<PAGE>
As filed with the Securities and Exchange Commission on August 14, 2000
-------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d)of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 2000
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 June 30, 2000, there were 17,789,100 shares of
eUniverse, Inc. common stock, $.001 par value outstanding.
<PAGE>
eUNIVERSE, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. FINANCIAL STATEMENTS (Unaudited) . . . . . . . . . . . . . . . . . . . . . 3
Balance sheets, June 30, 2000 and March 31, 2000 . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations, for the three months ended
June 30, 2000 and June 30, 1999. . . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of cash flows, for the three months ended June 30, 2000 and
June 30, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 5
Notes to financial statements . . . . . . . . . . . . . . . . . . . . . .. . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION . . . . . . . . . . . . . . . . . . 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK .. . . . . . . . . . . . . . . . . . . . . . . . .. . . . 16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
eUNIVERSE, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
---- ----
Unaudited
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents .............................. $ 28,751 $ 2,323,087
Accounts receivable, net of allowances for
doubtful accounts of 78,214 and $78,214, respectively 1,590,911 994,364
Inventory .............................................. 333,192 431,714
Due from employees ..................................... 153,200 153,200
Prepaid expenses and other current assets .............. 2,594,166 2,350,559
------------ ------------
Total Current Assets 4,700,220 6,252,924
FURNITURE AND EQUIPMENT, less accumulated depreciation
of $341,889, and $270,188 respectively .............. 1,259,991 1,190,071
GOODWILL, net of amortization of
$3,121,508 and $2,287,420 respectively .............. 28,941,486 29,114,844
OTHER INTANGIBLES, net of amortization of
$209,070 and $153,319, respectively ................. 921,961 911,212
Other Assets ................................................ 486,175 309,393
------------ ------------
TOTAL ASSETS ..................................... $ 36,309,833 $ 37,778,444
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable ....................................... $ 2,665,733 $ 2,273,672
Accrued liabilities .................................... 2,299,202 2,104,688
Accrued advertising .................................... 2,157,595 2,653,412
Notes payable .......................................... 1,250,000 --
Short-term portion of lease obligations ................ 6,758 8,158
------------ ------------
Total Current Liabilities 8,379,288 7,039,930
------------ ------------
LONG-TERM LIABILITIES
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.10 par value; 40,000,000 shares
authorized; 1,782,524 and 1,795,024 shares
issued and outstanding, respectively .............. 178,252 179,502
Common stock, $.001 par value; 250,000,000 shares
authorized; 17,792,822 and 17,630,422 shares
issued and outstanding, respectively .............. 17,793 17,630
Additional paid-in capital ............................. 42,411,732 41,609,028
Retained deficit ....................................... (14,677,232) (11,067,646)
------------ ------------
Total Shareholders' Equity 27,930,545 30,738,514
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....... $ 36,309,833 $ 37,778,444
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
eUNIVERSE, INC.
COSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------------
2000 1999
---- ----
REVENUE:
<S> <C> <C>
Products ............................................ $ 3,030,553 $ 1,964,554
Services ............................................ 2,803,993 70,400
----------- -----------
TOTAL REVENUE ........................................... 5,834,546 2,034,954
COST OF GOODS SOLD
Products ............................................ 3,018,690 1,651,189
Services ............................................ 573,482 8,652
----------- -----------
TOTAL COST OF GOODS SOLD ................................ 3,592,172 1,659,841
GROSS PROFIT
Products ............................................ 11,863 313,365
Services ............................................ 2,230,511 61,748
----------- -----------
TOTAL GROSS PROFIT ...................................... 2,242,374 375,113
OPERATING EXPENSES:
Marketing and sales (excludes stock-based
compensation of $(2,935) and $5,402, repectively .. 2,855,471 436,726
Product development (excludes stock-based
compensation of $(19,656) and $6,218, repectively . 1,166,374 81,014
General and administrative (excludes
compensation of $(164,598) and $255, repectively .. 1,118,341 772,434
Amortization of goodwill
and other intangibles ............................. 889,839 322,719
Stock-based compensation ............................ (187,189) 11,875
----------- -----------
TOTAL OPERATING EXPENSES ................................ 5,842,836 1,624,768
----------- -----------
OPERATING LOSS (3,600,462) (1,249,655)
NONOPERATING INCOME (EXPENSE)
Interest and dividend income ........................ 5,303 7,049
Interest expense .................................... (14,427) --
----------- -----------
LOSS BEFORE INCOME TAXES (3,609,586) (1,242,606)
INCOME TAXES ............................................ -- --
----------- -----------
NET LOSS $(3,609,586) $(1,242,606)
=========== ===========
Basic loss per common share ............................. $ (0.20) $ (0.10)
=========== ===========
Basic weighted average common
shares outstanding ..................................... 17,744,336 12,221,900
=========== ===========
</TABLE>
See accompanying notes to the financial statements
4
<PAGE>
eUNIVERSE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
June 30,
2000 1999
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net loss ............................................ $(3,609,586) $(1,242,606)
Transactions not requiring cash:
Depreciation ..................................... 71,701 19,354
Amortization ..................................... 889,839 309,981
Common stock issued to employees ................. -- 11,875
Amortization of variable stock
option issued to employees ................... (207,011) --
Stock options and warrants issued to
outside consultants and affiliates ........... 149,327
Changes in current assets ........................... (820,217) (185,050)
Changes in current liabilities ...................... 317,014 88,547
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (3,208,933) (997,899)
----------- -----------
INVESTING ACTIVITIES
Acquisitions ........................................ -- (1,915,000)
Proceeds through acquisitions ....................... -- 37,214
Proceeds through reverse acquisition ................ -- 858,477
Changes in other assets ............................. (201,782) --
Purchases of fixed assets ........................... (141,621) (68,118)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (343,403) (1,087,427)
----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock ........... -- 5,875,204
Proceeds from issuance of common stock .............. -- 505,000
Proceeds from issuance of warrants .................. 8,000 --
Payment to repurchase common stock .................. -- (20,000)
Financing costs ..................................... -- (6,672)
Repayment of advances from officer .................. -- (105,000)
Repayment of loan from affiliates ................... -- (30,000)
Proceeds from Short term notes ...................... 1,250,000 --
Receipt of advances to officer ...................... -- 157,769
Advances to Employees ............................... -- (153,200)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,258,000 6,223,101
----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS ..................... (2,294,336) 4,137,775
Cash and cash equivalents,
beginning of period ................................. 2,323,087 11,335
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD .................................... $ 28,751 $ 4,149,110
=========== ===========
CASH PAID DURING THE YEAR FOR:
Interest Expense .................................... $ --
=========== ===========
Income taxes ........................................ $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
EUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
(unaudited)
(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 (VHS), and digital videodisks ('DVDs') over the Internet, providing
online games, offering advertising on its network of web sites, and, to a
limited extent, website development for third parties. The Company conducts
operations from facilities located in Wallingford, CT, San Francisco and Los
Angeles, CA and Mount Vernon, WA. The financial statements being presented
include the accounts of eUniverse, Inc. and its wholly owned subsidiaries. All
significant inter-company transactions and balances have been eliminated in
consolidation.
(2) ACCOUNTING POLICIES
In the opinion of the management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting of normal recurring
adjustments and accruals) necessary for a fair presentation of the Company's
balance sheet, results of operations and cash flows for the periods presented.
The results of the operations for the quarter ended June 30, 2000 may not be
indicative of the total results for the full year. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to the rules and regulations of the SEC. These unaudited financial
statements should be read in conjunction with audited financial statements and
accompanying notes contained in the Company's Annual Report on Form 10-K for the
year ended March 31, 2000.
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 advertising is recorded based on impressions delivered and received with
the difference recorded as an advance or prepaid. During the quarter ended June
30, 2000, the Company recorded $115,255 as bartered advertising revenue.
Additionally, the Company derives revenue from the sale of advertisements.
Advertising, membership and sponsorship revenue is recognized as earned. Returns
are provided for based on reasonable estimates of future returns.
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. During the
quarters ended June 30, 2000 and 1999 advertising expense amounted to $1,133,313
and $51,866, respectively.
EARNINGS PER SHARE
The computation of basic earnings per share ('EPS') is computed by dividing
6
<PAGE>
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.
Securities that could potentially dilute basis earnings per share in the
future that were not included in the computation of diluted earnings per share
because their effect would have been antidilutive are as follows:
<TABLE>
<CAPTION>
June 30
2000 1999
------ ------
<S> <C> <C>
Warrants............................. 1,121 207 671,865
Options ............................. 4,057,094 2,865,000
---------- ----------
Total ............................. 5,178,301 3,536,865
========== ==========
</TABLE>
(3) NON-CASH FINANCIAL ACTIVITIES
<TABLE>
<S> <C>
Stock issued in acquisition of Dustcloud.com (1) $ 150,000
Additional stock issued in acquisition of Gamers Alliance 103,513
Additional stock issued in acquisition of The Big Network (1) 552,230
Stock issued to employees, 16,653 shares 124,139
Additional warrants issued to preferred shareholders 4,168
Reversal of amortization of variable stock options issued to employees (207,011)
Stock options issued in connection with services performed 45,531
Stock options issued in connection with Affiliate 205,081
</TABLE>
(1) On April 2, 2000, the Company acquired Dustcloud.com ("Dustcloud") for a
purchase price of up to $300,000. The Company issued 23,668 common shares
totaling $150,000 at closing. Additional consideration of up to $150,000 of
common stock may be paid over the next twelve months, based on the attainment of
certain performance goals. In consideration of their continued employment, the
Company also issued to each of Dustcloud's two employees options to purchase
50,000 shares of common stock. The options have an exercise price of $6.50 and
vest over three years. The entire operating results of Dustcloud for the quarter
ended June 30, 2000 are reflected in the financial statements being presented
(2) On June 2, 2000, the Company completed its acquisition of the remaining 5
percent of capital stock of The Big Network, Inc. by issuing an additional
90,160 shares of its common stock valued at $6.125 (market price at the original
acquisition date).
(4) FIXED ASSETS
Fixed assets, at cost, consist of the following:
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
--------------- --------------
<S> <C> <C>
Furniture and fixture................................. $ 59,672 $ 59,672
Computers and equipment............................... 1,234,079 1,098,907
Purchased software.................................... 259,586 253,137
Leasehold improvements................................ 48,543 48,543
----------- -----------
1,601,880 1,460,259
Less accumulated depreciation and amortization........ 341,889 270,188
----------- -----------
Fixed assets, Net................................ $1,259,991 $ 1,190,071
=========== ===========
</TABLE>
7
<PAGE>
Accumulated amortization of purchased software as of June 30, 2000 and 1999 was
$45,723 and $650, respectively. Depreciation expense for the reporting periods
were as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
2000 1999
------ ------
<S> <C> <C>
Depreciation expense.......................... $71,701 $19,354
</TABLE>
(5) OTHER INTANGIBLES
Other Intangibles consist primarily of the purchase price of web sites
acquired:
<TABLE>
<CAPTION>
June 30, 2000 MARCH 31, 2000
------------------ --------------
<S> <C> <C>
Domain names........................................ $ 723,958 $ 657,458
Customer lists...................................... 400,000 400,000
Other............................................... 7,073 7,073
--------- ---------
1,131,031 1,064,531
Less accumulated amortization........................ 209,070 153,319
--------- ---------
Other Intangible, Net................................ $ 921,961 $ 911,212
======== =========
</TABLE>
(6) MAJOR VENDORS
Traditionally, the Company has purchased approximately 80% of its
merchandise from one vendor. The Company is in the process of diversifying its
sources for product procurement. As of June 30, 2000, four major vendors were
owed a total of $937,000, distributed almost evenly, which are being paid
through August 2000.
(7) NOTES PAYABLE
On April 26, 2000, the Company received $1,000,000 pursuant a promissory note.
This note bears an interest rate of 8% per year and is payable July 26, 2000.
Also, on May 31, 2000, the Company received $250,000 pursuant a promissory note
bearing an annual interest rate of 6% and payable on August 31, 2000.
(8) COMMITMENTS AND CONTINGENCIES
a) 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 a 25% royalty of advertising revenue generated from the usage of the game
on the Company's web sites. As of June 30, 2000, the Company has no material
liabilities or expenses due under these agreements.
b) 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:
8
<PAGE>
<TABLE>
<CAPTION>
March 31,
----------
<S> <C>
2001...................................................... $1,032,590
2002...................................................... 848,905
2003...................................................... 438,130
2004...................................................... 165,600
</TABLE>
Rent expense for the reporting periods were as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
2000 1999
------ ------
<S> <C> <C>
Rent expense................................ $101,281 $29,250
</TABLE>
c) 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 (the Company's chairman), 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.
d) In December, 1999, The Company was contacted by a person claiming to
possess CD Universe customer information and demanding compensation in return
for not posting the information on the Internet. The FBI was immediately
contacted and an investigation was initiated. The Company learned on Saturday
January 8, 2000 that customer data was posted on the Internet and immediately
notified the FBI, which caused the site to be shut down the same day.
This information has been widely disseminated in the national press. The
publicity generated by the press coverage may cause customer concerns regarding
the security of their credit card data, which could affect future sales of CD
Universe products and consequently its revenues and operating results. The
Company may also be required to defend against lawsuits arising in connection
with the theft of data. At this time, the Company is unable to determine the
extent of any such effect on sales or exposure to lawsuits or any associated
liability.
(9) STOCK BASED COMPENSATION
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 Ended
June 30,
2000 1999
---- ----
<S> <C> <C>
Marketing and Sales............................. $(2,935) $ 5,402
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C>
Product Development............................. (19,656) 6,218
General and Administrative...................... (164,598) 255
-------- --------
Total stock based compensation............. $(187,189) $ 11,875
======== ========
</TABLE>
(10) SEGMENTED DISCLOSURES
The following table represents segmented reporting for the three months
period ending June 30, 2000 and 1999
<TABLE>
<CAPTION>
PRODUCT SERVICES CORPORATE TOTAL
------- -------- --------- -----
<S> <C> <C> <C> <C>
(000'S)
THREE MONTHS ENDED JUNE 30, 2000:
Revenue................................................. $ 3,031 $ 2,804 $ -- $ 5,835
Operating loss.......................................... (1,958) (804) (838) (3,600)
Net interest income and expense......................... (9) (9)
------- ------- ------- -------
Pre tax loss............................................ (1,958) (804) (847) (3,609)
Net loss................................................ (1,958) (804) (847) (3,609)
Assets.................................................. 11,362 21,138 3,809 36,309
Depreciation and amortization........................... 1,560 2,065 47 3,672
Fixed assets additions.................................. 35 107 -- 142
THREE MONTHS ENDED JUNE 30, 1999:
Revenue................................................. 1,965 70 -- 2,035
Operating loss.......................................... (679) (103) (468) (1,250)
Net interest income and expense......................... 7 7
------- ------- ------- -------
Pre tax loss............................................ (679) (103) (461) (1,243)
Net loss................................................ (679) (103) (461) (1,243)
Assets.................................................. 10,050 8,415 4,417 22,882
Depreciation and amortization........................... 368 67 15 450
Fixed assets additions.................................. 368 67 15 450
</TABLE>
Significant reconciling items in the corporate columns are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000:
<S> <C>
Operating loss: Professional fees $201; Compensation $242; Consulting $103;
Investor and public relations $115; Stock based
compensation ($187).
Assets: Prepaid Expense $2,260; Goodwill and other
intangible $326; Deposits and other assets $431.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999:
<S> <C>
Operating loss: Professional fees $95; Compensation $100;
Investor and public relations $96;
Assets: Cash $4,154; Other intangible assets $120.
</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.
(11) Going Concern Issue
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has sustained
losses and negative cash flows from operations since its inception. The Company
currently has minimal cash reserves and working capital surplus to fund its
operations and its ability to meet its obligations in the ordinary course of
business is dependent upon its ability to raise additional financing through
public or private equity financings, establish profitable operations, enter into
collaborative or other arrangements with corporate sources, or secure other
sources of financing to fund operations. Since June 30, 2000 the Company
received short term loans of $0.93 million from new investors. The cash was used
principally to finance working capital requirements.
Management intends to raise working capital through additional equity and/or
debt financings in the upcoming year. The matters discussed above raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments that
might result from the outcome of this uncertainty. The Company has a limited
operating history and its prospects are subject to the risks, expenses and
uncertainties frequently encountered by companies in the new and rapidly
evolving markets for Internet products and services. These risks include the
failure to obtain and ship products sold to consumers, the rejection of the
Company's services by Internet consumers or advertisers, the inability of the
Company to maintain and increase the levels of traffic on its websites, as
well as other risks and uncertainties. In the event that the Company does not
successfully implement its business plan and obtain additional equity and/or
debt financing, certain assets may not be recoverable.
(12) SUBSEQUENT EVENTS
Subsequent to June 30, 2000 the Company:
o The maturity date of a $1,000,000 promissory note dated April 26, 2000 (see
Note 8) extended from July 26, 2000 to August 25, 2000. The notes bears
interest at the rate of 8% per year and is secured by the personal
guarantee of the Company's Chairman.
11
<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 the current quarter reflect the consolidated operations of
eUniverse, including CD Universe, the predecessor company, Case's Ladder,
Gamer's Alliance, Big Network and Falcon Ventures. Results for the comparable
period in 1999 include only those of CD Universe and Case's Ladder (since May
31, 1999). 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 ENDED JUNE 30, 2000 VS. 1999
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 advertising, sponsorship and
membership revenues.
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
--------------------------
2000 1999 % CHANGE
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales
Products................... $3,031 $1,965 54%
Services................... $2,804 $ 70 NA
</TABLE>
For the quarter ended June 30, 2000, total revenues increased nearly 187%
or $3.8 million. Product revenues increased significantly over the prior year as
a result of strong DVD and video sales reflecting the acquisitions of Falcon
Ventures (DVD Wave) and MegaDVD. As a result of competitive factors, these sales
are deeply discounted and have adversely affected margins. Service revenues,
principally advertising, grew to represent 48% of revenues and had a positive
effect on gross margins. Revenues include barter advertising where we exchange
banner and other ad impressions on our sites for similar quantities on our
barter partner's sites. Barter revenues represented 2.0% of revenues for the
quarter. The company had no barter transactions for the prior year. All sales
from services were attributable to acquisitions made during 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.
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
--------------------------
2000 1999 % CHANGE
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross Profit
Products.................. $ 12 $313 (96%)
Percentage of sales....... 0.4% 16.0%
Services.................. $2,231 $ 62 NA
Percentage of sales....... 79.5% 87.7%
</TABLE>
For the quarter ended June 30, 2000, combined gross profit increased as a
percentage of net sales to 38% from 18% and in absolute dollars to $2.2 million
from $376 thousand over the same periods in 1999, reflecting a change in the mix
of sales to include advertising and membership revenues as noted above. Gross
margins on product sales decreased during the current quarter as a
12
<PAGE>
result of the significant discounting in DVD's that depressed the profit margin
on products to 0.4%, down from 16% in the prior year. Gross margin percentages
on advertising revenues of 80% are substantially higher. The Company over time
intends to improve its product sales margins by reviewing our pricing across all
lines. Gross margins attributable to new business areas may be lower than those
associated with the Company's existing business activities. However, the Company
over time will continue to focus on increasing advertising revenue particularly
for the gamers community and funpage sites 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
JUNE 30,
--------------------------
2000 1999 % CHANGE
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Marketing and Sales..............$2,855 $437 554%
Percentage of sales.............. 48.7% 21.5%
</TABLE>
Marketing and sales expenses increased during the quarter ended June 30,
2000 due to factors principally related to the acquisitions during the latter
part of the prior year. For the three months, costs in the services segment,
representing the acquired companies, accounted for $1,863 thousand of the $2,368
thousand increase. Payroll was $368 thousand, advertising $996 thousand,
consulting and other services were $167 thousand and facilities were $125
thousand. Comparatively in the product segment total costs, due principally to
volume increases, increased $694 thousand. Processing and fulfillment costs
increased $310 thousand, payroll increases were $249 thousand, partner
commissions were higher by $49 thousand and advertising and promotion $94
thousand. The Company intends to continue its branding and marketing campaigns
and 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.
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
--------------------------
2000 1999 % CHANGE
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Product Development............. $1,166 $ 81 1340%
Percentage of sales............. 20.0% 4.0%
</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, Big Network and Falcon Ventures. The $1.1 million increase for the
quarter came from $36 thousand in payroll related costs and $370 thousand in
outside services related to the product segment and the remainder from increases
related to the acquisitions and corporate site development and integration. Of
this $665 thousand, $400 thousand was in payroll related costs, $219 thousand
was in facilities and internet fees and the remaining $45 thousand in outside
services. The company intends to create a tighter structure amongst its sites
and design new sites that will drive increased expenses.
13
<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>
QUARTER ENDED
JUNE 30,
--------------------------
2000 1999 % CHANGE
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
General and administrative.. ....$1,118 $772 45%
Percentage of sales.............. 19.2% 38.0%
</TABLE>
Increases in G&A costs are primarily attributable to increased
infrastructure costs associated with the Company's expansion efforts during the
balance of the last fiscal year. These include payroll $77 thousand,
professional consulting services $69 thousand and other increases of $135
thousand consisted of office and facility expense categories. The company
expects G&A costs to continue to increase commensurate with its expansion plans.
AMORTIZATION OF INTANGIBLES
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
---------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Amortization of intangibles............ $890 $323
</TABLE>
The current period charges reflect the stock acquisitions of CD Universe,
Case's Ladder, Gamer's Alliance, Big Network, Pokemon Village and Falcon
Ventures and the asset acquitions of Funone and Dustcloud. It is likely that the
Company will continue to expand its business through acquisitions and
investments, which will cause amortization costs to increase.
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. Additional stock-based compensation is recorded for stock price
fluctuations that affect compensation expense for options that were repriced in
September 1999.
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
---------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Stock-based Compensation............. $(187) $12
</TABLE>
The expenses for the quarter are attributable to the variable stock
compensation in connection with repricing of options to employees in September
1999. Since the Company's stock price at June 30, 2000 was below that at March
31, a negative expense was recorded.
NON-OPERATING INCOME AND (EXPENSE)
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
---------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Interest income/(expense), Net... $(9) $7
</TABLE>
14
<PAGE>
Interest expense for the quarter for the short term loans exceeded income
from cash balances; in the prior year we had no short term loans.
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
JUNE 30,
---------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net (Loss)...................... $(3,531) $(1,243)
Percentage of sales............. (60.1%) (60.5%)
</TABLE>
Net Income/(Loss) attributable to the products segment increased to nearly
$(2.0) million from $(0.7) million for the prior year period. In the services
segment losses increased to $0.8 million from $0.1 million due to acquisitions
made during the prior year. Corporate costs increased due to growth to $850
thousand from $460 thousand for the respective periods.
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 net proceeds raised in April 1999) and short term loans and cash flow
from sales of music CDs and videos.
Net cash used in operating activities was $3.2 million and $1.0 million for
the three-month periods ended June 30, 2000 and 1999, respectively. Net
operating cash flows were primarily attributable to quarterly net losses,
increases in current assets, offset by increases in current liabilities and by
non-cash charges for depreciation and amortization.
Net cash used in investing activities was $343 thousand and $1.087 thousand
for the three-month periods ended June 30, 2000 and 1999, respectively. In the
three-months, $142 thousand was used for fixed asset purchases and $202 thousand
for other assets and deposits. Investments for 1999 consisted of $1.9 million
for acquisitions less proceeds received through acquisitions.
Net cash provided by financing activities of $1.3 million for the
three-month period ended June 30, 2000 resulted from proceeds from short term
loans from new investors. These notes mature on September 30, 2000. For the
comparable period in 1999 cash flows from financing activities were $6.2 million
which resulted from net proceeds of $6.3 million from the sale of 1.8 million
shares of preferred stock and 997,835 shares of common stock. The remaining
amount came from repayments of advances to an officer and affiliates offset by
advances to employees made in conjunction with acquisitions.
As of June 30, 2000, the Company's principal commitments include
obligations for leases amounting to about $180 thousand, annually. Continued
acquisitions and investments may also require future capital expenditures.
The Company currently has minimal cash reserves and working capital surplus
to fund its operations and its ability to meet its obligations in the ordinary
course of business is dependent upon its ability to raise additional financing
through public or private equity financings, establish profitable operations,
enter into collaborative or other arrangements with corporate sources, or secure
other sources of financing to fund operations. Cash was used principally to
finance working capital requirements. Management intends to raise additional
working capital through additional equity and/or debt financings in the upcoming
year. Since June 30, 2000 the Company received short term loans of almost
$1 million from new investors.
15
<PAGE>
The matters discussed above raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty. The Company has a limited operating history and its prospects are
subject to the risks, expenses and uncertainties frequently encountered by
companies in the new and rapidly evolving markets for Internet products and
services. These risks include the failure to obtain and ship products sold to
consumers, the rejection of the Company's services by Internet consumers or
advertisers, the inability of the Company to maintain and increase the levels of
traffic on its websites, as well as other risks and uncertainties. In the event
that the Company does not successfully implement its plan for additional
funding, certain assets may not be recoverable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
eUniverse places its cash and cash equivalents in banks with high quality
standards. Cash investments consist of high quality overnight investments that
bear immaterial exposure to interest rate fluctuations.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE/DESCRIPTION
------ -------------------------
<S> <C>
3.01 -- Articles of Incorporation of eUniverse.(1)
3.02 -- Amendment to Articles of Incorporation of eUniverse
regarding change of name.(1)
3.03 -- Certificate of Amendment of Articles of Incorporation
regarding issuance of Preferred Stock.(1)
3.04 -- Bylaws of eUniverse.(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 eUniverse.(1)
3.06.01 -- First Amendment to Designation of Stock of eUniverse,
Inc. f/k/a Motorcycle Centers of America, Inc. and First
Amended and Restated Certificate of Designation of Series
A 6% Convertible Preferred Stock of eUniverse, Inc., dated
as of February 2, 2000.(6)
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 eUniverse'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., and Stan
Goldenberg and Andrea R. Goldenberg, Ten Ent., dated as of
the 1st day of July, 1999.(6)
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., and Stan
Goldenberg and Andrea R. Goldenberg, Ten Ent., 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).(6)
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.(6)
10.18 -- Employment Agreement by and between eUniverse, Inc. and
James Haiduck, dated as of June 17, 1999.(6)
10.19 -- Employment Agreement by and between eUniverse, Inc. and
Stephen D. Sellers, dated as of August 31, 1999.(6)
10.21 -- eUniverse, Inc. Registration Rights Agreement dated
July 30, 1999.(6)
10.22 -- Office Sublease by and between Golden Gate University and
The Big Network, Inc., dated July 9, 1999.(6)
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE/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.(6)
10.24 -- Indemnification Agreement by Entertainment Universe, Inc.
and Brad Greenspan in favor of Gerard Klauer Mattison &
Co., Inc., dated February 24, 1999.(6)
10.25 -- eUniverse, Inc. 1999 Stock Awards Plan.(6)
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. Mr. Martin
terminated his employment on March 2, 2000 to pursue other
business opportunities.(1)
10.28 -- Web Advertising Agreement by and between eUniverse, Inc.
and Mpath Interactive, Inc., dated as of August 13, 1999
and terminated as of February 1, 2000. Portions of
Exhibit 10.28 have been omitted pursuant to a request for
confidential treatment, which was granted by the SEC.(2)
10.29 -- eUniverse, Inc. Common Stock Purchase Warrant to Gerard
Klauer Mattison & Co., Inc., dated April 14, 1999.(1)
10.30 -- Asset Purchase Agreement by and between eUniverse, Inc.
and Scott Smith d/b/a Pokemonvillage.com and Quake City
Gaming Network, dated as of February 1, 2000.(3)
10.31 -- Letter agreement by and among eUniverse, Inc. Take-Two
Interactive Software, Inc. and Falcon Ventures
Corporation, dated as of February 2, 2000.(3)
10.32 -- Employment Agreement by and between eUniverse, Inc. and
William R. Wagner dated as of April 5, 1999.(3)
10.33 -- Letter Agreement by and between eUniverse, Inc. and
Christian Walter d/b/a Justsaywow.com dated February 20,
2000.(4)
10.34 -- Lease by and between Hamms Building Associates and Falcon
Ventures Corp., dated as of July 27, 1999.(5)
10.35 -- eUniverse, Inc. Common Stock Purchase Warrant to Michael
Zaroff, dated December 10, 1999.(5)
10.36 -- eUniverse, Inc. Common Stock Purchase Warrant to Bob
Agriogianis, dated December 10, 1999.(5)
10.37 -- eUniverse, Inc. Common Stock Purchase Warrant to Mark
Bergman, dated January 15, 2000.(5)
10.38 -- eUniverse, Inc. Common Stock Purchase Warrant to Mark
Bergman, dated February 15, 2000.(5)
10.39 -- Stock Option Agreement by and between eUniverse, Inc. and
Charles Beilman, dated as of January 26, 2000.(5)
10.39.01 -- First Amendment to Stock Option Agreement by and between
eUniverse, Inc. and Charles Beilman, dated as of
March 31, 2000.(5)
10.39.02 -- Second Amendment to Stock Option Agreement by and between
eUniverse, Inc. and Charles Beilman, dated as of May 31,
2000.(6)
10.39.03 -- Third Amendment to Stock Option Agreement and Escrow
Agreement by and among eUniverse, Inc., Charles Beilman
and Martin, Gasparrini & Chioffi, LLP, dated as of
June 16, 2000.(6)
10.39.04 -- Fourth Amendment to Stock Option Agreement by and between
eUniverse, Inc. and Charles Beilman, dated as of July 31, 2000.*
10.40 -- Letter agreement between eUniverse, Inc. and former
shareholders of The Big Network, Inc. which provides
eUniverse, Inc. with the right to purchase a minimum of
500,000 shares of eUniverse, Inc. common stock from former
shareholders of The Big Network, Inc. (the 'Big Network
Buyout Agreement'), the closing of which shall occur on or
before April 24, 2000.(5)
10.40.01 -- First Amendment providing for extension of closing date
of the Big Network Buyout Agreement to May 5, 2000.(7)
10.40.02 -- Second Amendment providing for extension of closing date
of the Big Network Buyout Agreement to May 19, 2000.(7)
10.40.03 -- Third Amendment providing for extension of closing date
of the Big Network Buyout Agreement to May 26, 2000.(7)
10.41 -- eUniverse, Inc. Common Stock Purchase Warrant to Salomon
Grey Financial Corporation, dated March 14, 2000
(terminated).(5)
10.42 -- eUniverse, Inc. Common Stock Purchase Warrant to Salomon
Grey Financial Corporation, dated March 14, 2000
(terminated). (5)
10.43 -- Agreement by and between eUniverse, Inc. and Take-Two
Interactive Software, Inc., dated as of March 16, 2000,
providing for account marketing services.(5)
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE/DESCRIPTION
------ -------------------------
<S> <C>
10.44 -- Agreement by and between eUniverse, Inc. and Take-Two
Interactive Software, Inc., dated as of March 16, 2000,
providing for programming services.(5)
10.45 -- Letter agreement by and among eUniverse, Inc. and Erik
MacKinnon and Dan Barnes d/b/a Dustcloud Media, dated
March 29, 2000.(6)
10.46 -- Form of Warrant issued to certain eUniverse preferred
shareholders on February 2, 2000.(7)
21.01 -- Subsidiaries of eUniverse, Inc.(5)
27.01 -- Financial Data Schedule*
</TABLE>
---------
* Filed herewith.
(1) Incorporated by reference to eUniverse's Form 10 filed on June 15, 1999
(Registration File No. 0-26355).
(2) Incorporated by reference to eUniverse's Form 10-Q filed on November 15,
1999.
(3) Incorporated by reference to eUniverse's Form 10-Q filed on February 14,
2000.
(4) Incorporated by reference to eUniverse's Form 8-K filed on March 13, 2000.
(5) Incorporated by reference to eUniverse's Form S-1 filed on March 23, 2000
(Registration File No. 333-33084).
(6) Incorporated by reference to eUniverse's Form 8-K filed on June 28, 2000.
(7) Incorporated by reference to eUniverse's Form 10-K filed on July 14, 2000.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
eUNIVERSE INC.
Registrant
Dated: August 14, 2000 /s/ William R. Wagner
--------------------------
William R. Wagner
Chief Financial Officer
(Principal Financial Officer)
and Registrant's Authorized Officer
18
