000
Due from employees................................ 156,260 -- --
Prepaid expenses and other current assets......... 199,532 9,629 43,031
----------- --------- ---------
Total current assets......................... 2,916,735 294,118 335,122
Furniture and equipment, less accumulated depreciation
of $170,492, $83,052, and $36,900 respectively....... 488,598 225,718 158,362
Goodwill, net of amortization of $825,380.............. 25,500,231 -- --
Other intangibles, net of amortization of $65,118,
$340, and $170, respectively......................... 697,356 510 680
Other assets........................................... 71,910 -- --
----------- --------- ---------
Total assets................................. $29,674,830 $ 520,346 $ 494,164
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities
Accounts payable.................................. $ 797,927 $ 828,718 $ 435,015
Accrued liabilities............................... 186,713 113,604 99,566
Due to affiliates................................. 2,500 30,000 110,395
Due to officer.................................... -- 105,000 --
Short-term portion of lease obligations........... 8,585 -- --
----------- --------- ---------
Total current liabilities.................... 995,725 1,077,322 644,976
----------- --------- ---------
Long-term liabilities
Long-term portion of lease obligations............ 2,596 -- --
Commitments and contingencies.......................... -- -- --
Minority interest...................................... -- -- --
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; 16,277,723 issued and outstanding... 16,278 1,000 1,000
Additional paid-in capital........................ 31,914,760 -- --
Deferred stock compensation cost.................. (154,375) -- --
Retained deficit.................................. (3,279,656) (557,976) (151,812)
----------- --------- ---------
Total shareholders' equity................... 28,676,509 (556,976) (150,812)
----------- --------- ---------
Total liabilities and shareholders' equity... $29,674,830 $ 520,346 $ 494,164
----------- --------- ---------
----------- --------- ---------
</TABLE>
See accompanying notes to the financial statements
F-5
<PAGE>
eUNIVERSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
CD UNIVERSE CD UNIVERSE
<S> <C> <C> <C> <C>
Revenue
Products.............................. $ 1,585,181 $2,181,259 $ 3,549,735 $4,299,444
Services.............................. 259,722 -- 330,122 --
----------- ---------- ----------- ----------
Total revenue.............................. 1,844,903 2,181,259 3,879,857 4,299,444
Cost of goods sold
Products.............................. 1,363,260 1,794,498 3,014,449 3,588,676
Services.............................. 13,468 -- 22,120 --
Total cost of goods sold................... 1,376,728 1,794,498 3,036,569 3,588,676
Gross profit
Products.............................. 221,921 386,761 535,286 710,768
Services.............................. 246,254 -- 308,002 --
----------- ---------- ----------- ----------
Total gross profit......................... 468,175 386,761 843,288 710,768
Operating expenses
Marketing and sales................... 585,456 279,956 1,022,182 524,561
Product development................... 414,864 56,311 495,878 156,814
General and administrative............ 914,565 131,885 1,686,999 181,736
Amortization of goodwill and other
intangibles......................... 567,120 42 889,839 84
Stock-based compensation.............. 71,250 -- 83,125 --
----------- ---------- ----------- ----------
Total operating expenses................... 2,553,255 468,194 4,178,023 863,195
----------- ---------- ----------- ----------
Operating loss........................ (2,085,080) (81,433) (3,334,735) (152,427)
Nonoperating income (expense)
Interest and dividend income.......... 31,947 201 38,996 310
Interest expense...................... (355) -- (355) --
Loss allocated to minority interest... 16,438 -- 16,438 --
----------- ---------- ----------- ----------
Income (loss) before income taxes..... (2,037,050) (81,232) (3,279,656) (152,117)
Income taxes............................... -- -- -- --
----------- ---------- ----------- ----------
Net income (loss)..................... $(2,037,050) $ (81,232) $(3,279,656) $ (152,117)
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Basic income (loss) per common share....... $ (0.13) N/A $ (0.22) N/A
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Basic weighted average common shares
outstanding.............................. 15,317,723 N/A 14,592,274 N/A
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
See accompanying notes to the financial statements
F-6
<PAGE>
eUNIVERSE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
---- ----
CD UNIVERSE
<S> <C> <C>
Operating activities
Net income (loss)...................................... $(3,279,656) $(152,117)
Transactions not requiring cash:
Depreciation...................................... 50,279 23,076
Amortization...................................... 890,199 84
Bad debt reserve.................................. 15,000
Common stock issued to employees.................. 83,125
Common stock issued to outside consultants........ 10,000 --
Non-cash interest income.......................... (3,060)
Loss allocated to minority interest............... (16,438)
Changes in current assets.............................. (446,943) 7,871
Changes in other assets................................ (60,685)
Changes in current liabilities......................... (32,728) (65,152)
----------- ---------
Net cash (used in) operating activities...... (2,790,907) (186,238)
----------- ---------
Investing activities
Acquisitions........................................... (1,915,000) --
Proceeds through acquisitions.......................... 136,419 --
Proceeds through reverse acquisition................... 858,477
Purchases of fixed assets.............................. (184,572) (18,445)
Repayment of advances from officers.................... (105,000) --
Advance to officers.................................... -- (7,300)
Receipt of advances to officers........................ 157,769 --
Advances made to Employees............................. (153,200) --
----------- ---------
Net cash provided by investing activities.... (1,205,107) (25,745)
----------- ---------
Financing activities
Proceeds from issuance of preferred stock.............. 5,875,204 --
Proceeds from issuance of common stock................. 505,000 --
Payment to repurchase common stock..................... (20,000) --
Financing costs........................................ (6,672) --
Repayment of loan from affiliates...................... (74,808) --
----------- ---------
Net cash provided by financing activities.... 6,278,724 --
----------- ---------
Change in cash and cash equivalents......................... 2,282,710 (211,983)
Cash and cash equivalents, beginning of period.............. 11,335 267,214
----------- ---------
Cash and cash equivalents at end of period.................. $ 2,294,045 $ 55,231
----------- ---------
----------- ---------
</TABLE>
See accompanying notes to the financial statements
F-7
<PAGE>
eUNIVERSE, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
--------------------- ---------------------- PAID-IN STOCK RETAINED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL COMPENSATION DEFICIT
------ --------- ------ --------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Share issued to acquire option
to purchase CD Universe..... -- $ -- 8,061,000 $ 8,061 $ 247,039 --
Shares issued for merger
related services............ -- -- 1,539,000 1,539 47,145 --
Shares issued pursuant to
Rule 506 of Regulation D.... -- -- 250,000 250 249,750
Shares issued pursuant to
employment agreement........ -- -- 200,000 200 6,036 --
--------- -------- ---------- ------- ----------- --------- -----------
Balance, March 31,
1999................ -- -- 10,050,000 10,050 549,970 --
Sale of Preferred Stock....... 1,795,024 179,502 6,282,584
Cost of offerings and
issuance.................... -- -- (1,950,110)
Shares issued in acquisition
of eUniverse.com website.... -- -- 15,000 15 59,985
Shares issued in acquisition
of CD Universe, Inc. ....... -- -- 2,425,000 2,425 7,272,575
Shares issued for services.... -- -- 339,000 339 169,161
Shares retained by former MCA
Shareholders................ -- -- 1,200,993 1,201 857,276
Shares issued in acquisition
of Mega DVD................. -- -- 4,605 5 52,495
Shares issued in acquisition
of Case's Ladder, Inc. ..... -- -- 700,000 700 6,999,300
Stock options issued in
connection with acquisition
of Case's Ladder, Inc. ..... -- -- -- -- 350,000
Stock options issued in
connection with services
performed................... -- -- -- -- 1,000
Fair Value of the warrants
issued...................... -- -- -- -- 1,214,567
Shares issued in acquisition
of Gamer's Alliance,
Inc. ....................... -- -- 78,125 78 999,922
Shares issued to employees of
CD Universe as compensation
expense..................... -- -- 25,000 25 237,475 (237,500)
Amortization of deferred stock
compensation................ -- -- -- -- -- 83,125
Shares issued in acquisition
of The Big Network, Inc. ... 1,440,000 1,440 8,818,560
Net income for the six months
ended September 30, 1999.... -- -- -- -- -- (3,279,656)
--------- -------- ---------- ------- ----------- --------- -----------
Balance, September 30,
1999................ 1,795,024 $179,502 16,277,723 $16,278 $31,914,760 $(154,375) $(3,279,656)
--------- -------- ---------- ------- ----------- --------- -----------
--------- -------- ---------- ------- ----------- --------- -----------
<CAPTION>
TOTAL
-----
<S> <C>
Share issued to acquire option
to purchase CD Universe..... $ 255,100
Shares issued for merger
related services............ 48,684
Shares issued pursuant to
Rule 506 of Regulation D.... 250,000
Shares issued pursuant to
employment agreement........ 6,236
-----------
Balance, March 31,
1999................ 560,020
Sale of Preferred Stock....... 6,462,086
Cost of offerings and
issuance.................... (1,950,110)
Shares issued in acquisition
of eUniverse.com website.... 60,000
Shares issued in acquisition
of CD Universe, Inc. ....... 7,275,000
Shares issued for services.... 169,500
Shares retained by former MCA
Shareholders................ 858,477
Shares issued in acquisition
of Mega DVD................. 52,500
Shares issued in acquisition
of Case's Ladder, Inc. ..... 7,000,000
Stock options issued in
connection with acquisition
of Case's Ladder, Inc. ..... 350,000
Stock options issued in
connection with services
performed................... 1,000
Fair Value of the warrants
issued...................... 1,214,567
Shares issued in acquisition
of Gamer's Alliance,
Inc. ....................... 1,000,000
Shares issued to employees of
CD Universe as compensation
expense..................... 0
Amortization of deferred stock
compensation................ 83,125
Shares issued in acquisition
of The Big Network, Inc. ... 8,820,000
Net income for the six months
ended September 30, 1999.... (3,279,656)
-----------
Balance, September 30,
1999................ $28,676,509
-----------
-----------
</TABLE>
F-8
<PAGE>
eUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(1) ORGANIZATION AND LINE OF BUSINESS
eUniverse, Inc. ('the Company') is a Nevada Corporation engaged in
developing 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, Gamer's Alliance, Inc. acquired June 30, 1999, and The Big
Network, Inc. acquired as of August 31, 1999. All significant inter company
transactions and balances have been eliminated.
(2) BUSINESS DEVELOPMENTS
The Company was founded in February 1999 and incorporated as Entertainment
Universe, Inc. ('EUI'). EUI was formed as a holding company to acquire various
operating companies. 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 12,829,000 shares of MCA's $.001 par value restricted common
stock. EUI shareholders also exchanged all of their preferred shares for
1,795,024 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.
(3) ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements as of September 30, 1999 have
been prepared by eUniverse pursuant to the rules and regulations of the
Securities and Exchange Commission. These statements are unaudited and reflect
all adjustments that are, in the opinion of management, necessary for a fair
presentation of the consolidated balance sheet, consolidated operating results,
and consolidated cash flows for the interim periods. These adjustments,
consisting of normal recurring adjustments and accruals, are made on a basis
consistent with the annual audited financial statements and generally accepted
accounting principles. The results of operation for the six months ended
September 30, 1999 are not necessarily indicative of the results for any other
period.
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. Revenue
includes shipping and handling charges. The Company also 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 products. The partner receives a commission of
5% to 15% of sales of the Company's products that originate from the site,
recognized as a selling 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
F-9
<PAGE>
eUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
advertising is recorded based on impressions delivered and received with the
difference recorded as an advance or prepaid. During the periods presented there
were no barter transactions. Additionally, the Company derives revenue from the
sale of advertisements. Advertising, membership and sponsorship revenues are
recognized as earned. Returns are provided for based on reasonable estimates of
future returns.
ROYALTY PAYMENTS
The Company has agreements to share revenue with individuals independent of
the Company. The Company is required to pay royalties for the use of computer
games based on a percentage of advertising revenue generated from the Company's
usage of the games on its web-sites. As the Company generates advertising
revenue, a corresponding liability is accrued as a royalty expense, which is
recorded as a cost of revenue (see note 11).
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.
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
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.
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:
<TABLE>
<S> <C>
Leasehold improvements...................................... 3 years
Computer equipment.......................................... 5 years
Telephone equipment......................................... 5 years
Furniture, fixtures and other............................... 10 years
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist of goodwill, customer lists, and domain names.
Excess cost over the fair value of net assets acquired (or goodwill) generally
is amortized on a straight-line basis over 10 years. Customer lists and domain
names are being amortized on a straight-line basis over a period of 3 and 10
years, respectively. The carrying values of intangible assets are reviewed if
the facts and circumstances suggest that they may be impaired. Negative
operating results, negative cash flows from operations,
F-10
<PAGE>
eUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
among other factors, could be indicative of the impairment of intangible assets.
If this review indicates that intangible assets will not be recoverable, the
Company's carrying value of intangible assets would be reduced.
ORGANIZATION COSTS
In accordance with American Institutes of Certified Public Accountants'
Statement of Position 98-5 'Reporting on the Costs of Start-Up Activities', the
Company expenses, as incurred, costs related to organizational and start-up
activities.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
receivable from employees, accounts payable and accrued expenses approximate
fair value due to the relatively short maturity of these instruments.
LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles to be 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.
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.
ADVERTISING COSTS
Advertising costs, except for costs associated with direct-response
advertising, are charged to operations when incurred. The costs of
direct-response advertising, if any, are capitalized and amortized over the
period during which future benefits are expected to be received.
EARNINGS PER SHARE
The computation of basic earnings per share ('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.
F-11
<PAGE>
eUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
The computation of diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an anti-dilutive effect.
(4) BUSINESS COMBINATIONS AND INVESTMENTS
During the six months ended September 30th 1999, the Company completed the
following acquisitions: CD Universe, Inc., Cases Ladder, Inc., Gamers Alliance,
Inc. and The Big Network, Inc. All four 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 (fair value on
acquisition date). This was an arm's length transaction between independent and
unrelated parties. The Company also incurred direct costs related to the
acquisition totaling $60,215, which has been added to the acquisitioin price.
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 was an arm's length transaction between independent
and unrelated parties. The Company also incurred direct costs related to the
acquisition totaling $351,050, which have been added to the acquisition price.
Of this amount, $350,000 is attributable to 400,000 options issued (subsequently
repriced) for services rendered, based on the fair value of the services
performed. The options vest quarterly over three years and had an exercise price
of $9.50 per share. These options were cancelled on September 15, 1999 and
options were reissued for 340,000 shares at exercise price of $6.00 per share.
These options vest as follows, 113,333 vest on September 16, 2000 and 28,333
vest each 3 months thereafter.
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. The Company also incurred direct
costs related to the acquisition totaling $26,887, which have been added to the
acquisition price.
Effective as of August 31, 1999, the Company completed its acquisition of
80 percent of the outstanding capital stock of The Big Network, Inc. (83.5% of
the common and 70.7% of the preferred), a company providing a suite of classic
board and card games, such as spades, checkers, chess, and backgammon, allowing
simultaneous play by its members. The Big Network has also developed LivePlace,
a Java applet that provides users with an overview of activities around the
site, allows them to follow public conversation, send private messages to other
users, and co-navigate the web. The purchase price of this acquisition was
1,440,000 shares of the Company's common stock, valued at $6.125 per share (the
market price on the acquisition date), issued in exchange for 80 percent of the
issued and outstanding shares of The Big Network, Inc. This was an arm's length
transaction between independent and unrelated parties. The Company also incurred
direct costs related to the acquisition totaling $87,124, which have been added
to the acquisition price.
F-12
<PAGE>
eUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
The Company expects to complete its acquisition of the remaining 20 percent
of capital stock of The Big Network, Inc. by issuing an additional 360,000
shares of its common stock valued at $6.125 (market price at the original
acquisition date).
The estimated fair value of assets acquired and liabilities assumed is
summarized as follows:
<TABLE>
<CAPTION>
CD CASES GAMER'S THE BIG
UNIVERSE LADDER ALLIANCE NETWORK
-------- ------ -------- -------
<S> <C> <C> <C> <C>
Cash.................................. $ 11,335 $ 20,286 $ 5,503 $ 99,204
Accounts receivable................... 92,938 59,218 52,664 17,000
Inventory............................. 22,647 -- -- --
Fixed assets.......................... 225,718 33,916 20,240 71,685
Receivable, related party............. 157,569 -- -- --
Customer list......................... 250,000 100,000 -- --
Domain names.......................... 100,000 75,000 90,000 24,000
Other assets.......................... 10,139 10,254 -- 13,075
Accounts payable...................... (942,321) (75,379) (35,284) (82,403)
Other liabilities..................... (30,000) -- (29,528) (36,373)
Notes payable, officers............... (105,000) -- -- --
Minority interest..................... -- -- -- (16,438)
Goodwill.............................. 9,457,190 7,127,755 923,292 8,817,374
---------- ---------- ---------- ----------
$9,250,215 $7,351,050 $1,026,887 $8,907,124
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Total goodwill recorded through the acquisitions is $26,325,611 and is
being amortized on a straight-line basis over ten years.
The operations of the acquired entities have been included in the statement
of operations from the date of acquisition, with the exception of CD Universe,
which is included from the beginning of the period.
PRO FORMA INFORMATION
Pro forma information as if the acquisitions had occurred at the beginning
of the periods presented is as follows:
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDING
SEPTEMBER 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Revenue............................................ $ 4,089,151 $ 4,451,491
Net loss........................................... 4,225,739 (1,891,106)
Loss per share..................................... (.26) (.12)
</TABLE>
5 OTHER NON-CASH FINANCIAL ACTIVITIES
<TABLE>
<S> <C>
Stock issued in connection with acquisitions:
Acquisition of The Big Network......................... $8,820,000
Acquisition of CD Universe............................. 7,275,000
Acquisition Cases Ladder............................... 7,000,000
Stock options issued in connection with the acquisition
of Cases Ladder shares................................ 350,000
Acquisition Gamer's Alliance........................... 1,000,000
Acquisition of eUniverse.com website(1)................ 60,000
Acquisition of MegaDVD(1).............................. 52,500
Stock options issued in connection with services
performed................................................. 1,000
Stock issued in connection with the preferred stock
offering, 319,000 shares(2)............................... 159,500
Stock issued in connection with services performed, 20,000
shares(2)................................................. 10,000
Stock issued to employees of CD Universe 25,000 shares...... 237,500
</TABLE>
(footnotes on next page)
F-13
<PAGE>
eUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(footnotes from previous page)
(1) The purchase of eUniverse.com website was accomplished through issuance of
15,000 shares of common stock priced at $4.00 per share for a total of
$60,000 (fair value of the site at the date of purchase). Acquisition of
megaDVD website was accomplished through issuance of 4,605 shares of common
stock priced at $11.40 per share (market price of the stock on issue date).
(2) Issuance of 339,000 share of common stock valued at $.50 per share (fair
value of the services performed) for various consulting services such as
financial and legal services performed during March and April of 1999 in
relation to the Company's stock offering completed in April 1999, and public
relations services performed subsequent to the reorganization in April 1999.
Additionally, 25,000 shares of common stock were issued to key employees of
CD Universe, Inc. for their involvement in the Company's activities. These
shares were issued on June 15, 1999 and were valued at $9.50 per share (market
price on issue date) and will vest on April 14, 2000. The compensation expense
is being amortized over this period.
Moreover, warrants were issued to purchase a total of 671,865 shares 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 $2.74 per share and became exercisable on April 14,
1999 and expire on April 14, 2004. The remaining 271,865 have an exercise price
of $2.75 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. The Black-Scholes option-pricing model with a risk free
interest rate of 4.5%, an annualized volatility of 81%, no expected dividend
yield, and an exercise term of five years was used to estimate the fair value of
the warrants issued.
(6) 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.
(7) FIXED ASSETS
Fixed assets, at cost, consist of the following
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ --------------
<S> <C> <C>
Furniture and fixture................................. $ 39,062 $ 29,069
Computers and equipment............................... 530,798 238,622
Purchased Software.................................... 49,230 1,079
Leasehold Improvements................................ 40,000 40,000
-------- --------
659,090 308,770
Less accumulated depreciation and amortization........ 170,492 83,052
Fixed assets, Net................................ $488,598 $225,718
-------- --------
-------- --------
</TABLE>
Depreciation expense for the reporting period were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Depreciation expense............................ $30,925 $11,538 $50,279 $23,076
</TABLE>
F-14
<PAGE>
eUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(8) OTHER INTANGIBLES
Other Intangibles primarily consists of purchase price of web sites
acquired:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ --------------
<S> <C> <C>
Domain Name -- eUniverse.Com.......................... $ 60,000 --$
Domain Names -- CD Universe, Inc...................... 100,000
Domain Names -- Cases Ladder, Inc. ................... 75,000
Domain Names -- Gamer's Alliance, Inc. ............... 90,000
Domain Names -- The Big Network, Inc. ................ 24,000
MegaDVD.com........................................... 52,500
Customer list -- CD Universe, Inc. ................... 250,000
Customer list -- Cases Ladder, Inc. .................. 100,000
Other................................................. 10,974 850
-------- ----
762,474 850
Less accumulated amortization......................... 65,118 340
Other Intangible, Net................................. $697,356 $510
-------- ----
-------- ----
</TABLE>
The above Web sites and customer lists are valued at their fair value based
on management judgment and are being amortized on a straight-line basis over the
period of ten years and three years, respectively. Amortization expense for
goodwill and intangible assets for the reporting period ending September 30,
1999 was $889,839.
(9) INCOME TAXES
The components of the provision for income taxes for the six months period
ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <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>
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Federal income tax rate..................................... 34.0% 34.0%
Deferred tax charge (credit)................................ -- --
---- ----
Effect on valuation allowance............................... 34.0% 34.0%
State income tax, net of Federal benefit.................... -- --
---- ----
Effective income tax rate................................... 0.0% 0.0%
---- ----
---- ----
</TABLE>
F-15
<PAGE>
eUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(10) MAJOR VENDOR
The Company purchased approximately 90% of its merchandise from one vendor.
At September 30, 1999, the balance due to that vendor was approximately
$338,000, which was paid in October 1999. The Company believes that the loss of
this vendor mayhave a material adverse effect on the Company.
(11) COMMITMENTS AND CONTINGENCIES
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 been operating on its web
sites. 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 sites. For the six months ended September 30, 1999, the
Company has no liabilities or expenses due under these agreements.
The Company leases office space under non-cancelable operating lease
agreements that expire within the next three years. Future lease payments under
these non cancelable operating lease are as follows:
<TABLE>
<CAPTION>
MARCH 31,
- ---------
<S> <C>
2000...................................................... $ 91,500
2001...................................................... 183,900
2002...................................................... 175,050
2003...................................................... 16,950
</TABLE>
On September 23, 1999, a former employee of The Big Network, Inc. ('TBN'),
filed suit in the Superior Court of California against The Big Network, Inc.,
the Company and various unnamed individuals seeking an unspecified amount of
compensatory and punitive damages based on (i) alleged breach of employment
agreement with TBN, (ii) alleged breach of an oral agreement among various
principals of TBN prior to its merger with the Company relating to salary and
stock options and (iii) alleged breach of an implied covenant of good faith and
fair dealing and fraud in connection with salary, stock options and proposed
terms of employment with the Company following the merger with TBN. The Company
believes the allegations in the complaint are without merit and will defend the
suit vigorously. In the event that there is any liability in connection with
this lawsuit, the Company has a right of indemnification from the former
shareholders of TBN.
On December 9, 1999, The Isosceles Fund Limited, a Bahamian corporation
('Isosceles'), filed suit in the Superior Court of California against the
Company, Brad Greenspan, Gerard Klauer Mattison & Co., Inc. ('GKM') and ten
unnamed individuals seeking damages based on (i) breach of an alleged
subscription agreement between Isosceles and the Company to purchase common
stock of eUniverse, (ii) breach of an implied covenant of good faith and fair
dealing in connection with the alleged subscription agreement, and (iii)
intentional interference with the alleged subscription agreement by GKM and ten
unnamed individuals. With respect to each count of the cause of action,
Isosceles has claimed damages of $1,750,000. Isosceles has also requested that
the court award exemplary and punitive damages, interest, costs of suit and such
other relief as the court may deem fair, just, equitable and proper. The Company
believes the allegations in the complaint are without merit and will defend the
suit vigorously.
(12) EQUITY COMPENSATION PLAN
On June 15, 1999, the Company issued 25,000 shares of common stock as
compensation to key employees of CD Universe, Inc. for their involvement in the
Company activities. These shares were issued on June 15, 1999 and were valued at
$9.50 per share (market price on issue date) and will vest on April 14, 2000.
The compensation expense is being amortized over this period.
F-16
<PAGE>
eUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
The following table presents the amount of stock-based compensation that
would have been recorded under the following income statement categories if the
stock-based compensation had not been separately stated in the financial
statements.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Marketing and Sales............................. $32,204 $ -- $37,606 $ --
Product Development............................. 37,306 -- 43,524 --
General and Administrative...................... 1,740 -- 1,995 --
------- ------- ------- -------
Total stock based compensation............. $71,250 $ -- $83,125 $ --
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Under the Company's 1999 Stock Award Plan, stock options may be granted to
officers, directors, employees and consultants. An aggregate of 5,000,000 shares
of common stock have been reserved for issuance under the Plan. For the six
months ended September 30, 1999 the plan's activities were as follows:
STOCK OPTIONS:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF EXERCISE AVERAGE
SHARES PRICE PRICE
------ ----- -----
<S> <C> <C> <C>
Outstanding at 3-31-1999.............................. -- -- --
Granted............................................... 4,064,750 $3.00 - 11.00 $7.13
Cancelled............................................. (1,932,000 9.50 - 11.40 9.67
Reissued.............................................. 1,642,200 6.00 6.00
Exercised............................................. --
Forfeited............................................. --
---------- --------------- -----
Outstanding at 9-30-1999.............................. 3,774,950 $3.00 - 9.50 $5.32
---------- --------------- -----
Options exercisable at 9-30-1999...................... 91,667 $3.00 $3.00
---------- --------------- -----
</TABLE>
Weighted average of remaining life of the options is 35 months.
On September 15, 1999, the Company cancelled 1,932,000 options, which had
been granted to employees on June 15, 1999 with a weighted average exercise
price of $9.67 and reissued 1,642,200 (85 percent) options with a weighted
average exercise price of $6.00 to the same employees. In addition to the stock
options granted to the employees, the Company has granted 340,000 options with
exercise price of $6.00 to an outside consultant for the services performed
related to the acquisition of Cases Ladder, Inc. These options were priced at
the market value of the services performed and have been included as part of the
acquisition cost. Moreover, 10,000 options with an exercise price of $13.00 were
granted to a firm for investor relation services. These options were recorded
based on the fair value of services performed.
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.
Equity instruments issued to non-employees are recorded pursuant to
SFAS 123 based on the fair value of the services performed or the fair value of
the equity instruments issued, whichever is more reliably measurable.
F-17
<PAGE>
eUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
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 $340,084 in compensation cost for the six months ended
September 30, 1999 as presented by the pro forma statement below:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
SEPTEMBER 30,
1999
----
<S> <C>
Net loss as reported........................................ $(3,279,656)
-----------
Pro forma net loss.......................................... $(3,619,740)
-----------
Net loss per common share................................... $ (0.22)
-----------
Pro forma loss per share.................................... $ (0.25)
-----------
</TABLE>
The Black-Scholes option-pricing model with a risk free interest rate
ranging from 4.5% to 5.86%, a weighted average volatility of 79%, zero dividend
yield and an expected life of three years for the options was used.
WARRANTS:
<TABLE>
<CAPTION>
NUMBER
OF SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at 3-31-1999.................................... -- --
Granted..................................................... 671,865 $ 2.75 - 2.75
Exercised................................................... --
Forfeited................................................... --
------- --------------
Outstanding at 9-30-1999.................................... 671,865 $ 2.75 - 2.75
------- --------------
Options exercisable at 9-30-1999............................ 400,000 $2.75
------- --------------
</TABLE>
The Warrants were issued as part of compensation to Gerard Klauer Mattison
& Co., Inc., the Company's exclusive placement agents. 400,000 of these warrants
have the exercise price of $2.74 per share and became exercisable on April 14,
1999 and expire on April 14, 2004. The remaining 271,865 have an exercise price
of $2.75 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. The Black-Scholes option-pricing model with a risk free
interest rate of 4.5%, an annualized volatility of 81%, no expected dividend
yield, and an exercise term of five years was used to estimate the fair value of
the warrants issued.
(13) 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 $6,462,086. 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.
The shares of preferred stock have a liquidation preference of $3.60 per
share, which increases at a rate of 6% per annum. Each share of preferred stock
may be converted to common stock at an initial rate of one share of common stock
for each $3.60 of liquidation preference. If the common stock's market price at
the time of conversion is less than $3.60 per share, the conversion rate is
determined by reference to such lower price. Because of the variable conversion
rate and the 6% accretion factor, each
F-18
<PAGE>
eUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
share of preferred stock may be converted into greater than one share of common
stock. Prior to any conversion, the conversion price is adjusted to account for
any increase or decrease in the number of outstanding shares of common stock by
stock split, stock dividend, or other similar event.
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, the liquidation preference
amount described above.
At any time after one year from the effective date of the registration
statement registering the common stock issued or to be issued upon conversion of
the preferred stock, if the closing bid price per share of the Company's common
stock is equal to or greater than $16.00, the company, at its option, may either
automatically convert the preferred stock to common stock or redeem the
preferred stock for cash in an amount per share equal to $3.60 plus accretion
thereon at a rate of 6% per year.
(14) INTERIM SEGMENTED DISCLOSURES
The following table represents segmented reporting for the reporting period
ending September 30, 1999. There were no identifiable reportable segments during
the similar period last year.
<TABLE>
<CAPTION>
PRODUCT SERVICES CORPORATE TOTAL
------- -------- --------- -----
(000'S)
<S> <C> <C> <C> <C>
Revenue................................................. $ 3,550 $ 330 $ -- $ 3,880
Operating loss.......................................... (1,491) (716) (1,128) (3,335)
Interest income......................................... 39 39
Minority interest....................................... 16 16
Pre tax loss............................................ (1,491) (700) (1,089) (3,280)
Net loss................................................ (1,491) (700) (1,089) (3,280)
Assets.................................................. 9,878 17,184 2,612 29,674
Depreciation and amortization........................... 559 380 2 941
Fixed assets additions.................................. 162 11 12 185
</TABLE>
Significant reconciling items in the corporate columns are as follows:
<TABLE>
<S> <C>
Operating loss: Professional fees $323; Compensation $335; Consulting $129; Investor
relations $198.
Assets: Cash $2,105; Loans $156; Prepaid Expense $172.
</TABLE>
Management has chosen to organize the enterprise around differences in
products and services. Products include audio CDs, videotapes, and digital
videodisks. Services include advertising, membership and sponsorship revenue.
All revenues recorded are from external customers.
(15) SUBSEQUENT EVENT
On October 1, 1999, the Company finalized its purchase of the assets of
FunOne.com, an entertainment and community hub with over 250,000 unique visitors
per month. FunOne provides online greetings, cartoons, joke lists and gags and
its subscribers can receive weekly jokes and send fun electronic greetings to
their friends. The purchase price of FunOne is $40,000 payable in shares of the
company's common stock. Additional payments of up to $360,000 in stock may be
payable upon achievement of targeted numbers of unique visitors to FunOne.com
during the seven consecutive months following the Closing Date.
F-19
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent auditors' report................................ F-21
Balance sheets, March 31, 1999 and December 31, 1998 and
1997...................................................... F-22
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-23
Statement of shareholders' equity (deficit), for the period
from January 1, 1996 through March 31, 1999............... F-24
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-25
Summary of significant accounting policies.................. F-26
Notes to financial statements............................... F-28
</TABLE>
F-20
<PAGE>
<TABLE>
<S> <C>
Cordovano and Harvey, P.C. Certified Public Accountants
201 Steele Street
Suite 300
Denver, Colorado 80206
(303) 329-0220 Phone
(303) 316-7493 Fax
</TABLE>
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-21
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
MARCH 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 8,887 70,071
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............................ 5,226,776 103,814 111,127
Deferred offering costs............................... (5,734) (5,734) --
Retained deficit...................................... (5,194,214) (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-22
<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)..................... 1,419,999 -- -- -- --
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............ (1,430,412) (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... (1,345,809) (102,893) (7,726) (24,965) (62,093)
Income taxes (Note E)............... -- -- -- -- --
----------- --------- ----------- -------- ---------
Net loss, as previously
reported................ (1,345,809) (102,893) (7,726) (24,965) (62,093)
Prior period
adjustment -- common stock
issued for services
adjustment (Note G).......... -- (479,486) (3,227,055) -- (119,497)
----------- --------- ----------- -------- ---------
Net loss, as restated..... $(1,345,809) $(582,379) $(3,234,781) $(24,965) $(181,590)
----------- --------- ----------- -------- ---------
----------- --------- ----------- -------- ---------
Basic income (loss) per common share
as previously reported............ $ (14.19) $ (1.47) $ (0.53) $ (3.73) $ (3.07)
Prior period
adjustment -- common stock
issued for services
adjustment................... -- (6.84) (220.93) -- --
----------- --------- ----------- -------- ---------
Basic income (loss) per common share
as restated....................... $ (14.19) $ (8.32) $ (221.45) $ (3.73) $ (3.07)
----------- --------- ----------- -------- ---------
----------- --------- ----------- -------- ---------
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-23
<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
SHARES PAR VALUE SHARES PAR VALUE SHARES AMOUNT CAPITAL COSTS
------ --------- ------ --------- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996........ -- $-- 5,405* $ 5 15* $(9,750) $ 106,412
Sale of treasury stock
(Note F)...................... -- -- -- -- (8)* 4,875 (1,500) $--
Purchase of treasury stock
(Note F)...................... -- -- -- -- 8* (3,375) --
Sale of treasury stock
(Note F)...................... -- -- -- -- (13)* 7,125 (875)
Net loss........................ -- -- -- -- -- -- --
--- ---- --------- ------ ---- ------- ---------- ------
Balance, December 31, 1996...... -- -- 5,405* 5 2* (1,125) 104,037 --
Treasury stock contributed by
officer (Notes B & F)......... -- -- -- -- 3* (2,600) -- --
Sale of treasury stock
(Note F)...................... -- -- -- -- (5)* 3,725 (2,362) --
Sale of common stock............ -- -- 47,500* 48 -- -- 9,452 --
Net loss........................ -- -- -- -- -- -- -- --
--- ---- --------- ------ ---- ------- ---------- ------
Balance, December 31, 1998, as
previously reported........... -- -- 70,098* 70 -- -- 103,814 (5,734)
Prior period adjustment --
common stock issued for
services adjustment (Note
G)............................ -- -- -- -- -- -- -- --
--- ---- --------- ------ ---- ------- ---------- ------
Balance, December 31, 1998, as
adjusted...................... -- -- 70,098* 70 -- -- 103,814 (5,734)
Common stock issued for services
(Note F)...................... -- -- 2,078,000 2,078 -- -- 5,122,962 --
Net loss for the three months
ended March 31, 1999.......... -- -- -- -- -- -- -- --
--- ---- --------- ------ ---- ------- ---------- ------
Balance, March 31, 1999......... -- $-- 2,148,098 $2,148 -- $ -- $5,226,776 $(5,734)
--- ---- --------- ------ ---- ------- ---------- ------
--- ---- --------- ------ ---- ------- ---------- ------
<CAPTION>
RETAINED
DEFICIT TOTAL
------- -----
<S> <C> <C>
Balance, January 1, 1996........ $ (7,780) $ 88,887
Sale of treasury stock
(Note F)...................... -- 3,375
Purchase of treasury stock
(Note F)...................... -- (3,375)
Sale of treasury stock
(Note F)...................... -- 6,250
Net loss........................ (24,965) (24,965)
----------- -----------
Balance, December 31, 1996...... (32,745) 70,172
Treasury stock contributed by
officer (Notes B & F)......... -- (2,600)
Sale of treasury stock
(Note F)...................... -- 1,363
Sale of common stock............ -- 9,500
Net loss........................ (7,726) (7,726)
----------- -----------
Balance, December 31, 1998, as
previously reported........... (143,364) (45,214)
Prior period adjustment --
common stock issued for
services adjustment (Note
G)............................ (3,705,041) (3,705,041)
----------- -----------
Balance, December 31, 1998, as
adjusted...................... (3,848,405) (3,750,255)
Common stock issued for services
(Note F)...................... -- 5,125,040
Net loss for the three months
ended March 31, 1999.......... (1,345,809) (1,345,809)
----------- -----------
Balance, March 31, 1999......... $(5,194,214) $ 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-24
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
STATEMENTS OF CASH FLOWS
<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>
Operating activities
Net income (loss)................... $(1,345,809) $(102,893) $ (7,726) $(24,965) $(62,093)
Transactions not requiring cash:
Depreciation..................... 125 723 833 833 181
Common stock issued for
services....................... 1,419,999 -- -- -- --
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
----------- --------- -------- -------- --------
----------- --------- -------- -------- --------
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
cancelled........................ $ -- $ 11,046 $ -- $ -- $ --
----------- --------- -------- -------- --------
----------- --------- -------- -------- --------
</TABLE>
See accompanying summary of significant accounting policies and
notes to the financial statements.
F-25
<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.
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
F-26
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
MARCH 31, 1999
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-27
<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 G and K).
During the three months ended March 31, 1999, the Company issued 75,000
shares of its $.001 par value common stock to various shareholders in exchange
for services.
During the three months ended March 31, 1999, the Company issued 3,000
shares of its $.001 par value common stock in exchange for services.
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
F-28
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
$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>
<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>
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-29
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
On March 29, 1999, Motorcycle Centers of America, Inc. issued 75,000 shares
(post-split) of its common stock in exchange for consulting and administrative
services provided to the Company during the period from February 1, 1998 through
March 31, 1999. The transaction was recorded at the fair value of the Company's
common stock over the service period.
On March 31, 1999, the Company issued 3,000 shares (post-split) of its
common stock in exchange for administrative services provided to the Company
during each of the years in the three-year period ended March 31, 1999. The
transaction was recorded at the fair value of the Company's common stock over
the service period.
On March 31, 1999, the Company also issued 2,000,000 shares (post-split) of
its common stock to an officer in exchange for consulting services provided to
the Company during each of the years in the three-year period ended March 31,
1999. The transaction was recorded at the fair value of the Company's common
stock over the service period.
F-30
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
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.
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: STOCK-BASED COMPENSATION-CORRECTING AN ERROR IN PREVIOUSLY ISSUED
FINANCIAL STATEMENTS
On March 29, 1999, the Company issued 75,000 shares (post-split) of its
restricted common stock as payment for public relations, management advisory,
and consulting expenses. The period of services was from February 1, 1998
through January 31, 1999. On March 31, 1999, the Company issued 3,000 shares
(post-split) of its restricted common stock as payment for administrative
expense. The period of service was from January 1, 1997 through March 31, 1999.
On March 31, 1999, the Company issued 2,000,000 shares (post-split) of its
restricted common stock as payment in lieu of compensation. The period of
service was from January 1, 1997 through March 31, 1999.
Management initially valued these transactions at the cost of the services
provided or a total of $70,060. However, management has since undertaken to
value the transactions based on the quoted market price of the common stock at
the end of each period. Accordingly, services performed were valued at the
closing stock price on December 31, 1997 of $3.63, December 31, 1998 of $0.50,
and March 31, 1999 of $6.24 for services rendered for the years ended December
31, 1997, 1998 and for the three months ended March 31, 1999, respectively. 'As
a result of the revaluation, the net loss was increased from ($102,893) to
($580,897) and from ($7,726) to ($3,234,781) for the years ended December 31,
1998 and 1997, respectively, in the accompanying financial statements.
NOTE H: 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
F-31
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
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 I: 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.
NOTE J: 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 K: 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 1,832,810 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
F-32
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
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 897,835 shares for a gross amount of $897,835.
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-33
<PAGE>
CD UNIVERSE, INC.
FINANCIAL STATEMENTS
MARCH 31, 1999
INDEX
<TABLE>
<S> <C>
Independent Auditor's Report................................ F-35
Balance Sheet............................................... F-36
Statement of Operations..................................... F-37
Statement of Stockholder's Deficit.......................... F-38
Statement of Cash Flows..................................... F-39
Notes to Financial Statements............................... F-40
</TABLE>
F-34
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
CD UNIVERSE, INC.
We have audited the accompanying balance sheets of CD UNIVERSE, INC. as of
March 31, 1999 and 1998 and the related statements of operations, stockholder's
deficit, and cash flows for each of the three years in the period ended March
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CD UNIVERSE, INC. as of
March 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1999 in conformity
with generally accepted accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO,
P.C.
Certified Public Accountants
New York, New York
May 14, 1999
F-35
<PAGE>
CD UNIVERSE, INC.
BALANCE SHEET
MARCH 31, 1999
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................. $ 11,335 $ 267,214
Accounts receivable, net of allowance for doubtful
accounts of $0........................................ 92,938 --
Inventory.............................................. 22,647 23,877
Due from officer....................................... 157,569 1,000
Prepaid expenses and other current assets.............. 9,629 43,031
---------- ----------
Total current assets.............................. 294,118 335,122
Property and equipment, net of accumulated depreciation of
$83,052 and $36,900 respectively.......................... 225,718 158,362
Organization costs, net of accumulated amortization of $340
and $170 respectively..................................... 510 680
---------- ----------
Total assets...................................... $ 520,346 $ 494,164
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Accounts payable and accrued expenses.................. $ 942,322 $ 534,581
Notes payable -- officer............................... 105,000 --
Due to affiliates (Note 5)............................. 30,000 110,395
---------- ----------
Total current liabilities......................... 1,077,322 644,976
---------- ----------
Commitments and contingencies (Note 9)...................... --
Stockholder's deficit
Common stock -- no par value; authorized 1,000 shares;
1,000 issued and outstanding.......................... 1,000 1,000
Accumulated deficit.................................... (557,976) (151,812)
---------- ----------
Total stockholder's deficit....................... (556,976) (150,812)
---------- ----------
Total liabilities and stockholder's deficit....... $ 520,346 $ 494,164
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-36
<PAGE>
CD UNIVERSE, INC.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
DIVISION OF
PRIME SOFTWARE, INC.
1999 1998 1997
---- ---- --------------------
<S> <C> <C> <C>
Revenue............................................. $8,851,713 $5,685,211 $ 1,675,815
Cost of goods sold.................................. 7,550,289 4,709,528 1,433,766
---------- ---------- --------------------
Gross profit........................................ 1,301,424 975,683 242,049
Selling, general and administrative expenses........ 1,708,601 1,111,698 434,203
---------- ---------- --------------------
Loss from operations................................ (407,177) (136,015) (192,154)
Other income........................................ 1,013 (15,797) --
---------- ---------- --------------------
Net loss............................................ (406,164) $ (151,812) $ (192,154)
---------- ---------- --------------------
---------- ---------- --------------------
Net loss per common share
Basic.......................................... (406.16) $ (151.81) $ (192.15)
---------- ---------- --------------------
---------- ---------- --------------------
Diluted........................................ (406.16) $ (151.81) $ (192.15)
---------- ---------- --------------------
---------- ---------- --------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-37
<PAGE>
CD UNIVERSE, INC.
STATEMENT OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT DEFICIT DEFICIT
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at April 7, 1997............................. -- $-- $ -- $ --
Issuance of shares for cash.......................... 1,000 1,000 -- 1,000
Net loss for the year ended March 31, 1998........... -- -- (151,812) (151,812)
----- ------ --------- ---------
Balance at March 31, 1998............................ 1,000 1,000 (151,812) (150,812)
Net loss for the year ended March 31, 1999........... -- -- (406,164) (406,164)
----- ------ --------- ---------
Balance at March 31, 1999............................ 1,000 $1,000 $(557,976) $(556,976)
----- ------ --------- ---------
----- ------ --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-38
<PAGE>
CD UNIVERSE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31
<TABLE>
<CAPTION>
DIVISION OF
PRIME SOFTWARE, INC.
1999 1998 1997
---- ---- --------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss........................................ $(406,164) $(151,812) $(192,154)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization................... 46,322 37,070 --
Write off of excess of purchase price over cost
assigned to assets acquired................... -- 40,000 --
Changes in certain assets and liabilities:
(Increase) in accounts receivable.......... (92,938) -- --
Decrease (increase) in inventory........... 1,230 (23,877) --
Decrease (increase) in prepaid expenses and
other current assets..................... 33,402 (43,031) (6,028)
Increase in accounts payable and accrued
expenses................................. 407,741 534,581 --
--------- --------- ---------
Total cash provided by (used in) operating
activities............................... (10,407) 392,931 (198,182)
--------- --------- ---------
Cash Flows From Investing Activities:
Increase in other assets........................ -- (40,850) --
Increase in property and equipment.............. (113,508) (195,262) (6,500)
--------- --------- ---------
Total cash used in investing activities.... (113,508) (236,112) (6,500)
--------- --------- ---------
Cash Flows From Financing Activities:
Sale of common stock............................ -- 1,000 --
Cash retained by affiliate...................... -- (19,558) --
Increase in notes payable -- officer............ 150,000 -- --
Repayment of notes payable -- officer........... (45,000) -- --
Loans from affiliates........................... 30,000 110,395 224,240
Repayment of loans from affiliates.............. (110,395) -- --
Loan to officer................................. (156,569) (1,000) --
--------- --------- ---------
Total cash provided by (used in) financing
activities............................... (131,964) 90,837 224,240
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents........................................ (255,879) 247,656 19,558
Cash and cash equivalents -- beginning of year....... 267,214 19,558 --
--------- --------- ---------
Cash and cash equivalents -- end of year............. $ 11,335 $ 267,214 $ 19,558
--------- --------- ---------
--------- --------- ---------
Cash Paid During the Year For:
Interest expense................................ $ 286 $ -- $--
--------- --------- ---------
--------- --------- ---------
Income taxes.................................... $ -- $ -- $--
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-39
<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 began operations as CD Universe
commencing April 1, 1997. The Company was sold to new management in April 1999.
Prior to incorporating, the Company operated as a division of Prime
Software, Inc., a related party. The statements of operations and cash flows for
the year ended March 31, 1997 reflects the activity of that division. Prime
Software, Inc.'s fiscal year end is March 31. For the initial year ended
March 31, 1997, the division of Prime Software had an accumulated deficit of
$192,154 and advances from the parent of $224,240.
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:
<TABLE>
<S> <C>
Leasehold Improvements...................................... 3 years
Computer Equipment.......................................... 5 years
Telephone Equipment......................................... 5 years
Furniture, Fixtures and Other............................... 10 years
</TABLE>
F-40
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
h) ORGANIZATION COSTS
Organization costs are being amortized over 5 years using the straight-line
method.
i) 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.
j) 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.
k) 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.
l) 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.
m) 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.
n) ADVERTISING COSTS
Advertising costs, except for costs associated with direct-response
advertising, are charged to operations incurred. The costs of direct-response
advertising, if any, are capitalized and amortized over the period during which
future benefits are expected to be received.
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').
F-41
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
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 years ended March 31, 1999, 1998
and 1997 were 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, 1998 and 1997, the Company had 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.
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.
F-42
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at March 31,:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Leasehold Improvements.................................. $ 40,000 $ --
Computer Equipment...................................... 215,543 155,273
Telephone Equipment..................................... 24,158 18,467
Furniture, Fixtures and Other........................... 29,069 21,522
-------- --------
308,770 195,262
Less: Accumulated Depreciation.......................... 83,052 36,900
-------- --------
Property and Equipment, net........................ $225,718 $158,362
-------- --------
-------- --------
</TABLE>
Depreciation expense for the years ended March 31, 1999 and 1998 was
$46,152 and $36,000, respectively.
NOTE 3 -- INCOME TAXES
The components of the provision for income taxes for the years ended
March 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <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>
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal Income Tax Rate........................... (34.0)% (34.0)% (34.0)%
Deferred Tax Charge (Credit)...................... -- -- --
Effect on Valuation Allowance..................... 34.0% 34.0% 34.0%
State Income Tax, Net of Federal Benefit.......... -- -- --
------ ----- -----
Effective Income Tax Rate......................... 0.0% 0.0% 0.0%
------ ----- -----
------ ----- -----
</TABLE>
At March 31, 1999, the Company had net carryforward losses of approximately
$556,000 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.
F-43
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
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>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Loss Carryforwards.................................... $ 189,000 $ 51,700
Less: Valuation Allowance............................. (189,000) (51,700)
--------- ---------
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.
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 believes that the loss of this vendor
may have a material adverse effect on the Company.
NOTE 7 -- ADVERTISING COSTS
Advertising costs incurred and recorded as expense in the statement of
operations were $67,052, $128,432 and $110,717 for the years ended March 31,
1999, 1998 and 1997, respectively.
NOTE 8 -- ACQUISITION OF ASSETS
During the year ended March 31, 1998, the Company purchased various assets
from a related party. Due to the fact that the entities were under common
control, the assets have been valued at historical cost in the financial
statements. The excess of purchase prior over cost has been charged to expense
during the year ended March 31, 1998. This amount was $40,000.
NOTE 9 -- 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:
F-44
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
<TABLE>
<CAPTION>
MARCH 31,
- ---------
<S> <C>
2000.............................................. $117,000
2001.............................................. 117,000
2002.............................................. 107,250
--------
Total........................................ $341,250
--------
--------
</TABLE>
Rent expense under the office lease for the years ending March 31, 1999,
1998 and 1997 was $82,000, $45,938 and $5,387, respectively.
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 10 -- SUBSEQUENT EVENTS
The Company was acquired by Entertainment Universe, Inc. in April 1999 as a
wholly owned subsidiary.
F-45
<PAGE>
CASES LADDER, INC.
FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-47
Balance Sheets.............................................. F-48
Statements of Operations.................................... F-49
Statement of Stockholders' Equity........................... F-50
Statements of Cash Flows.................................... F-51
Notes to Financial Statements............................... F-52
</TABLE>
F-46
<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), as of 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 audit 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 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 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/ Jonathon P. Reuben CPA
_________________________________
JONATHON P. REUBEN,
Certified Public Accountant
Torrance, California
April 9, 1999
F-47
<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
$5,675 and $19,175)....................................... 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
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities
Accounts payable....................................... $ 19,365 $ 16,185
Accrued payroll and payroll taxes...................... -- 57,472
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
F-48
<PAGE>
CASES LADDER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS 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
--------- ---------
--------- ---------
Basic Income (Loss) per share............................... (0.0015) 0.0012
--------- ---------
--------- ---------
Weighted average shares outstanding......................... 9,404,630 9,437,500
--------- ---------
--------- ---------
</TABLE>
See accompanying notes
F-49
<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)
--------- ------ ------- -------
--------- ------ ------- -------
</TABLE>
See accompanying notes
F-50
<PAGE>
CASES LADDER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1998 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
Changes in operating assets and liabilities:
Decrease (increase) in assets:
Accounts receivable............................. (70,936) (42,962)
Prepaid items and deposits...................... -- (685)
Deferred tax asset.............................. (2,172) 2,172
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>
See accompanying notes
F-51
<PAGE>
CASES LADDER, INC.
NOTES TO FINANCIAL STATEMENTS
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.
Case's Ladder began as a collaboration of six individuals in January 1998,
all of whom remain involved with the business. There was no formal legal
structure to the operations until the individuals agreed on a corporate form of
organization and ownership distribution in August 1998. Those six individuals
were the sole shareholders until other individuals invested in the business and
became shareholders later in 1998. Since the corporation continued an operation
begun earlier in 1998, the prior activity was accounted for in the corporation
as if that activity had occurred in the corporation.
Upon the inception of business, an agent of a related entity was asked to
open a bank account for the Company. The related entity, Strategic Alliance
Partners, Inc., shared common owners with the company. The agent mistakenly
thought that the account was to be a part of Strategic Alliance Partners'
activity and opened the account as 'Strategic Alliance Partners, Inc. dba Cases
Ladder'. Additionally, a fictitious business name statement was filed with this
name. These errors were not noted. However, only receipts and disbursements
related to the transactions and operations of Cases Ladder flowed through the
account. No other company, or individual, used the bank account.
Case's Ladder operated as a totally separate and distinct business from
Strategic Alliance Partners, Inc. Management does not believe that the mere fact
that the account was opened in the wrong name would deem the Company to be
considered a successor of Strategic Alliance Partners, Inc. and currently no
third party has made this claim.
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 product sales and services are recognized at the time the
product is shipped or the services are performed. Customer advance payments are
deferred and are recognized as revenue when the underlying income is earned.
Revenue from the licensing of the Company's software products is recognized when
the respective royalties are earned, based on the percentage of completion
method.
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
F-52
<PAGE>
CASES LADDER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
The following is a summary of computer equipment and software as of
December 31, 1998:
<TABLE>
<S> <C>
Computer Equipment.......................................... $21,237
Computer Software........................................... 795
-------
22,032
Less Accumulated Depreciation............................... (280)
-------
$21,752
-------
-------
</TABLE>
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.
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>
F-53
<PAGE>
CASES LADDER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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............................................ $(14,424)
--------
--------
Proforma............................................... $(15,552)
--------
--------
Basic Loss Per Share
As reported............................................ $(0.0015)
--------
--------
Proforma............................................... $(0.0017)
--------
--------
</TABLE>
For proforma purposes, the Company valued the options using the
Black-Scholes 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.
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>
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.
F-54
<PAGE>
CASES LADDER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 shares of common stock to a
consultant who assisted in the sale of all of the outstanding stock of the
Company to eUniverse, Inc. These services were performed on behalf of the
individual shareholders of the Company and are not an expense of the Company.
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's
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.
F-55
<PAGE>
THE BIG NETWORK, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998
F-56
<PAGE>
THE BIG NETWORK, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998
INDEX
<TABLE>
<S> <C>
Independent Auditor's Report................................ F-58
Balance Sheet............................................... F-59
Statement of Operations..................................... F-60
Statement of Stockholders' Deficiency....................... F-61
Statement of Cash Flows..................................... F-62
Notes to Financial Statements............................... F-63
</TABLE>
F-57
<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
F-58
<PAGE>
THE BIG NETWORK, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................. $ 3,554 $ 118,800
Accounts receivable.................................... 21,451 6,900
Other current assets................................... 144 514
-------- ------------
25,149 126,214
Equipment, net.............................................. 80,649 58,941
Other assets................................................ 2,266 2,105
-------- ------------
Total assets...................................... $108,064 $ 187,260
-------- ------------
-------- ------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable and accrued expenses.................. $ 73,555 $ 76,684
Advances from stockholders............................. 16,500 13,500
Capital lease obligation -- current portion............ 14,785 8,585
-------- ------------
104,840 98,769
Capital lease obligation, less current portion.............. 3,771 2,596
Commitments and contingencies............................... -- --
-------- ------------
Total liabilities................................. 108,611 101,365
-------- ------------
Stockholders' deficiency
Preferred stock -- Series A, par value $.001, 5,000,000
shares authorized and 529,449 shares issued and
outstanding........................................... 530 983
Common stock, par value $.001, 15,000,000 shares
authorized and 2,675,385 shares issued and
outstanding........................................... 2,676 2,676
Additional paid-in capital.................................. 732,312 1,080,964
Accumulated deficit......................................... (736,065) (998,728)
-------- ------------
Total stockholders' deficiency.................... (547) 85,895
-------- ------------
Total liabilities and stockholders' deficiency.... $108,064 $ 187,260
-------- ------------
-------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
THE BIG NETWORK, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN SIX SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1998
---- ---- ----
<S> <C> <C> <C>
Revenue.............................................. $ 83,883 $ 15,056 $ 30,106
Cost of revenue...................................... 56,375 27,620 28,637
--------- --------- ---------
27,508 (12,564) 1,469
--------- --------- ---------
Development cost..................................... 609,416 172,349 446,348
General and administrative expenses.................. 131,849 77,725 113,425
Write-off of purchase price over estimated fair value
of net assets acquired............................. 24,165 -- 24,165
--------- --------- ---------
Total expenses.................................. 765,430 250,074 583,938
--------- --------- ---------
Loss from operations................................. (737,922) (262,638) (582,469)
--------- --------- ---------
Other income (expense)
Investment income............................... 4,136 3,961 3,837
Interest expense................................ (2,279) (3,986) (1,407)
--------- --------- ---------
Total other income (expenses)................... (1,857) (25) 2,430
--------- --------- ---------
Net loss............................................. $(736,065) $(262,663) $(580,039)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<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 12,622 -- 12,750
Compensation for
services
rendered....... -- -- 55,385 55 5,484 -- 5,539
Acquisition of
assets......... -- -- 2,492,500 2,493 264,483 -- 266,976
Additional
Paid-in-
Capital........ -- -- -- -- 2,500 -- 2,500
Net loss......... -- -- -- -- -- (736,065) (736,065)
------- ---- --------- ------ ---------- --------- ---------
Balance at December
31, 1998............ 529,449 530 2,675,385 2,676 732,312 (736,065) (547)
Sale of Preferred
Stock-Series A
(Unaudited)......... 453,633 453 -- -- 348,652 -- 349,105
Net Loss
(Unaudited)......... -- -- -- -- -- (262,663) (262,663)
------- ---- --------- ------ ---------- --------- ---------
Balance at June 30,
1999 (Unaudited).... 983,082 $983 2,675,385 $2,676 $1,080,964 $(998,728) $ 85,895
------- ---- --------- ------ ---------- --------- ---------
------- ---- --------- ------ ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
THE BIG NETWORK, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN SIX SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1998
---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities
Net loss........................................ $(736,065) $(262,663) $(580,039)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation.................................... 25,905 21,808 8,975
Write-off of purchase price over the estimated
fair value of net assets acquired............. 24,165 -- 24,165
Issuance of equity securities for services
rendered...................................... 11,999 -- 11,999
Write-off of organizational costs............... 103,431 -- 103,431
Loss on sale of securities...................... 4,752 -- 4,752
Change in assets and liabilities
(increase) decrease:
Accounts receivable........................ (8,673) 14,451 3,298
Other current assets....................... (144) (370) (1,622)
Other assets............................... (2,266) 161 (4,060)
Increase (Decrease):
Accounts payable and accrued expenses...... 53,732 3,129 90,878
--------- --------- ---------
Net cash used in operating activities................ (523,164) (223,484) (338,223)
--------- --------- ---------
Cash flows from investing activities
Purchase of equipment........................... (2,632) -- (2,632)
Sale of securities.............................. 78,262 -- 78,262
Acquisition of Dream Zero, net of cash
acquired...................................... 238 -- 238
--------- --------- ---------
Net cash provided by investing activities............ 75,868 -- 75,868
--------- --------- ---------
Cash flows from financing activities
Payments for capital lease obligations.......... (22,193) (7,375) (11,629)
Advances from (repayments to) stockholders...... 16,500 (3,000) 8,500
Proceeds from issuances of note................. 100,000 -- 100,000
Issuance of common stock........................ 12,750 -- 12,750
Purchase of treasury stock...................... -- (10,875) --
Additional paid-in capital...................... 2,500 -- --
Issuance of preferred stock -- Series A......... 341,293 359,980 181,239
--------- --------- ---------
Net cash provided by financing activities............ 450,850 338,730 290,860
--------- --------- ---------
Net increase in cash and cash equivalents............ 3,554 115,246 28,505
Cash and cash equivalents -- Beginning of period..... -- 3,554 --
--------- --------- ---------
Cash and cash equivalents -- End of period........... $ 3,554 $ 118,800 $ 28,505
--------- --------- ---------
--------- --------- ---------
</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.
For the six months ended June 30, 1999, the Company paid no income taxes
and paid interest of $3,986 (unaudited).
NON-CASH INVESTING AND FINANCING ACTIVITIES:
See Notes 3, 4 & 7
The accompanying notes are an integral part of these financial statements.
F-62
<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 generally
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.
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.
F-63
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
LONG-LIVED ASSETS
Long-lived assets to be 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 of fair vlaue
less cost to sell.
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 period ending December 31, 1998.
ORGANIZATIONAL EXPENSES
In accordance with American Institutes of Certified Public Accountants'
Statement of Position 98-5 'Reporting on the Costs of Start-Up Activities, the
Company expenses, as incurred, costs related to organizational and start-up
activities.
ROYALTY PAYMENTS
The Company has agreements to share revenue with individuals independent of
the Company. The Company is required to pay royalties for the use of computer
games based on a percentage of advertising revenue generated from the Company's
usage of the games on its web-site. As the Company generates advertising revenue
a corresponding liability is accrued as a royalty expense, which is recorded as
a cost of revenue. (See Note 3).
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.
F-64
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
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.
UNAUDITED INFORMATION
The financial statements for the period ended June 30, 1999 are unaudited.
In the opinion of management, the unaudited information is fairly presented
and all adjustments (consisting only of normal recurring adjustments) necessary
to present fairly the financial position of the Company as of June 30, 1999 and
the results of operations and cash flows for the six month period then ended
have been included. The operating results of the Company for the six month
period may not be indicative of operating results for the full year.
NOTE 2 -- EQUIPMENT
As of December 31, 1998 and June 30, 1999, equipment consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Computer Equipment.................................. $ 54,900 $45,577
Computer Software................................... 50,836 44,066
Office Equipment.................................... 818 818
-------- -------
106,554 90,461
Less: Accumulated Depreciation...................... 25,905 31,520
-------- -------
Equipment, net...................................... $ 80,649 $58,941
-------- -------
-------- -------
</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 and for the six months ended June 30, 1999 was $21,808.
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:
F-65
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
YEAR ENDED DECEMBER 31, ------ ------
<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 these agreements.
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.
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.
F-66
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
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
$12,750.
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).
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
F-67
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
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.
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, or
$0.10 per share which was determined to be the fair value of the shares issued
based on the Company's sales of stock in 1998 at $0.10. 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. The assets have been incorporated in the operations of the
Company since 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, or
$0.10 per share which was determined to be the fair value of the shares issued
based on the Company's sales of stock in 1998 at $0.10. 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 assets have been
incorporated in the operations of the Company since 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> <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.
F-68
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
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
Effective August 31, 1999, certain of the stockholders of the Company
consummated an agreement exchanging an aggregate of approximately 80% of the
issued and outstanding shares of the Company's common and preferred stock for
1,440,000 shares of a publicly held corporation's common stock. The Company
expects the remaining stockholders to consummate an exchange of their shares for
an aggregate of 360,000 additional shares of the same publicly held
corporation's common stock.
F-69
<PAGE>
GAMER'S ALLIANCE, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998
JUNE 30, 1999
F-70
<PAGE>
GAMER'S ALLIANCE, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998
INDEX
<TABLE>
<S> <C>
Independent Auditor's Report................................ F-72
Balance Sheet............................................... F-73
Income Statement............................................ F-74
Statement of Stockholders' Equity........................... F-75
Statement of Cash Flows..................................... F-76
Notes to Financial Statements............................... F-77
</TABLE>
F-71
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
GAMER'S ALLIANCE, INC.
We have audited the accompanying balance sheets of Gamer's Alliance, Inc.
as of December 31, 1998 and June 30, 1999 and the related statements of
operations, stockholders' equity and cash flows for the initial period June 1,
1998 to December 31, 1998 and for the six month period January 1, 1999 to
June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gamer's Alliance, Inc. as of
December 31, 1998 and June 30, 1999, and the results of its operations and its
cash flows for the initial period and six month period then ended, in conformity
with generally accepted accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
November 17, 1999
F-72
<PAGE>
GAMER'S ALLIANCE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................. $ 6,183 $ 5,503
Accounts receivable.................................... 30,543 52,464
------- -------
36,726 57,967
Equipment, net.............................................. 11,178 20,240
------- -------
Total assets...................................... $47,904 $78,207
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable....................................... $15,991 $35,284
Advances from stockholders............................. 29,328 29,328
------- -------
Total liabilities................................. 45,319 64,612
------- -------
Stockholders' equity
Common stock, par value $1.00, 30,000 shares authorized
and 200 shares issued and outstanding................. 200 200
Retained earnings...................................... 2,385 13,395
------- -------
Total stockholders' equity........................ 2,585 13,595
------- -------
Total liabilities and stockholders' equity........ $47,904 $78,207
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
GAMER'S ALLIANCE, INC.
INCOME STATEMENT
<TABLE>
<CAPTION>
SEVEN MONTHS SIX MONTHS INCEPTION
ENDED ENDED (JUNE 1, 1998)
DECEMBER 31, JUNE 30, TO JUNE 30,
1998 1999 1998
---- ---- ----
<S> <C> <C> <C>
Revenue................................................ $108,347 $163,047 $ 245
Cost of revenue........................................ 20,671 33,233 730
-------- -------- -------
87,676 129,814 (485)
General and administrative expenses.................... 85,291 118,804 968
-------- -------- -------
Income from operations................................. 2,385 11,010 (1,453)
Provision for income taxes............................. -- -- --
-------- -------- -------
Net income............................................. $ 2,385 $ 11,010 $(1,453)
-------- -------- -------
-------- -------- -------
Earnings per share, basic and diluted.................. $ 11.93 $ 55.05 $ (7.27)
-------- -------- -------
-------- -------- -------
Weighted average shares outstanding.................... 200 200 200
-------- -------- -------
-------- -------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
GAMER'S ALLIANCE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ -------- -----
<S> <C> <C> <C> <C>
Balance at June 1, 1998.................................... -- $-- $ -- $ --
Issuance of Common Stock for:
Cash.................................................. 200 200 -- 200
Net Income............................................ -- -- 2,385 2,385
--- ---- ------- -------
Balance at December 31, 1998............................... 200 200 2,385 2,585
Net Income................................................. -- -- 11,010 11,010
--- ---- ------- -------
Balance at June 30, 1999................................... 200 $200 $13,395 $13,595
--- ---- ------- -------
--- ---- ------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
GAMER'S ALLIANCE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS SIX MONTHS INCEPTION
ENDED ENDED (JUNE 1, 1998)
DECEMBER 31, JUNE 30, TO JUNE 30,
1998 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income........................................ $ 2,385 $11,010 $(1,453)
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation...................................... 2,795 1,752 157
Change in assets and liabilities
Increase in accounts receivable................... (30,543) (21,921) --
Increase in accounts payable...................... 15,991 19,293 --
------- ------- -------
Net Cash Provided by (Used in) Operating Activities.... (9,372) 10,134 (1,296)
------- ------- -------
Cash Flows from Investing Activities
Purchase of equipment............................. (13,973) (10,814) (5,650)
------- ------- -------
Cash Flows from Financing Activities
Advances from (repayments to) stockholders........ 29,328 -- 9,800
Issuance of common Stock.......................... 200 -- 200
------- ------- -------
Net Cash Provided by Financing Activities.............. 29,528 -- 10,000
------- ------- -------
Net Increase (Decrease) in Cash and Cash Equivalents... 6,183 (680) 3,054
Cash and Cash Equivalents -- Beginning................. -- 6,183 --
------- ------- -------
Cash and Cash Equivalents -- End of Period............. $ 6,183 $ 5,503 $ 3,054
------- ------- -------
------- ------- -------
</TABLE>
Supplemental Cash Flow Information:
For the seven months ended December 31, 1998 and the six months ended June 30,
1999, and the one month ended June 30, 1998, the Company paid no income taxes
and no interest.
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
GAMER'S ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND JUNE 30, 1999
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Gamer's Alliance, Inc. (the 'Company') is a collection of multiple
internet-based websites for information and evaluation of the current and most
popular software games sold on the World Wide Web and in software stores. The
Company was incorporated in the state of Missouri on June 1, 1998 and began
operations on that date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
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 such as cash and cash
equivalents, receivables, accounts payable and advances from stockholders the
carrying amounts approximate fair value due to their short maturities.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances may exceed the FDIC insured
levels at various times during the year. 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 5 years.
LONG-LIVED ASSETS
Long-lived assets to be 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 of fair value
less cost to sell.
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.
INCOME TAXES
The Company has been a subchapter S corporation. Income is passed through
to the stockholders who pay personally their share of the applicable taxes.
Therefore, no provision for income taxes was made at December 31, 1998.
Subsequent to the termination of the Company's S Corporation election (See
Note 3), provisions for income taxes are based on taxes payable or refundable
for the current year and deferred taxes on
F-77
<PAGE>
GAMER'S ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND JUNE 30, 1999
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.
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 and June 30, 1999, the Company had
no items that represent other comprehensive income and, therefore, has not
included a schedule of comprehensive income in the financial statements.
EARNINGS PER SHARE
In accordance with SFAS No. 128, 'Earnings Per Share', the basic loss per
share is computed by dividing net loss available to common stockholders by the
weighted average number of common shares outstanding. Diluted loss per common
share is computed similar to basic loss per common share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potential common shares had been issued and
if the additional common shares were dilutive.
IMPACT OF THE YEAR 2000 ISSUE
During the period 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 and June 30, 1999, equipment consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
---- ----
<S> <C> <C>
Computer Equipment.......................................... $13,973 $24,787
Less: Accumulated Depreciation.............................. 2,795 4,547
------- -------
Equipment, net.............................................. $11,178 $20,240
------- -------
------- -------
</TABLE>
Depreciation expense for the seven months ended December 31, 1998 was
$2,795 and for the six months ended June 30, 1999 was $1,752. For the one month
ended June 30, 1998 depreciation expense was $157.
NOTE 3 -- SUBSEQUENT EVENTS
On June 30, 1998, 100% of the Company's common stock was acquired by
eUniverse, Inc., a publicly held company.
As a result of the sale of the Company, the Subchapter Corporation status
has been terminated.
F-78
<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.
<TABLE>
<S> <C>
Date: December 28, 1999 By: /s/ Brad Greenspan
------------------------------------
Chairman of the Board
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
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.(1)
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)
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)
10.15.1 -- Second Amendment to 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 12th day of November,
1999.(1)
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>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<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)
10.26 -- Online Partner Agreement between CD Universe, Inc. and
Accessio.com Inc., regarding US-Style, dated November 5,
1998.(1)
10.27 -- Employment Agreement by and between eUniverse, Inc. and
Martin Hamilton, dated as of October 25, 1999.(1)
10.28 -- Web Advertising Agreement by and between eUniverse, Inc.
and Mpath Interactive, Inc., dated as of August 13, 1999.
Portions of Exhibit 10.28 have been omitted pursuant to a
request for confidential treatment.(3)
10.29 -- eUniverse, Inc. Common Stock Purchase Warrant to Gerard
Klauer Mattison & Co., Inc., dated April 14, 1999.
21.01 -- Subsidiaries of eUniverse, Inc.(1)
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
23.05 -- Consent of Merdinger, Fruchter, Rosen & Corso, PC
27.01 -- Financial Data Schedule(1)
</TABLE>
- ------------
(1) Exhibit previously filed.
(2) Incorporated by reference to the Company's Form SB-2 filed on September 13,
1999 (Registration File No. 333-86959).
(3) Incorporated by reference to the Company's 10-Q Report filed on
November 15, 1999.
<PAGE>
DATED: APRIL 14, 1999
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND NEITHER THE
SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND
SUCH LAWS.
--------------------------------------
eUNIVERSE, INC.
COMMON STOCK PURCHASE WARRANT
--------------------------------------
This certifies that, for good and valuable consideration,
eUniverse, Inc., a Nevada corporation (the "Company"), grants to Gerard Klauer
Mattison & Co., Inc., or registered assigns (the "Warrantholder"), the right to
subscribe for and purchase from the Company 671,865 validly issued, fully paid
and nonassessable shares (the "Warrant Shares") of the Company's Common Stock,
par value $.001 per share (the "Common Stock"), at the purchase price per share
of $2.74 (the "Exercise Price"), from time to time, prior to 5:00PM Eastern
Standard Time on April 14, 2004 (the "Expiration Date"), all subject to the
terms, conditions and adjustments herein set forth.
Certificate No. _______________
Number of Shares 671,865
Name of Warrantholder: Gerard Klauer Mattison & Co., Inc.
<PAGE>
1. Duration and Exercise of Warrant; Limitation on Exercise; Payment of
Taxes.
1.1 Duration and Exercise of Warrant. Subject to the terms and conditions set
forth herein, the Warrant may be exercised, in whole or in part, by the
Warrantholder by:
(a) the surrender of this Warrant to the Company, with a duly
executed Exercise Form (substantially in the form attached hereto at Exhibit
"A") specifying the number of Warrant Shares to be purchased, during normal
business hours on any Business Day prior to the Expiration Date; and
(b) the delivery of payment to the Company, for the account of the
Company, by cash or by certified or bank cashier's check, of the Exercise Price
for the number of Warrant Shares specified in the Exercise Form in lawful money
of the United States of America. The Company agrees that such Warrant Shares
shall be deemed to be issued to the Warrantholder as the record holder of such
Warrant Shares as of the close of business on the date on which this Warrant
shall have been surrendered and payment made for the Warrant Shares as aforesaid
(or as provided in Section 1.2 below).
1.2 Conversion Right.
(a) In lieu of the payment of the Exercise Price, the Warrantholder
shall have the right (but not the obligation) to require the Company to convert
this Warrant, in whole or in part, into shares of Common Stock (the "Conversion
Right") as provided for in this Section 1.2. Upon exercise of the Conversion
Right, the Company shall deliver to the Warrantholder (without payment by the
Warrantholder of any of the Exercise Price; provided, however, that the
Warrantholder shall be required to pay the par value for any shares of Common
Stock so delivered) that number of shares of Common Stock equal to the quotient
obtained by dividing (x) the value of the Warrant at the time the Conversion
Right is exercised (determined by subtracting the aggregate Exercise Price in
effect immediately prior to the exercise of the Conversion Right from the
aggregate Fair Market Value for the shares of Common Stock issuable upon
exercise of the Warrant immediately prior to the exercise of the Conversion
Right) by (y) the Fair Market Value of one share of Common Stock immediately
prior to the exercise of the Conversion Right.
2
<PAGE>
(b) The Conversion Right may be exercised by the Warrantholder on any
Business Day prior to the Expiration Date by delivering the Warrant Certificate,
with a duly executed Exercise Form with the conversion section completed to the
Company, exercising the Conversion Right and specifying the total number of
shares of Common Stock the Warrantholder will be issued pursuant to such
conversion.
(c) Fair Market Value of a share of Common Stock as of a particular date
(the "Determination Date") shall mean:
(i) If the Common Stock is listed on a national securities exchange,
then the Fair Market Value shall be the average of the last ten "daily sales
prices" of the Common Stock on the principal national securities exchange on
which the Common Stock is listed or admitted for trading on the last ten
Business Days prior to the Determination Date, or if not listed or traded on any
such exchange, then the Fair Market Value shall be the average of the last ten
"daily sales prices" of the Common Stock on the National Market (the "National
Market") of the National Association of Securities Dealers Automated Quotations
System ("Nasdaq") on the last ten business days prior to the Determination Date.
The "daily sales price" shall be the closing price of the Common Stock at the
end of each day; or
(ii) If the Common Stock is not so listed or admitted to unlisted
trading privileges or if no such sale is made on at least nine of such days,
then the Fair Market Value shall be the higher of (x) the Book Value per share,
and (y) the fair value as reasonably determined in good faith by the Company's
Board of Directors or a duly appointed committee of the Board (which
determination shall be reasonably described in the written notice delivered to
the Warrantholder together with the Common Stock certificates).
1.3 Limitations on Exercise. Notwithstanding anything to the contrary herein,
this Warrant may be exercised only upon the delivery to the Company of any
certificates, legal opinions, or other documents reasonably requested by the
Company to satisfy the Company that the proposed exercise of this Warrant may be
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effected without registration under the Securities Act. The Warrantholder shall
not be entitled to exercise this Warrant, or any part thereof, unless and until
such certificates, legal opinions or other documents are reasonably acceptable
to the Company.
1.4 Warrant Shares Certificate. A stock certificate or certificates for the
Warrant Shares specified in the Exercise Form shall be delivered to the
Warrantholder within 10 Business Days after receipt of the Exercise Form and
receipt of payment of the purchase price if the Conversion Right is not
exercised. If this Warrant shall have been exercised only in part, the Company
shall, at the time of delivery of the stock certificate or certificates, deliver
to the Warrantholder a new Warrant evidencing the rights to purchase the
remaining Warrant Shares, which new Warrant shall in all other respects be
identical with this Warrant.
1.5 Payment of Taxes. The issuance of certificates for Warrant Shares shall
be made without charge to the Warrantholder for any stock transfer or other
issuance tax in respect thereto; provided, however, that the Warrantholder shall
be required to pay all costs and expenses related to registration of ownership
of the Warrant Shares, all income or other gains tax applicable to the issuance
or sale of the Warrant Shares and any and all taxes which may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the then Warrantholder as reflected upon the books
of the Company.
1.6 Transfer of Warrant. Upon surrender of this Warrant to the Company with a
duly executed Assignment Form and funds sufficient to pay any transfer tax, the
Company shall, without charge, execute and deliver a new Warrant of like tenor
in the name of the assignee named in such Assignment Form, and this Warrant
shall promptly be canceled. Each Warrantholder agrees that prior to any proposed
transfer of this Warrant, such Warrantholder shall give written notice to the
Company of such Warrantholder's intention to effect such transfer. Each such
notice shall describe the manner and circumstances of the proposed transfer in
sufficient detail, and, if requested by the Company, shall be accompanied by a
written opinion of legal counsel, which opinion shall be addressed to the
Company and be
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reasonably satisfactory in form and substance to the Company's counsel, to the
effect that the proposed transfer of this Warrant may be effected without
registration under the Securities Act. In addition, the Warrantholder and the
transferee shall execute any documentation reasonably required by the Company to
ensure compliance with the Securities Act. The Warrantholder shall not be
entitled to transfer this Warrant, or any part thereof, if such legal opinion is
not acceptable to the Company or if such documentation is not provided. The term
"Warrant" as used in this Agreement shall be deemed to include any Warrants
issued in substitution or exchange for this Warrant.
2. Restrictions on Transfer;
Restrictive Legends.
Except as otherwise permitted by this Section 2, each Warrant shall (and
each Warrant issued upon direct or indirect transfer or in substitution for any
Warrant pursuant to Section 1.6 or Section 4 shall) be stamped or otherwise
imprinted with a legend in substantially the following form:
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY
INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND
SUCH LAWS.
Except as otherwise permitted by this Section 2, each stock certificate for
Warrant Shares issued upon the exercise of any Warrant and each stock
certificate issued upon the direct or indirect transfer of any such Warrant
Shares shall be stamped or otherwise imprinted with a legend in substantially
the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS
AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE
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REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT AND SUCH LAWS.
Notwithstanding the foregoing, the Warrantholder may require the Company to
issue a Warrant or a stock certificate for Warrant Shares, in each case without
a legend, if either (i) such Warrant or such Warrant Shares, as the case may be,
have been registered for resale under the Securities Act or (ii) the
Warrantholder has delivered to the Company an opinion of legal counsel, which
opinion shall be addressed to the Company and be reasonably satisfactory in form
and substance to the Company's counsel, to the effect that such registration is
not required with respect to such Warrant or such Warrant Shares, as the case
may be.
3. Reservation and Registration of Shares, Etc.
The Company covenants and agrees as follows:
(a) all Warrant Shares which are issued upon the exercise of this
Warrant will, upon issuance, be validly issued, fully paid, and nonassessable,
not subject to any preempt ive rights, and free from all taxes, liens, security
interests, charges, and other encumbrances with respect to the issue thereof,
other than taxes with respect to any transfer occurring contemporaneously with
such issue;
(b) during the period within which this Warrant may be exercised, the
Company will at all times have authorized and reserved, and keep available free
from preemptive rights, a sufficient number of shares of Common Stock to provide
for the exercise of the rights represented by this Warrant; and
(c) the Company will, from time to time, take all such action as may be
required to assure that the par value per share of the Warrant Shares is at all
times equal to or less than the then effective Exercise Price.
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4. Loss or Destruction of Warrant.
Subject to the terms and conditions hereof, upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant and, in the case of loss, theft or destruction, of
such bond or indemnification as the Company may reasonably require, and, in the
case of such mutilation, upon surrender and cancellation of this Warrant, the
Company will execute and deliver a new Warrant of like tenor.
5. Ownership of Warrant.
The Company may deem and treat the person in whose name this Warrant is
registered as the holder and owner hereof (notwithstanding any notations of
ownership or writing hereon made by anyone other than the Company) for all
purposes and shall not be affected by any notice to the contrary, until
presentation of this Warrant for registration of transfer.
6. Certain Adjustments.
6.1 The number of Warrant Shares purchasable upon the exercise of this
Warrant and the Exercise Price shall be subject to adjustment as follows:
(a) Stock Dividends. If at any time after the date of the issuance of
this Warrant (i) the Company shall fix a record date for the issuance of any
stock dividend payable in shares of Common Stock or (ii) the number of shares of
Common Stock shall have been increased by a subdivision or split-up of shares of
Common Stock, then, on the record date fixed for the determination of holders of
Common Stock entitled to receive such dividend or immediately after the
effective date of subdivision or split up, as the case may be, the number of
shares to be delivered upon exercise of this Warrant will be increased so that
the Warrantholder will be entitled to receive the number of Shares of Common
Stock that such Warrantholder would have owned immediately following such action
had this Warrant been exercised immediately prior thereto, and the Exercise
Price will be adjusted as provided below in paragraph (g).
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(b) Combination of Stock. If the number of shares of Common Stock
outstanding at any time after the date of the issuance of this Warrant shall
have been decreased by a combination of the outstanding shares of Common Stock,
then, immediately after the effective date of such combination, the number of
shares of Common Stock to be delivered upon exercise of this Warrant will be
decreased so that the Warrantholder thereafter will be entitled to receive the
number of shares of Common Stock that such Warrantholder would have owned
immediately following such action had this Warrant been exercised immediately
prior thereto, and the Exercise Price will be adjusted as provided below in
paragraph (g).
(c) Reorganization, etc. If any capital reorganization of the Company,
any reclassification of the Common Stock, any consolidation of the Company with
or merger of the Company into any other person, or any sale or lease or other
transfer of all or substantially all of the assets of the Company to any other
person, shall be effected in such a way that the holders of Common Stock shall
be entitled to receive stock, other securities or assets (whether such stock,
other securities or assets are issued or distributed by the Company or another
person) with respect to or in exchange for Common Stock, then, upon exercise of
this Warrant, the Warrantholder shall have the right to receive the kind and
amount of stock, other securities or assets receivable upon such reorganization,
reclassification, consolidation, merger or sale, lease or other transfer by a
holder of the number of shares of Common Stock that such Warrantholder would
have been entitled to receive upon exercise of this Warrant had this Warrant
been exercised immediately before such reorganization, reclassification,
consolidation, merger or sale, lease or other transfer, subject to adjustments
that shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 6.
(d) Notwithstanding any other provision of this Section 6, no adjustment
shall be made in any of the following cases:
(i) Upon the grant or exercise of stock options now or hereafter
granted, or the issuance of shares of Common Stock, under any employee stock
option or stock purchase plan now
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or hereafter authorized, to the extent that the aggregate number of shares of
Common Stock which may be purchased pursuant to such options and issued under
such employee stock purchase plan is less than or equal to 10 percent of the
number of shares of Common Stock outstanding on January 1 of the year of the
grant or exercise;
(ii) Issuance of shares of Common Stock upon the conversion of any
of the Company's convertible or exchangeable securities;
(iii) Issuance of shares of Common Stock in connection with the
acquisition by the Company or by any subsidiary of the Company of eighty percent
(80%) or more of the assets of another corporation or entity, issuance of shares
of Common Stock in connection with the acquisition by the Company or by any
subsidiary of the Company of eighty percent (80%) or more of the voting shares
of another corporation (including shares of Common Stock issued in connection
with such acquisition of voting shares of such other corporation subsequent to
the acquisition of an aggregate of eighty percent (80%) of such voting shares),
issuance of shares of Common Stock in a merger of or share exchange by the
Company or a subsidiary of the Company with another corporation in which the
Company or the Company's subsidiary is the surviving or acquiring corporation,
and issuance of shares of Common Stock upon the conversion of other securities
issued in connection with any such acquisition or in any such merger or share
exchange; and
(iv) Issuance of shares of Common Stock issued pursuant to this
Warrant and pursuant to all stock options and warrants outstanding on the date
hereof.
(e) Fractional Shares. No fractional shares of Common Stock or scrip
shall be issued to any Warrantholder in connection with the exercise of this
Warrant. Instead of any fractional shares of Common Stock that would otherwise
be issuable to such Warrantholder, the Company will pay to such Warrantholder a
cash adjustment in respect of such fractional interest in an amount equal to
that fractional interest of the then current Fair Market Value per share of
Common Stock.
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(f) Carryover. Notwithstanding any other provision of this Section 6, no
adjustment shall be made to the number of shares of Common Stock to be delivered
to the Warrantholder (or to the Exercise Price) if such adjustment represents
less than 1% of the number of shares to be so delivered, but any lesser
adjustment shall be carried forward and shall be made at the time and together
with the next subsequent adjustment which together with any adjustments so
carried forward shall amount to 1% or more of the number of shares to be so
delivered.
(g) Exercise Price Adjustment. Whenever the number of Warrant Shares
purchasable upon the exercise of the Warrant is adjusted, as herein provided,
the Exercise Price payable upon the exercise of this Warrant shall be adjusted
by multiplying such Exercise Price immediately prior to such adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of the Warrant immediately prior to such
adjustment, and of which the denominator shall be the number of Warrant Shares
purchasable immediately thereafter.
6.2 Notice of Adjustments. Whenever the number of Warrant Shares or the
Exercise Price of such Warrant Shares is adjusted, as herein provided, the
Company shall promptly mail by first class, postage prepaid, to the
Warrantholder, notice setting forth such adjustment or adjustments.
6.3 Notice of Extraordinary Corporate Events. In case the Company after the
date hereof shall propose to (i) distribute any dividend (whether stock or cash
or otherwise) to the holders of shares of Common Stock or to make any other
distribution to the holders of shares of Common Stock, (ii) offer to the holders
of shares of Common Stock rights to subscribe for or purchase any additional
shares of any class of stock or any other rights or options, or (iii) effect any
reclassification of the Common Stock (other than a reclassification involving
merely the subdivision or combination of outstanding shares of Common Stock),
any sale, transfer or other disposition of all or substantially all of its
property, assets and business, or the liquidation, dissolution or winding up of
the Company, then, in each such case, the Company shall mail to each
Warrantholder notice of such proposed action, which notice shall specify the
date on which (a) the books of the Company shall close, or (b) a record shall be
taken for determining the holders of Common Stock entitled to receive such
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stock dividends or other distribution or such rights or options, or (c) such
reclassification, sale, transfer, other disposition, liquidation, dissolution or
winding up shall take place or commence, as the case may be, and the date, if
any, as of which it is expected that holders of record of Common Stock shall be
entitled to receive securities or other property deliverable upon such action.
Such notice shall be mailed in the case of any action covered by clause (i) or
(ii) above at least 10 days prior to the record date for determining holders of
Common Stock for purposes of receiving such payment or offer, or in the case of
any action covered by clause (iii) above at least 30 days prior to the date upon
which such action takes place and 20 days prior to any record date to determine
holders of Common Stock entitled to receive such securities or other property.
6.4 Effect of Failure to Notify. Failure to file any certificate or notice or
to mail any notice, or any defect in any certificate or notice, pursuant to
Sections 6.4 and 6.5 shall not affect the legality or validity of the adjustment
to the Exercise Price, the number of shares purchasable upon exercise of this
Warrant, or any transaction giving rise thereto.
7. Registration Rights.
7.1 Incidental Registration.
(a) If at any time after October 14, 2000, the Company proposes to
register any of its Common Stock under the Securities Act in connection with a
public offering of such securities solely for cash by registration on any form
other than Form S-4 or S-8 or any form that does not include substantially the
same information as would be required to be included in a registration statement
covering the sale of such securities, whether or not for sale for its own
account, it shall each such time give prompt written notice to all registered
Holders of Registrable Securities of its intention to do so and of such Holders'
rights under this Section 7.2. Upon the written request of any such Holder (a
"Requesting Holder") made as promptly as practicable and in any event within 10
days after the receipt of any such notice (which request shall specify the
Registrable Securities intended to be disposed of by such Requesting Holder and
the intended method of disposition), the Company shall use its reasonable best
efforts to effect the registration under the
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Securities Act of all Registrable Securities that the Company has been so
requested to register by the Requesting Holders thereof to the extent required
to permit the disposition of such Registrable Securities in accordance with the
intended methods thereof described as aforesaid; provided, however, that prior
to the effective date of the registration statement filed in connection with
such registration, immediately upon notification to the Company from the
managing underwriter of the price at which such securities are to be sold, if
such price is below the price which any Requesting Holder shall have indicated
to be acceptable to such Requesting Holder, the Company shall so advise such
Requesting Holder of such price, and such Requesting Holder shall then have the
right to withdraw its request to have its Registrable Securities included in
such registration statement; provided further, that if, at any time after giving
written notice of its intention to register any securities and prior to the
effective date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to register or to
delay registration of such securities, the Company may, at its election, give
written notice of such determination to each Requesting Holder of Registrable
Securities and (i) in the case of a determination not to register, shall be
relieved of its obligation to register any Registrable Securities in connection
with such registration (but not from any obligation of the Company to pay the
registration expenses in connection therewith), without prejudice, however, to
the rights of any Holder or Holders of Registrable Securities under Section 7.1,
and (ii) in the case of a determination to delay registering, shall be permitted
to delay registering any Registrable Securities, for the same period as the
delay in registering such other securities. No registration effected under this
Section 7.2 shall relieve the Company of its obligations under Section 7.1.
Notwithstanding the foregoing, if registration pursuant to Section 7.1 is
effective at the time the Company proposes to effect a registration subject to
this Section 7.2, the Company shall have no obligation to notify the Holders of
Registrable Securities or effect the registration of any such securities under
this Section 7.2 unless the securities to be registered by the Company are to be
disposed of in an underwritten offering.
(b) If the managing underwriter of any underwritten offering under this
Section 7.2 shall inform the Company by
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letter that, in its opinion, the number or type of Registrable Securities
requested to be included in such registration would adversely affect such
offering, and the Company has so advised the Requesting Holders in writing, then
the Company will include in such registration, to the extent of the number and
type that the Company is so advised can be sold in (or during the time of) such
offering, first, all securities proposed by the Company to be sold for its own
account, second, such Registrable Securities requested to be included in such
registration pursuant to this Agreement, pro rata among such Requesting Holders
on the basis of the estimated proceeds from the sale thereof and, third, all
other securities proposed to be registered.
8. Obligations of the Company. In connection with the registration of the
Registrable Securities as contemplated by Section 7.1 or 7.2, the Company shall:
8.1 prepare and file with the SEC a registration statement or statements or
similar documents (the "Registration Statement") with respect to (i) in the case
of registration contemplated by Section 7.1, all Registrable Securities, and
thereafter use its best efforts to cause the Registration Statement to become
effective and keep the Registration Statement effective pursuant to Rule 415 at
all times until the third anniversary of such effective date, and (ii) in the
case of incidental registration pursuant to Section 7.2, the securities to be
sold by the Company together with the Registrable Securities to be sold by the
Requesting Holders, and thereafter use its best efforts to cause the
Registration Statement to become effective, which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein), in each case, shall not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading;
8.2 prepare and file with the SEC such amendments (including post-effective
amendments) and supplements to the Registration Statement and the prospectus
used in connection with the Registration Statement as may be necessary to keep
the Registration Statement effective and to comply with the provisions of the
Securities Act with respect to the disposition
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of all Registrable Securities covered by the Registration Statement for 180 days
after such effective date;
8.3 furnish to each Holder whose Registrable Securities are included in the
Registration Statement such number of copies of a prospectus, including a
preliminary prospectus and all amendments and supplements thereto and such other
documents, as such Holder may reasonably request in order to facilitate the
disposition of the Registrable securities owned by such Holder;
8.4 use reasonable efforts to (i) register and qualify the Registrable
Securities covered by the Registration Statement under such other securities or
Blue Sky laws of such jurisdictions as the Holders who hold a majority in
interest of the Registrable Securities reasonably request, (ii) prepare and file
in those jurisdictions all required amendments (including post-effective
amendments) and supplements, (iii) take such other actions as may be necessary
to maintain such registrations and qualifications in effect at all times the
Registration Statement is in effect and (iv) take all other actions necessary or
advisable to enable the disposition of such securities in all such
jurisdictions; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 8.4;
8.5 (i) in the case of registration contemplated by Section 7.1, in the event
Holders who hold a majority in interest of the Registrable Securities select
underwriters for the offering, and (ii) in the case of registration contemplated
by Section 7.2, in the event of an underwritten offering, enter into and perform
its obligations under an underwriting agreement with the managing underwriter of
such offering, in usual and customary form, including, without limitation,
customary indemnification and contribution obligations, and (iii) in the case of
any non-underwritten offering, provide to broker-dealers participating in any
distribution of Registrable Securities reasonable indemnification substantially
similar to that provided by Section 11.1;
8.6 promptly notify each Holder who holds Registrable Securities being sold
(or, in the event of an underwritten offering, the managing underwriters) of the
issuance by the SEC
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of any stop order or other suspension of effectiveness of the Registration
Statement, and make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of the Registration Statement at the earliest
possible time;
8.7 permit a single firm of counsel designated as selling stockholders'
counsel by the Holders who hold a majority in interest of the Registrable
Securities being sold to review a draft of the Registration Statement and all
amendments and supplements thereto a reasonable period of time prior to their
filing with the SEC;
8.8 if Registrable Securities are delivered to an underwriter for sale in
connection with the Registration Statement, at the request of the Holders who
hold a majority in interest of the Registrable Securities being sold, furnish on
the date that Registrable Securities are delivered to an underwriter for sale in
connection with the Registration Statement (i) a letter, dated such date, from
the Company's independent certified public accountants, in form and substance as
is customarily given by independent certified public accountants to underwriters
in an underwritten public offering, addressed to the underwriters; and (ii) an
opinion, dated such date, from counsel representing the Company for purposes of
such Registration Statement, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters;
8.9 make available for inspection by any Holder, any underwriter
participating in any disposition pursuant to the Registration Statement, and any
attorney, accountant, or other agent retained by any such Holder or underwriter
(collectively, the "Inspectors"), all pertinent financial and other records,
pertinent corporate documents and properties of the Company, as shall be
reasonably necessary to enable each Inspector to exercise its due diligence
responsibility, and cause the Company's officers, directors and employees to
supply all information reasonably requested by any such Inspector in connection
with the Registration Statement;
8.10 use its best efforts either to (i) cause all the Registrable Securities
covered by the Registration Statement to be listed on a national securities
exchange and on each additional national securities exchange on which similar
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securities issued by the Company are then listed, if any, if the listing of such
Registrable Securities is then permitted under the rules of such exchange or
(ii) secure designation of all the Registrable Securities covered by the
Registration Statement as a Nasdaq "National Market Security" within the meaning
of Rule 11Aa2-l of the SEC and the quotation of the Registrable Securities on
the Nasdaq National Market;
8.11 provide a transfer agent and registrar, which may be a single entity,
for the Registrable Securities not later than the effective date of the
Registration Statement;
8.12 cooperate with the Holders who hold Registrable Securities being sold
and the managing underwriter or underwriters, if any, to facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legends)
representing Registrable Securities to be sold pursuant to the Registration
Statement and enable such certificates to be in such denominations or amounts,
as the case may be, and registered in such names as the managing underwriter or
underwriters, if any, or the Holders may reasonably request; and
8.13 take all other reasonable actions necessary to expedite and facilitate
disposition by the Holders of the Registrable Securities pursuant to the
Registration Statement.
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9. Obligations of the Holders.
9.1 It shall be a condition precedent to the obligations of the Company to
take any action pursuant to this Agreement with respect to each Holder that such
Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it and the intended method of disposition of such
securities as shall be reasonably required to effect the registration of the
Registrable Securities and shall execute such documents and agreements in
connection with such registration as the Company may reasonably request. At
least ten days prior to the first anticipated filing date of the Registration
Statement, the Company shall notify each Holder of the information the Company
requires from each such Holder (the "Requested Information") if he elects to
have any of his Registrable Securities included in the Registration Statement.
If within three Business Days of the filing date the Company has not received
the Requested Information from a Holder (a "Non-Responsive Holder"), then the
Company may file the Registration Statement without including Registrable
Securities of such Non-Responsive Holders;
9.2 Each Holder, by his acceptance of the Registrable Securities, agrees to
cooperate with the Company in connection with the preparation and filing of any
registration statement hereunder, unless, (i) in the case of registration
contemplated by Section 7.1, such Holder has notified the Company in writing of
his election to exclude all of his Registrable Securities from the Registration
Statement, or (ii) in the case of incidental registration pursuant to Section
7.2, such Holder has decided not to participate;
9.3 In the case of registration contemplated by Section 7.1, in the event
Holders holding a majority in interest of the Registrable Securities select
underwriters for the offering, and in the case of registration contemplated by
Section 7.2, in the event of an underwritten offering, each Holder agrees to
enter into and perform his obligations under an underwriting agreement, in usual
and customary form, including without limitation customary indemnification and
contribution obligations, with the managing underwriter of such offering and
take such other actions
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as are reasonably required in order to expedite or facilitate the disposition of
the Registrable Securities, unless (i) in the case of registration contemplated
by Section 7.1, such Holder has notified the Company in writing of his election
to exclude all of his Registrable Securities from the Registration Statement, or
(ii) in the case of registration contemplated by Section 7.2, such Holder has
decided not to participate;
9.4 Each Holder agrees that, upon receipt of any notice from the Company of
the happening of any event of the kind described in Section 8.6, such Holder
will immediately discontinue disposition of Registrable Securities pursuant to
the Registration Statement covering such Registrable Securities until such
Holder's receipt of the copies of the supplemented or amended prospectus
contemplated by Section 8.6 and, if so directed by the Company, such Holder
shall deliver to the Company (at the expense of the Company) or destroy (and
deliver to the Company a certificate of such destruction) all copies, other than
permanent file copies then in such Holder's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice; and
9.5 No Holder may participate in any underwritten registration hereunder
unless such Holder (i) agrees to sell such Holder's Registrable Securities on
the basis provided in any underwriting arrangements approved by the Holders
entitled hereunder to approve such arrangements, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements and (iii) agrees to pay such Holder's pro rata portion of all
underwriting discounts and commissions.
10. Expenses of Registration. Except as otherwise set forth herein, all
expenses other than underwriting discounts and commissions incurred in
connection with registration, filings or qualifications pursuant to Section 8,
including, without limitation, all registration, listing, filing and
qualification fees, printers and accounting fees, the fees and disbursements of
counsel for the Company and the reasonable fees and disbursements of one firm of
counsel for the Holders shall be borne by the Company.
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11. Indemnification. In the event any Registrable Securities are included in
a Registration Statement under this Agreement:
11.1 To the extent permitted by law, the Company will indemnify and hold
harmless each Holder who holds such Registrable Securities, the directors, if
any, of such Holder, the officers, if any, of such Holder, who sign the
Registration Statement, each person, if any, who controls such Holder, any
underwriter (as defined in the Securities Act) for the Holders, and each person,
if any, who controls any such underwriter within the meaning of the Securities
Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(each, an "Indemnified Holder") against any losses, claims, damages, expenses,
liabilities (joint or several) (collectively, "Claims") to which any of them may
become subject under the Securities Act, the Exchange Act or otherwise, insofar
as such Claims (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively, a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or any post-effective amendment thereof, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented if
the Company files any amendment thereof or supplement thereto with the SEC), or
the omission or alleged omission to state therein a material fact required to be
stated therein, or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading, or (iii) any
violation or alleged violation by the Company of the Securities Act, the
Exchange Act, any state securities law, or any rule or regulation promulgated
under the Securities Act, the Exchange Act, or any state securities law. Subject
to the restrictions set forth in Section 11.4 with respect to the number of
legal counsel, the Company shall reimburse the Holders and each such underwriter
or controlling person, promptly as such expenses are incurred and are due and
payable, for any legal fees or other reasonable expenses incurred by them in
connection with investigating or
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defending any such Claim, whether or not such claim, investigation or proceeding
is brought or initiated by the Company or a third party. If multiple claims are
brought against an Indemnified Holder in an arbitration proceeding, and
indemnification is permitted under applicable law and is provided for under this
Section 11 with respect to at least one such claim, the Company agrees that any
arbitration award shall be conclusively deemed to be based on claims as to which
indemnification is permitted and provided for, except to the extent the
arbitration award expressly states that the award, or any portion thereof, is
based solely on a claim as to which indemnification is not available.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 11.1 (a) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by any Indemnified Holder
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto; and (b) shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of the Company, which consent shall not be
unreasonably withheld. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Indemnified Holder
and shall survive the transfer of the Registrable Securities by the Holders
pursuant to Section 14.
11.2 In connection with any Registration Statement in which a Holder is
participating, each such Holder agrees to indemnify and hold harmless, to the
same extent and in the same manner set forth in Section 11.1, the Company, each
of its directors, each of its officers who sign the Registration Statement, each
person, if any, who controls the Company within the meaning of the Securities
Act or the Exchange Act, any underwriter and any other stockholder selling
securities pursuant to the Registration Statement or any of its directors or
officers or any person who controls such stockholder or underwriter
(collectively and together with an Indemnified Holder, an "Indemnified Party"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
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information furnished to the Company by such Holder expressly for use in
connection with such Registration Statement; and such Holder will reimburse any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such Claim; provided, however, that the indemnity
agreement contained in this Section 11.2 shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of such Holder, which consent shall not be unreasonably withheld;
provided, further, that the Holder shall be liable under this Section 11.2 for
only that amount of a Claim as does not exceed the net proceeds to such Holder
as a result of the sale of Registrable Securities pursuant to such Registration
Statement.
11.3 The Company shall be entitled to receive indemnities from underwriters,
selling brokers, dealer managers, and similar securities industry professionals
participating in the distribution to the same extent as provided above, with
respect to information about such persons so furnished in writing by such
persons expressly for inclusion in the Registration Statement.
11.4 Promptly after receipt by an Indemnified Party under this Section 11 of
notice of the commencement of any action (including any governmental action),
such Indemnified Party shall, if a Claim in respect thereof is to be made
against any indemnifying party under this Section 11, deliver to the
indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
satisfactory to the Indemnified Parties; provided, however, that an Indemnified
Party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
for the Indemnified Party, representation of such Indemnified Party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such Indemnified Party and any other
party represented by such counsel in such proceeding. The Company shall pay for
only one legal counsel for the Holders; such legal counsel shall be selected by
the Holders holding a majority in interest of the Registrable Securities. The
failure to deliver written notice to the indemnifying party within a
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reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Party under this Section
11, except to the extent that such failure to notify results in the forfeiture
by the indemnifying party of substantive rights or defenses. The indemnification
required by this Section 11 shall be made by periodic payments of the amount
thereof during the course of the investigation or defense, as such expense,
loss, damage or liability is incurred and is due and payable.
12. Contribution. To the extent any indemnification by an indemnifying party
is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 11 to the fullest extent permitted by law; provided,
however, that (i) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 11, (ii) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of such fraudulent misrepresentation and (iii)
contribution by any seller of Registrable Securities shall be limited in amount
to the net amount of proceeds received by such seller from the sale of such
Registrable Securities.
13. Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the
Securities Act or any other similar rule or regulation of the SEC that may at
any time permit the Holders to sell securities of the Company to the public
without registration ("Rule 144"), the Company agrees to:
13.1 make and keep public information available, as those terms are
understood and defined in Rule 144, at all times after the date hereof;
13.2 file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and
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13.3 furnish to each Holder so long as such Holder owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144 (at any time after
90 days after the effective date of the first registration statement filed by
the Company), the Securities Act and the Exchange Act (at any time after it has
become subject to such reporting requirements), (ii) a copy of the most recent
annual or quarterly report of the Company and such other reports and documents
so filed by the Company, and (iii) such other information as may be reasonably
requested to permit the Holders to sell such securities without registration.
14. Assignment of Registration Rights. The right to have the Company register
Registrable Securities pursuant to this Warrant may be assigned by the Holders,
upon prior (or as soon as practicable) written notice to the Company, to
transferees or assignees of this Warrant or such Registrable Securities,
provided that immediately following such transfer or assignment, the further
disposition of such securities by the transferee or assignee would be subject to
restrictions under the Securities Act. The term "Holders" as used herein shall
include permitted assignees and transferees.
15. Amendments. Any provision of this Warrant (including registration rights)
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders who hold a majority in interest
of the Registrable Securities. Any amendment or waiver effected in accordance
with this Section 15 shall be binding upon each Holder and the Company.
16. Expiration of the Warrant. Except with respect to Sections 11, 12, and
13, the obligations of the Company pursuant to this Warrant shall terminate on
the Expiration Date.
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17. Definitions.
As used herein, unless the context otherwise requires, the following terms
have the following respective meanings:
Additional Securities: all shares, (including treasury shares) of Common
Stock, rights, options, warrants, or convertible or exchangeable securities
containing the right to subscribe for or purchase shares of Common Stock, issued
or sold by the Company after the date hereof, excluding: (i) any shares of
Common Stock, rights, options, warrants, or convertible or exchangeable
securities (or shares of Common stock issued upon conversion, exchange or
exercise, as the case may be, of such rights, options, warrants, or convertible
or exchangeable securities) for which an adjustment has been made pursuant to
Section 6.1(a); (ii) the Warrant Shares; and (iii) any options (or shares of
Common Stock issued upon exercise of such options) issued pursuant to a stock
option plan which is approved by the Board of Directors of the Company and
provides that such options shall be exercisable at a price per share of Common
Stock which is no less than 85% of the Fair Market Value per share of Common
Stock on the date of such issuance.
Assignment Form: an Assignment Form in the form annexed hereto as Exhibit B.
Book Value: per share of Common Stock as of any date herein shall mean the
Consolidated Net Worth of the Company and its Subsidiaries as of such date
divided by the number of shares of Common Stock outstanding as of such date.
Business Day: any day other than a Saturday, Sunday or a day on which
national banks are authorized by law to close in The City of New York, State of
New York.
Claims: the meaning specified in Section 11.1.
Common Stock: the meaning specified on the cover of this Warrant.
Company: the meaning specified on the cover of this Warrant.
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Convertible Securities: evidences of indebtedness, shares of stock or other
securities which are convertible into or exchangeable for, with or without
payment of additional consideration, additional shares of Common Stock, either
immediately or upon the arrival of a specified date or the happening of a
specified event.
Consolidated Net Worth: as of any date herein specified, the total
consolidated assets of the Company and its Subsidiaries minus the total
consolidated liabilities of the Company and its Subsidiaries (exclusive of any
liabilities associated with the Warrant) as determined from the consolidated
balance sheet of the Company and its Subsidiaries from the most recent fiscal
quarter, which consolidated balance sheet shall be prepared in accordance with
generally accepted accounting principles, shall be in reasonable detail, and
shall be certified as complete and correct by the chief financial or accounting
officer of the Company.
Exchange Act: the meaning specified in Section 11.1 or any similar Federal
statute, and the rules and regulations of the SEC thereunder, all as the same
shall be in effect at the time. Reference to a particular section of the
Exchange Act shall include a reference to a comparable section, if any, of any
such similar Federal statute.
Exercise Form: an Exercise Form in the form annexed hereto as Exhibit A.
Exercise Price: the meaning specified on the cover of this Warrant.
Expiration Date: the meaning specified on the cover of this Warrant.
Fair Market Value: the meaning specified in Section 1.2(c).
Holder(s): holder(s) of Registrable Securities.
Indemnified Holder: the meaning specified in Section 11.1.
Indemnified Party: the meaning specified in Section 11.2.
Inspectors: the meaning specified in Section 8.11.
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Nasdaq: the meaning specified in Section 1.2(c)(i).
National Market: the meaning specified in Section 1.2(c)(i).
Non-Responsive Holder: the meaning specified in Section 9.2.
Other Securities: any stock and other securities of the Company (other than
Common Stock) or of any other entity which shall become subject to issue or sale
upon the conversion or exchange of any stock or other securities of the Company.
Registrable Securities: (i) the Warrant Shares and other securities issued or
issuable upon exercise of the Warrants and (ii) any securities issued or
issuable with respect to any Common Stock or other securities referred to in
subdivision (i) by way of stock dividend or stock split or in connection with a
combination or other reorganization or otherwise.
Registration Statement: the meaning specified in Section 8.1.
Requested Information: the meaning specified in Section 9.1.
Requesting Holder: the meaning specified in Section 7.2.(a).
Rule 144: the meaning specified in Section 13.
Rule 415: Rule 415 under the Securities Act or any successor rule providing
for offering securities on a continuous basis.
SEC: the Securities and Exchange Commission or any other Federal agency at
the time administering the Securities Act or the Exchange Act, whichever is the
relevant statute for the particular purpose.
Securities Act: the meaning specified on the cover of this Warrant, or any
similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. Reference to a
particular section of the Securities Act, shall include a reference to the
comparable section, if any, of any such similar Federal statute.
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Subsidiary: any corporation or association (a) more than 50% (by number of
votes) owned by the Company by one or more of its Subsidiaries, or any other
business entity in which the Company or one or more of its Subsidiaries owns
more than a 50% interest in either the capital or profits of such business
entity, or (b) whose net earnings or portions thereof are consolidated with the
net earnings of the Company and are recorded in the books of the Company for
financial reporting purposes in accordance with generally accepted accounting
principles.
Violation: the meaning specified in Section 11.1.
Warrantholder: the meaning specified on the cover of this Warrant.
Warrant Shares: the meaning specified on the cover of this Warrant.
18. Miscellaneous.
18.1 Entire Agreement. This Warrant constitutes the entire agreement between
the Company and the Warrantholder with respect to the Warrants.
18.2 Binding Effects; Benefits. This Warrant shall inure to the benefit of
and shall be binding upon the Company and the Warrantholder and their respective
heirs, legal representatives, successors and assigns. Nothing in this Warrant,
expressed or implied, is intended to or shall confer on any person other than
the Company and the Warrantholder, or their respective heirs, legal
representatives, successors or assigns, any rights, remedies, obligations or
liabilities under or by reason of this Warrant.
18.3 Section and Other Headings. The section and other headings contained in
this Warrant are for reference purposes only and shall not be deemed to be a
part of this Warrant or to affect the meaning or interpretation of this Warrant.
18.4 Pronouns. All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may require.
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18.5 Further Assurances. Each of the Company and the Warrantholder shall do
and perform all such further acts and things and execute and deliver all such
other certificates, instruments and documents as the Company or the
Warrantholder may, at any time and from time to time, reasonably request in
connection with the performance of any of the provisions of this Agreement.
18.6 Notices. All notices and other communications required or permitted to
be given under this Warrant shall be in writing and shall be deemed to have been
duly given if delivered personally or sent by United States mail, postage
prepaid, to the parties hereto at the following addresses or to such other
address as any party hereto shall hereafter specify by notice to the other party
hereto:
(a) if to the Company, addressed to:
101 North Plains Industrial Road
Wallingford, CT 06492
Attention: President
(b) if to the Warrantholder, addressed to:
Gerard Klauer Mattison & Co., Inc.
529 Fifth Avenue
New York, NY 10017
Attention: Dominic A. Petito
the address of such Warrantholder appearing on the books of the
Company.
Except as otherwise provided herein, all such notices and communications shall
be deemed to have been received on the date of delivery thereof, if delivered
personally, or on the third Business Day after the mailing thereof.
18.7 Separability. Any term or provision of this Warrant which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the terms and provisions of this Warrant or
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affecting the validity or enforceability of any of the terms or provisions of
this Warrant in any other jurisdiction.
18.8 Governing Law. This Warrant shall be deemed to be a contract made under
the laws of Connecticut and for all purposes shall be governed by and construed
in accordance with the laws of such State applicable to such agreements made and
to be performed entirely within such State.
18.9 No Rights or Liabilities as Stockholder. Nothing contained in this
Warrant shall be determined as conferring upon the Warrantholder any rights as a
stockholder of the Company or as imposing any liabilities on the Warrantholder
to purchase any securities whether such liabilities are asserted by the Company
or by creditors or stockholders of the Company or otherwise.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
eUNIVERSE, INC.
By: /s/ Leland N. Silvas
___________________________________
Date: April 14, 1999
_________________________________
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EXHIBIT A
EXERCISE FORM
TO: eUNIVERSE, INC.
The undersigned hereby irrevocably elects to exercise the attached
Warrant Certificate to the extent of _____ shares of the Common Stock of
eUNIVERSE, INC., and hereby makes payment of $_____ in accordance with the
provisions of Section 1 of the Warrant Certificate in payment of the purchase
price thereof.
Name:
(Please type or print in block letters)
Gerard Klauer Mattison & Co., Inc.
By:
Name:
Its:
Date:
529 Fifth Avenue
New York, NY 10017
Attention: Dominic A. Petito
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EXHIBIT 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
eUNIVERSE, INC.
101 North Plains Industrial Road
Wallingford, Connecticut 06492
We consent to the use in this Registration Statement of eUniverse, Inc. on
Form 10, Amendment No. 3 of our report dated April 9, 1999, and to the reference
to us under the headings "Experts."
Jonathan P. Reuben, C.P.A.
An Accountancy Corporation
Torrance, CA 90505
December 28, 1999
<PAGE>
EXHIBIT 23.02
Securities and Exchange Commission
Washington, DC
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of eUniverse, Inc. on
Form 10/A, Amendment No. 3 of our report dated June 3, 1999, and to the
reference to us under the headings "Experts."
CORDOVANO AND HARVEY, P.C.
Cordovano and Harvey, P.C.
Denver, Colorado
December 28, 1999
<PAGE>
EXHIBIT 23.03
[LETTERHEAD OF MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.]
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 Statement.
Merdinger, Fruchter, Rosen & Corso, P.C.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
December 28, 1999
<PAGE>
EXHIBIT 23.04
[LETTERHEAD OF MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.]
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 Statement.
Merdinger, Fruchter, Rosen & Corso, P.C.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
December 28, 1999
<PAGE>
EXHIBIT 23.05
[LETTERHEAD OF MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.]
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in this Registration Statement of eUniverse, Inc.
on Form 10 of our report dated November 17, 1999 relating to the financial
statements of Gamer's Alliance, Inc., and to the reference to our Firm under the
caption "Experts" in such Registration Statement.
Merdinger, Fruchter, Rosen & Corso, P.C.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
December 28, 1999
