EUNIVERSE INC, 10-Q/A, 1999-12-30

EUNIVERSE INC
10-Q/A, 1999-12-30
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As filed with the Securities and Exchange Commission on December 30, 1999
- -------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NUMBER 1

Quarterly report pursuant to Section 13 or 15(d)of the Securities Exchange Act
of 1934

For the quarterly period ended September 30, 1999

Commission file number: 0-26355
eUniverse, Inc.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
Nevada 06-1556248
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

101 North Plains Industrial Road 06492
Wallingford, Connecticut (Zip Code)
(Address of principal executive offices)
</TABLE>

203-265-6412
(Registrant's telephone number, including area code)

The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 3 months and has
been subject to such filing requirements for the past 90 days.

As of November 15, 1999, there were 14,932,723 shares of
eUniverse, Inc. common stock, $.001 par value outstanding.

<PAGE>

eUNIVERSE, INC.

FORM 10-Q/A

AMENDMENT NUMBER 1

FOR THE QUARTER ENDED SEPTEMBER 30, 1999

INDEX
<TABLE>
<CAPTION>

Page
------
<S> <C>
PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.................................................................... 1

Balance sheets, September 30, 1999, March 31, 1999 and December 31, 1998...................... 1

Statements of operations, for the three and six months ended September 30, 1999 and 1998...... 2

Statements of cash flows, for the six months ended September 30, 1999 and 1998................ 3

Statements of shareholders' equity (deficit) for March 31 and September 30, 1999.............. 4

Summary of significant accounting policies.................................................... 5

Notes to financial statements................................................................. 5

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION............................................................................ 16

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS....................................................................... 21

</TABLE>

<PAGE>

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

<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

<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

<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 TOTAL
------ --------- ------ --------- ------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Share issued to acquire option
to purchase CD Universe..... -- $ -- 8,061,000 $ 8,061 $ 247,039 -- $255,100
Shares issued for merger
related services............ -- -- 1,539,000 1,539 47,145 -- 48,684
Shares issued pursuant to
Rule 506 of Regulation D.... -- -- 250,000 250 249,750 250,000
Shares issued pursuant to
employment agreement........ -- -- 200,000 200 6,036 -- 6,236
--------- -------- ---------- ------- ----------- --------- --------- ---------
Balance, March 31,
1999................ -- -- 10,050,000 10,050 549,970 -- 560,020
Sale of Preferred Stock....... 1,795,024 179,502 6,282,584 6,462,086
Cost of offerings and
issuance.................... -- -- (1,950,110) (1,950,110)
Shares issued in acquisition
of eUniverse.com website.... -- -- 15,000 15 59,985 60,000
Shares issued in acquisition
of CD Universe, Inc. ....... -- -- 2,425,000 2,425 7,272,575 7,275,000
Shares issued for services.... -- -- 339,000 339 169,161 169,500
Shares retained by former MCA
Shareholders................ -- -- 1,200,993 1,201 857,276 858,477
Shares issued in acquisition
of Mega DVD................. -- -- 4,605 5 52,495 52,500
Shares issued in acquisition
of Case's Ladder, Inc. ..... -- -- 700,000 700 6,999,300 7,000,000
Stock options issued in
connection with acquisition
of Case's Ladder, Inc. ..... -- -- -- -- 350,000 350,000
Stock options issued in
connection with services
performed................... -- -- -- -- 1,000 1,000
Fair Value of the warrants
issued...................... -- -- -- -- 1,214,567 1,214,567
Shares issued in acquisition
of Gamer's Alliance,
Inc. ....................... -- -- 78,125 78 999,922 1,000,000
Shares issued to employees of
CD Universe as compensation
expense..................... -- -- 25,000 25 237,475 (237,500) 0
Amortization of deferred stock
compensation................ -- -- -- -- -- 83,125 83,125
Shares issued in acquisition
of The Big Network, Inc. ... 1,440,000 1,440 8,818,560 8,820,000
Net income for the six months
ended September 30, 1999.... -- -- -- -- -- (3,279,656) (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) $28,676,509
--------- -------- ---------- ------- ----------- --------- ----------- -----------
--------- -------- ---------- ------- ----------- --------- ----------- -----------

</TABLE>

<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

<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,

<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.

<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.

<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)

<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>

<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>

<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.

<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.

<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

<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.

<PAGE>

ITEM 2. 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.

<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.

<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.

<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.

<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.

<PAGE>

PART II
OTHER INFORMATION

ITEM 1 -- 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.

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.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized.

eUNIVERSE, INC.
Registrant

Dated: December 30, 1999 /s/ WILLIAM R. WAGNER
--------------------------------------
William R. Wagner
Chief Financial Officer
(Principal Financial Officer)
and Registrant's Authorized Officer