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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 2000
Registration No. 333-33084
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1/A
AMENDMENT NUMBER 2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
eUNIVERSE, INC.
(Exact Name of Registrant as Specified in Its Charter)
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NEVADA 5735 06-1556248
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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101 NORTH PLAINS INDUSTRIAL ROAD, WALLINGFORD, CONNECTICUT 06492
(203) 265-6412
(Address and telephone number, including area code, of
registrant's principal executive offices)
LELAND N. SILVAS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
101 NORTH PLAINS INDUSTRIAL ROAD
WALLINGFORD, CONNECTICUT 06492
(203) 265-6412
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
CHRISTOPHER G. MARTIN, ESQ.
MARTIN, GASPARRINI & CHIOFFI, LLP
1177 SUMMER STREET
STAMFORD, CONNECTICUT 06905
(203) 324-4200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: The securities
being registered on this form are to be offered and sold from time to time after
the effective date of the Registration Statement by the selling stockholders.
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH PROPOSED MAXIMUM PROPOSED AMOUNT OF
CLASS AMOUNT TO OFFERING MAXIMUM REGISTRATION
OF SECURITIES BE PRICE AGGREGATE FEE(1)
TO BE REGISTERED PER OFFERING
REGISTERED SHARE(1) PRICE
Common Stock,
$.001 par value 910,000 $7.6825 $5,454,575 $1,440
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(1) Fee calculated under Rule 457(c) based on the average of the bid and asked
prices of the common stock as reported on the OTC Bulletin Board on March 21,
2000.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933, as amended, or until this registration statement shall
become effective on such date as the Commission, acting under such section 8(a),
may determine.
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PROSPECTUS
April 14, 2000
910,000 SHARES
eUNIVERSE, INC.
COMMON STOCK
($.001 PAR VALUE)
This prospectus relates to the offer and sale by Take-Two Interactive
Software, Inc. of 125,000 shares of common stock of eUniverse. Our stock is
currently traded on the OTC Electronic Bulletin Board under the trading
symbol EUNI. The last reported sale price for the common stock on the OTC
on March 21, 2000 was $8.0000 per share.
The shares will be sold from time to time in transactions effected on the
OTC or at any other securities exchange or market at which securities could be
issued, in privately negotiated transactions, or in a combination of these
methods of sale. These methods of sale may be conducted at market prices
prevailing at the time of sale, at prices related to the prevailing market
prices or at negotiated prices.
None of the proceeds from the sale of the shares by the selling
stockholders will be received by eUniverse. eUniverse has agreed to bear all
expenses of registration of the shares under federal or state securities laws.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR THE ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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SECTION PAGE
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SUMMARY...................................................... 5
RISK FACTORS ................................................ 7
USE OF PROCEEDS..............................................
DIVIDEND POLICY.............................................. 14
SELECTED FINANCIAL INFORMATION............................... 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................. 17
Year 2000 Readiness Disclosure...................... 27
BUSINESS..................................................... 29
General Development of Business..................... 29
Recent Transactions................................. 30
Description of Business............................. 33
Domain Names, Patents and Trademarks................ 38
Operations and Technology........................... 39
Sales and Marketing................................. 40
Employees........................................... 43
Facilities.......................................... 43
eUniverse's Strategy and Plans...................... 43
LEGAL PROCEEDINGS............................................ 45
MANAGEMENT................................................... 46
PRINCIPAL SHAREHOLDERS....................................... 53
SELLING STOCKHOLDERS......................................... 54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 55
PLAN OF DISTRIBUTION......................................... 55
DESCRIPTION OF CAPITAL STOCK................................. 56
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ............. 57
SHARES ELIGIBLE FOR FUTURE SALE.............................. 59
LEGAL MATTERS................................................ 62
EXPERTS...................................................... 62
SOURCES OF ADDITIONAL INFORMATION............................ 63
INDEX TO FINANCIAL STATEMENTS................................ 64
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You should rely only on the information contained in this prospectus. We have
not authorized any other person to provide you with different information. This
prospectus is not an offer to sell, nor is it seeking an offer to buy, these
securities in any state where the offer or sale is not permitted. The
information in this prospectus is complete and accurate as of the date on the
front cover, but the information may have changed since that date.
SUMMARY
THE ITEMS IN THE FOLLOWING SUMMARY ARE DESCRIBED IN MORE DETAIL LATER IN THIS
PROSPECTUS. THIS SUMMARY PROVIDES AN OVERVIEW OF SELECTED INFORMATION AND DOES
NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER. THEREFORE, YOU SHOULD ALSO
READ THE MORE DETAILED INFORMATION SET OUT IN THIS PROSPECTUS, THE FINANCIAL
STATEMENTS AND THE NOTES TO THESE STATEMENTS APPEARING ELSEWHERE IN THIS
PROSPECTUS.
eUniverse operates a network of entertainment-related web sites focused on
music, filmed and interactive entertainment. eUniverse's web properties include
CD Universe, an online retailer of music products and accessories; Video
Universe, an online retailer of video cassettes, DVDs and laser discs; and Games
Universe, an online retailer of single and multiplayer computer games. We do not
offer and do not intend to offer online gambling or other activities associated
with gambling.
eUniverse also provides a unique library of proprietary community-building
software technologies, named LivePlace. LivePlace combines group browsing, chat,
instant messaging and a host of other advanced features to introduce social
interaction to the web browsing and shopping experience.
eUniverse is a Nevada corporation with principal executive offices at 101
North Plains Industrial Road, Wallingford, Connecticut 06492, telephone number
(203) 265-6412. Neither eUniverse nor any of its subsidiaries has ever made a
profit in any fiscal quarter.
Historically, we primarily have generated revenue from merchandise sales. We
have implemented a program to generate advertising revenue through paid
third-party advertising on eUniverse's web sites and licensing revenue from
licensing our LivePlace software to third parties. We also intend to diversify
our retail offerings to include a greater selection of products, such as online
downloads of content, clothing, sports items and accessories.
Music Entertainment
The online store (www.cduniverse.com) of eUniverse's wholly owned
subsidiary, CD Universe, Inc., currently offers Internet customers a selection
of over 240,000 individual CD titles as well as proprietary content and
features. Recently, we established a Japanese version of the CD Universe web
site that markets and sells CDs and related products to Japanese customers.
Filmed Entertainment
eUniverse's Video Universe online store (www.videouniverse.com) offers
Internet users a selection of over 40,000 movie titles in videocassette, DVD and
laser disc formats. Additionally, the online store (www.dvdwave.com) of
eUniverse's wholly owned subsidiary, Falcon Ventures Corporation, offers a
selection of over 5,000 DVD titles.
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Interactive Entertainment
eUniverse's Games Universe site (www.gamesuniverse.com) sells interactive
computer games and links users to eUniverse's online interactive gaming sites
operated by our subsidiaries, which include Case's Ladder (www.casesladder.com),
an online portal to a variety of games that provides competitive rankings for
online game players and allows game players to compete against one another in a
variety of tournaments and leagues, Gamer's Alliance (www.gagames.net), a
network of online gaming editorial web sites devoted to interactive PC games,
and The Big Network (www.bignetwork.com), a site offering classic board and card
games (e.g., chess, checkers, backgammon, spades). eUniverse also operates other
entertainment web sites, including:
Pokemonvillage.com, an online community for enthusiasts of Pokemon,
computer/video games, and other collectibles;
Funone.com, a web site that provides online greetings, cartoons, joke lists
and gags. Subscribers can receive weekly jokes and send fun electronic
greetings to their friends.
Forumnation.com, a youth focused web site allowing the users to discuss a
variety of subjects, such as music, comics, and games that are of interest
to them; and
ReserveAuction.com, a site allows the owners of Pokemon cards, comics, and
other collectibles to meet and auction their items.
Expansion
eUniverse intends to continue to leverage its online retailing expertise
into other e-commerce areas by expanding its current product offerings through
acquisitions of content-oriented web sites that have experienced high growth in
unique monthly visitors and attractive demographics that cater to specific
communities of interest in the music, video and games businesses.
Concurrently with its acquisition strategy, eUniverse is actively adding to
and improving upon the existing content and functionality of its web sites.
THE OFFERING
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Common stock offered by the selling
stockholders 125,000 shares
Common stock to be outstanding after the
Offering 17,140,354 shares
Use of proceeds eUniverse will not receive any
proceeds from the sale of common
stock by the selling stockholders
under this prospectus.
OTC symbol EUNI
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Common stock to be outstanding after the offering is based on 17,140,354
shares of common stock outstanding as of March 3, 2000. This number does not
include:
- 1,795,024 shares of convertible preferred stock (see "DESCRIPTION OF
CAPITAL STOCK -- Preferred Stock";
- 4,232,500 shares of common stock subject to outstanding options
under our 1999 Stock Awards Plan;
- 978,145 shares of common stock subject to outstanding warrants;
- 354,600 shares of common stock to be issued in connection with
our acquisition of outstanding shares of Big Network held by unaffiliated
shareholders; and
- 11,696 shares of common stock issued in connection with our
acquisition of Justsaywow.com; and
- 23,668 shares of common stock issued in connection with our
acquisition of Dustcloud Media.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS
COULD BE HARMED BY ANY OF THE FOLLOWING RISKS. THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE DUE TO ANY OF THE FOLLOWING RISKS, AND YOU MIGHT LOSE ALL OR
PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR PROSPECTS FOR FINANCIAL SUCCESS ARE DIFFICULT TO FORECAST BECAUSE WE HAVE A
LIMITED OPERATING HISTORY. IF WE FAIL TO MEET THE EXPECTATIONS OF OUR INVESTORS
AND OF PUBLIC MARKET ANALYSTS, THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE.
Given that eUniverse's business, as currently operated, commenced in April 1997,
when the operations of our predecessor, CD Universe, began, we have a limited
operating history upon which an evaluation of eUniverse and its prospects can
be based. Neither eUniverse nor any of its subsidiaries has ever made a profit
in any fiscal quarter. Our prospects for financial success must be considered
in light of the risks, expenses and difficulties frequently encountered by
companies in new, unproven and rapidly evolving markets, such as the Internet
market. To address these risks, eUniverse must, among other things, expand its
customer base, respond effectively to competitive developments, continue to
attract, retain and motivate qualified employees and continue to upgrade its
technologies. If eUniverse is not successful in further developing and
expanding its music, video and interactive entertainment business, including
sales of advertising on its web sites and development of related business
opportunities, its ability to achieve profitability may not be realized and our
market price may decline.
IF WE ARE UNABLE TO MAINTAIN OUR STRATEGIC PARTNERSHIPS, TRAFFIC TO OUR WEB SITE
MAY BE REDUCED AND OUR REVENUES COULD DECREASE. ADDITIONALLY, IF OUR NETWORK
INFRASTRUCTURE IS NOT SUFFICIENT TO SERVICE OUR CUSTOMERS, WE COULD LOSE
CUSTOMERS AND OUR REVENUES COULD BE REDUCED. Although eUniverse's ability to
generate additional revenue from Internet commerce may depend on increased site
traffic, purchases and advertising that eUniverse expects to generate through
strategic partnerships, there can be no assurance that its existing
relationships will be maintained through their initial terms or that additional
third-party partnerships will be available to eUniverse on acceptable commercial
terms or at all. The inability to enter into new, and to maintain any one or
more of its existing, strategic partnerships, such as with Linkshare (see "Sales
and Marketing"), could result in decreased traffic to our web sites and our
product and service sales revenue could decrease. Even
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if we can maintain our strategic partnerships, there can be no assurance that
our infrastructure of hardware and software will be sufficient to handle the
potential increased traffic and sales volume from these partnerships.
IF WE ARE UNABLE TO EXPAND OUR WEB PRESENCE INTERNATIONALLY, WE MAY SEE AN
INCREASE IN OPERATING EXPENSES AND NO INCREASE IN REVENUES. eUniverse's web
sites are accessible throughout the world. If eUniverse is not able to
successfully market, sell and distribute its products in international markets
due to a variety of legal, contractual and practical considerations and the
risks inherent in doing business on a global level, such as unexpected changes
in regulatory requirements (such as those that may prohibit access to our web
sites), export restrictions, tariffs and other trade barriers, difficulties in
staffing and managing foreign operations, difficulties in protecting
intellectual property rights, longer payment cycles, problems in collecting
accounts receivable, political instability, fluctuations in currency exchange
rates and potentially adverse tax consequences, eUniverse's business, prospects,
financial condition and results of operations from successful international
operations will not be realized and our gross profits will not increase.
BECAUSE WE MAY NOT SUCCESSFULLY IDENTIFY AND ACQUIRE OTHER SUITABLE EXISTING
INTERNET-BASED BUSINESSES AND WEB SITES, OUR OPERATING EXPENSE COULD INCREASE
WHILE OUR REVENUES COULD BE REDUCED. eUniverse's growth and future profitability
may depend in part upon its ability to identify companies that are suitable
acquisition candidates, to acquire those companies upon appropriate terms and to
effectively integrate and expand their operations within its own infrastructure.
We may not be able to identify additional candidates that are suitable for
acquisition or to consummate desired acquisitions on favorable terms.
Acquisitions involve a number of special risks, including the diversion of
management's attention to the assimilation of the operations and personnel of
the acquired companies, adverse short-term effects on eUniverse's operating
results and the potential inability to integrate financial and management
reporting systems. A significant portion of eUniverse's capital resources could
be used for these acquisitions. Accordingly, eUniverse may require additional
debt or equity financing for future acquisitions, which may not be available on
terms favorable to eUniverse, if at all. Moreover, eUniverse may not be able to
successfully integrate an acquired business into eUniverse's business or to
operate an acquired business profitably. If we are not able to integrate and
expand the operations of acquired companies, without excessive costs, delays or
other adverse developments, our revenues could decrease.
IF WE ARE UNABLE TO USE NEW TECHNOLOGIES EFFECTIVELY OR ADAPT OUR WEB SITES,
PROPRIETARY TECHNOLOGY AND TRANSACTION-PROCESSING SYSTEMS TO CUSTOMER
REQUIREMENTS OR EMERGING INDUSTRY STANDARDS, CUSTOMERS MAY NOT VISIT OUR WEB
SITES OR PURCHASE PRODUCTS FROM US, WHICH COULD RESULT IN A DECREASE IN OUR
REVENUES. To remain competitive, eUniverse must continue to enhance and improve
the responsiveness, functionality and features of its web sites and develop new
features to meet customer needs. The Internet is characterized by rapid
technological change, changes in user and customer requirements and preferences,
frequent new product and service introductions and the emergence of new industry
standards and practices that could render eUniverse's existing web network and
sites, technology and systems obsolete. eUniverse's success will depend, in
part, on its ability to license leading technologies useful in its business,
enhance its existing products and services, develop new products, services and
technology that address the needs of its customers, and respond to technological
advances and emerging industry standards and practices on a cost-effective and
timely basis.
IF WE ARE UNABLE TO PROTECT OUR TRADEMARKS AND PROPRIETARY RIGHTS, OUR
REPUTATION AND BRAND COULD BE IMPAIRED AND WE COULD LOSE CUSTOMERS. eUniverse
regards its trademarks, trade secrets and similar intellectual property as
valuable to its business, and relies on trademark and copyright law, trade
secret protection and confidentiality and/or license agreements with its
employees, partners and others to protect its proprietary rights. There can be
no assurance that the steps taken by eUniverse will be adequate to prevent
misappropriation or infringement of its proprietary property. eUniverse does not
have any of its trademarks or service marks registered with the United States
Patent and Trademark Office. While
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eUniverse is currently applying for registration of a number of its trademarks
and service marks, we may not be able to successfully prosecute our applications
for these trademarks. See "BUSINESS--Domain Names, Patents, and Trademarks."
WE COULD LOSE ONE OR MORE OF THE KEY MEMBERS OF OUR MANAGEMENT TEAM, WHICH COULD
IMPAIR OUR BUSINESS OPERATIONS. We depend on the continued service of our
executive officers and key technical and marketing personnel, including, in
particular, Brad D. Greenspan, our Chairman, and Leland N. Silvas, our President
and Chief Executive Officer, William R. Wagner, our Chief Financial Officer,
James Haiduck, our Vice President of Sales and Stephen D. Sellers, our Vice
President of Business Affairs and Business Development. eUniverse has employment
agreements with Messrs. Silvas, Wagner, Haiduck and Sellers. However, these
employment agreements do not assure the services of these employees. Despite
employment agreements with these members of management, eUniverse's employees
may voluntarily terminate their employment with eUniverse at any time.
eUniverse's success also depends on its ability to attract and retain additional
qualified employees. Competition for qualified personnel is intense and there
are a limited number of persons with knowledge of and experience in commercial
application of the Internet and retail sales of music and entertainment related
products. There can be no assurance that eUniverse will be able to attract and
retain highly qualified personnel to fill critical managerial and operational
positions.
OUR FUTURE OPERATING RESULTS MAY FLUCTUATE. IF WE ARE UNABLE TO MEET THE
EXPECTATIONS OF INVESTORS AND PUBLIC MARKET ANALYSTS, THE MARKET PRICE OF OUR
COMMON STOCK MAY DECREASE. eUniverse expects to experience fluctuations in
future quarterly and long-term operating results that may be caused by a variety
of factors, many of which are outside eUniverse's control. Factors that may
affect eUniverse's quarterly operating results include, without limitation,
- - eUniverse's ability to retain existing customers, attract new customers
at a steady rate and maintain customer satisfaction,
- - the announcement or introduction of new or enhanced web sites, products and
strategic partnerships by eUniverse and its competitors,
- - the mix of products sold by eUniverse,
- - seasonality of the recorded music industry (namely, the fact that sales of
recorded music traditionally peak during the Christmas season),
- - seasonality of advertising sales,
- - eUniverse promotions and sales programs,
- - price competition or higher recorded music prices in the industry,
- - the level of use of the Internet and increasing consumer acceptance of the
Internet for the purchase of consumer products, such as those offered by
eUniverse,
- - eUniverse's ability to upgrade and develop its systems and infrastructure
in a timely and effective manner,
- - the amount and timing of operating costs and capital expenditures relating to
expansion of eUniverse's business, operations and infrastructure and the
implementation of marketing programs, key
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agreements and strategic partnerships, and general economic conditions and
economic conditions specific to the Internet, online commerce, and the recorded
music and prerecorded videocassette industries.
OUR REVENUES AND GROSS PROFITS MAY BE REDUCED IF WE ARE UNABLE TO FULFILL OUR
CUSTOMERS' ORDERS. eUniverse currently accepts orders only over the Internet.
Product orders received by CD Universe are accepted, verified, batched and
electronically sent on a daily basis to our suppliers, including Valley Media,
Inc. of Woodland Hills, California, eUniverse's primary supplier. Shipments from
our suppliers are received at eUniverse's fulfillment center in Wallingford,
Connecticut. Employees break down bulk shipments into the individual orders to
be sent to customers. This arrangement allows eUniverse to offer customers a
wide variety of CD and video titles while maintaining virtually no inventory. It
also reduces product returns by allowing eUniverse to only order products for
which it has received orders. eUniverse typically fills over 80% of its orders
by the next business day, and approximately 90% of its orders within one week.
eUniverse believes that the speed of order fulfillment is an important factor to
its customers, and accordingly has a significant impact on its ability to
increase revenues from retail sales.
At the present time, Valley Media supplies approximately 80% of the music and
video products and accessories sold by CD Universe. There is no written
agreement between eUniverse and Valley Media. We may not be able to maintain a
relationship with Valley Media or to find an alternative supplier that will
provide products and services on terms satisfactory to eUniverse should our
relationship with Valley Media terminate. Therefore, an unanticipated
termination of eUniverse's relationship with Valley Media, particularly during
the fourth quarter of the calendar year, in which a high percentage of recorded
music and video product sales is made, could cause our revenues to decline for
the quarter in which the termination occurred, even if eUniverse were able to
establish a relationship with an alternative supplier. To date, Valley Media has
satisfied eUniverse's requirements on a timely basis. However, to the extent
that Valley Media is unable to continue to satisfy eUniverse's increasing
product requirements, these constraints may result in decreased revenue and have
a material adverse effect on eUniverse's business, results of operations and
financial condition.
COMPETITION IN ONLINE COMMERCE IS INTENSE. IF WE ARE UNABLE TO COMPETE
SUCCESSFULLY AGAINST CURRENT AND FUTURE COMPETITORS, OUR REVENUES COULD DECLINE.
The online commerce market is new, rapidly evolving and intensely competitive,
and eUniverse expects that competition will further intensify in the future.
Barriers to entry are minimal, and current and new competitors can launch new
sites at a relatively low cost. With respect to recorded music sales, eUniverse
currently competes with numerous Internet retailers, including music retail
chains, record labels, independent retailers with web sites on the Internet and
online stores retailing music and video titles, such as CDnow and Amazon.com. In
addition, eUniverse competes with traditional music retailers, as well as
megastores, mass merchandisers, consumer electronics stores and music clubs.
The primary competitive factors in providing music, video and other
entertainment products and services via the Internet are name recognition,
variety of value-added services, ease of use, price, quality of service,
availability of customer support and technical expertise. eUniverse's prospects
for achieving its business objectives will depend heavily upon its ability to
provide high quality, entertaining content, along with user-friendly web site
features and value-added Internet services. Other factors that will affect
eUniverse's prospects for success include its ability to attract experienced and
qualified personnel, particularly in the areas of management, sales and
marketing, and web site design. If eUniverse is unable to compete successfully
in its retailing businesses, there will be a material adverse impact on its
business, results of operations and financial condition due to decreased
revenue. In addition, the competition for advertising revenues, both on Internet
web sites and in more traditional media, is intense. If eUniverse fails to
attract and retain significant sources of revenue from paid advertisements and
sponsorships on its web sites, eUniverse's business, results of operations and
financial condition will be materially adversely affected by the decreased
revenue.
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Many of eUniverse's current and potential competitors in the area of online
music, video and other entertainment retailing, such as CDNow.com and
Amazon.com, have longer operating histories, significantly greater financial,
technical and marketing resources, greater name recognition and larger existing
customer bases than eUniverse. These competitors may be able to respond more
quickly than eUniverse to new or emerging technologies and changes in the
economy or the marketplace affecting the products and services that eUniverse
offers. In addition, some of eUniverse's competitors can be expected to devote
greater resources, both human and financial, to the development, promotion and
sale of music, video and other entertainment products and services. Accordingly,
there can be no assurance that eUniverse will be able to compete successfully
and achieve its objectives with respect to growth in revenue and profit. See
"MARKETING AND SALES -- Competition".
RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE
The Year 2000 issue (Y2K) is the result of computer programs written using two
digits rather than four to define the applicable year. Any of eUniverse's
computer and telecommunications programs that have date sensitive software may
recognize a date using "00" as the year 1900 instead of 2000. This could result
in system failure or miscalculations causing disruptions in operations,
including the ability to process transactions, send invoices, or engage in
similar normal business activities.
During 2000, we may experience a Y2K issue, which could negatively affect our
operating results or financial condition because our costs to remedy the issue
would increase. We believe, however, that our most reasonably likely worst-case
scenario would relate to problems with the systems of third parties rather than
with our internal systems, including disruption of product delivery from
wholesalers, inability to charge purchases to credit cards, temporary power
outages, delayed transportation of products by third parties, and lost or
delayed customer purchases due to non-compliant personal computers. We are
limited in our abilities to address the Y2K issue as it relates to third parties
and are relying solely on the assurances of these third parties as to their Year
2000 preparedness.
RISKS RELATED TO THE INTERNET INDUSTRY
OUR FUTURE RESULTS AND GROWTH MAY NOT BE REALIZED IF THE USE OF THE INTERNET
DOES NOT CONTINUE TO INCREASE. Our market, users of the global computer network
known as the Internet, is new and rapidly evolving. Our business could suffer if
Internet usage does not continue to grow. Internet usage may be inhibited for a
number of reasons, including:
- inadequate network infrastructure;
- security concerns;
- inconsistent quality of service;
- lack of availability of cost-effective and high-speed service; and
- changes in government regulation of the Internet.
If Internet usage grows, the Internet infrastructure might not be able to
support the demands placed on it by this growth or its performance and
reliability may decline. In addition, future outages and other interruptions
occurring throughout the Internet could lead to decreased use of our network of
web sites and would therefore harm our business.
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WE COULD BE SUED FOR INFORMATION RETRIEVED FROM THE INTERNET. Due to the fact
that material may be downloaded from web sites and may be subsequently
distributed to others, there is a potential that claims will be made against
eUniverse under legal theories, such as defamation, negligence, copyright or
trademark infringement or other theories based on the nature and content of the
material. These claims have been brought, and sometimes successfully pressed,
against on-line services in the past. In addition, we could be exposed to
liability with respect to the material that may be accessible through our
products and web sites, including claims asserting that, by providing hypertext
links to web sites operated by third parties, we are liable for wrongful actions
by those third parties through the web sites. Although eUniverse carries general
liability insurance, its insurance may not cover potential claims of this type,
or the level of coverage may not be adequate to fully protect eUniverse against
all liability that may be imposed. Any costs or imposition of liability or legal
defense expenses that are not covered by insurance or in excess of insurance
coverage could reduce our working capital and have a material adverse effect on
eUniverse's business, results of operations and financial condition. Also, the
legal effectiveness of our terms and conditions of use is uncertain. We
currently are not aware of any claims that can be expected to have a material
adverse impact on our financial condition or our ability to conduct our
business.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD INCREASE OUR COSTS AND RISKS
TO DOING BUSINESS ON THE INTERNET. There are currently few laws or regulations
that specifically regulate communications or commerce on the Internet. However,
laws and regulations may be adopted in the future that address issues, such as
user privacy, pricing, taxation and the characteristics and quality of products
and services. For example, the Communications Decency Act of 1996 prohibits
obscene and other unlawful information and content from being transmitted over
the Internet. Several other nations have taken actions to restrict the free flow
of material deemed to be objectionable on the Internet. On October 21, 1998,
President Clinton signed the Internet Tax Freedom Act placing a three year
moratorium, beginning October 1, 1998 through October 21, 2001, on Internet
access taxes, multiple taxes on electronic commerce, and discriminatory taxes on
electronic commerce. In addition, local telephone carriers have argued before
the Federal Communications Commission that Internet service providers and online
service providers should be required to pay fees for access to local telephone
networks in a manner similar to long distance telephone carriers. Although the
FCC has informally stated that it has no intention of assessing per-minute
charges on Internet traffic or changing the way consumers obtain and pay for
access to the Internet, if the efforts of the local telephone carriers are
successful, costs for Internet access and usage could increase sharply.
Moreover, it may take years to determine the extent to which existing laws
relating to issues, such as property ownership, libel, taxation and personal
privacy are applicable to the Internet. Any new laws or regulations relating to
access to or use of the Internet could harm our business.
IF WE ARE UNABLE TO PROTECT OUR DOMAIN NAMES, OUR REPUTATION AND BRAND COULD BE
IMPAIRED AND WE COULD LOSE CUSTOMERS. We own the Internet domain names
"euniverse.com," "cduniverse.com", "videouniverse.com", "gamesuniverse.com",
"casesladder.com" and "gagames.com" as well as numerous other domain names in
the United States. See "Domain Names, Patents and Trademarks". National and
international Internet regulatory bodies generally regulate the registration of
domain names. The regulation of domain names in the United States and in other
countries is subject to change. Regulatory bodies could establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names. As a result, we might not acquire or
maintain the "euniverse.com," "cduniverse.com", "videouniverse.com",
"gamesuniverse.com", "casesladder.com", "gagames.com" or comparable domain names
in all the countries in which we conduct business, which could harm our
business. Furthermore, the relationship between regulations governing domain
names and laws protecting trademarks and similar proprietary rights is unclear
and still evolving. Therefore, we might be unable to prevent third parties from
acquiring domain names that infringe or otherwise decrease the value of our
trademarks and other proprietary rights.
12
<PAGE>
WE MAY BE NOT ABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE INTERNET
INDUSTRY, WHICH COULD CAUSE US TO LOSE CUSTOMERS AND REVENUE. Rapid
technological developments, evolving industry standards and user demands, and
frequent new product introductions and enhancements characterize the market for
Internet products and services. These market characteristics are exacerbated by
the emerging nature of the market and the fact that many companies are expected
to introduce new Internet products and services in the near future. Our future
success will depend on our ability to continually improve our content offerings
and services. In addition, the widespread adoption of developing
multimedia-enabling technologies could require fundamental and costly changes in
our technology and could fundamentally affect the nature, viability and
measurability of Internet-based advertising, which could harm our business.
OUR COMPUTER NETWORK SECURITY MEASURES COULD BE CIRCUMVENTED RESULTING IN LOSS
OF CUSTOMER DATA. eUniverse accepts credit cards, personal checks or money
orders as payment for customer orders. The CD Universe web site enables
customers to store their credit card information in a personal account, thereby
avoiding the need to re-enter this information when making future purchases.
Customers are offered several shipping options, including overnight delivery.
eUniverse confirms each order by e-mail communication to the customer promptly
after the order is placed, and subsequently confirms shipment of the order by
e-mail. In addition, the CD Universe web site includes a feature that enables
customers to check on the status of their order. Use of the Internet by
consumers is at an early stage of development, and market acceptance of the
Internet as a medium for commerce is still by no means certain. eUniverse's
future success will depend on its ability to significantly increase revenues,
which will require the development and widespread acceptance of the Internet as
a medium for commerce, particularly as a channel of retail distribution. The
Internet may not prove to be a viable commercial marketplace because of
inadequate development of the necessary infrastructure, such as reliable network
backbones, or complementary services, such as high-speed modems and security
procedures for financial transactions. The viability of the Internet may prove
uncertain due to delays in the development and adoption of new standards and
protocols to handle increased levels of Internet activity or due to increased
government regulation. If use of the Internet for the purposes envisioned by
eUniverse does not continue to grow, or if the necessary Internet infrastructure
is not further developed and maintained, eUniverse's business, results of
operations and financial condition could be materially adversely affected due to
decrease or loss of traffic.
Despite eUniverse's implementation of network security measures, its
infrastructure is potentially vulnerable to computer break-ins and similar
disruptive problems caused by individuals with a variety of objectives.
eUniverse learned on Saturday January 8, 2000 that customer data stolen from CD
Universe was posted on the Internet and immediately notified the FBI, which
caused the site to be shut down the same day. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Theft of Customer
Data from CD Universe".
Consumer concern over Internet security has been, and could continue to be,
an impediment to the expansion of commercial activities that require consumers
to transmit their credit card information and other personal information over
the Internet. In addition, computer viruses, break-ins or other security
problems could lead to misappropriation of proprietary information and
interruptions, delays or cessation in service to eUniverse's customers. Until
more comprehensive and reliable security technologies are developed and
implemented, the security and privacy concerns of existing and potential
customers may inhibit the growth of the Internet as a merchandising medium.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE COULD BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES TO
INVESTORS. Our common stock is currently traded on the OTC Bulletin Board. We
cannot predict the extent to which investor interest in eUniverse will develop
in the trading market or how liquid any trading market might become.
13
<PAGE>
The stock market has experienced extreme price and volume fluctuations and
the market prices of securities of technology companies, particularly
Internet-related companies, have been highly volatile. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation has often been instituted against a company. This
litigation could result in substantial costs and a diversion of our management's
attention and resources.
OUR STOCK OWNERSHIP WILL BE CONCENTRATED IN A SMALL NUMBER OF PEOPLE WHO COULD
NEGATIVELY AFFECT THE RIGHTS OF OUR OTHER STOCKHOLDERS. As of March 21, 2000,
the present directors, executive officers, greater than 5% shareholders and
their affiliates beneficially owned approximately 64% of our outstanding common
stock. As of March 21, 2000, Brad D. Greenspan beneficially owned
approximately 46% of our outstanding common stock. As a result of his beneficial
ownership, Mr. Greenspan, acting alone or with others, will be able to control
all matters requiring stockholder approval, including the election of directors
and approval of significant transactions. This concentration of ownership may
also have the effect of delaying or preventing a change in control of eUniverse.
See "PRINCIPAL SHAREHOLDERS."
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD CAUSE OUR STOCK PRICE
TO FALL. As of December 31, 1999, approximately 15,256,000 shares of our common
stock are restricted shares that may be sold only in the event that the shares
are registered, or exempted from registration, under the Securities Act.
Although a large number of our common stock is restricted, these shares may be
available for resale in the near future under Rule 144 or under one or more
registrations filed with the SEC statement, such as this registration statement
under which 125,000 shares are available for resale. See "SHARES ELIGIBLE FOR
FUTURE SALE" and "Selling Stockholders".
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES AND ADDRESS, AMONG OTHER THINGS, eUNIVERSE'S BUSINESS STRATEGY,
USE OF PROCEEDS, PROJECTED CAPITAL EXPENDITURES, LIQUIDITY, POSSIBLE BUSINESS
RELATIONSHIPS, AND POSSIBLE EFFECTS OF CHANGES IN GOVERNMENT REGULATION. THESE
STATEMENTS MAY BE FOUND UNDER "SUMMARY," "RISK FACTORS," "USE OF PROCEEDS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," AND "BUSINESS" AS WELL AS IN THE PROSPECTUS GENERALLY. THESE
STATEMENTS RELATE TO OUR FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS.
THESE STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS, SUCH AS "EXPECTS,"
"ANTICIPATES," "INTENDS," "PLANS," AND SIMILAR EXPRESSIONS. ACTUAL EVENTS OR
RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN FORWARD-LOOKING STATEMENTS
AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE FACTORS DISCUSSED ABOVE AND SET
FORTH IN THIS PROSPECTUS GENERALLY.
USE OF PROCEEDS
eUniverse will not receive any portion of the proceeds from the sale of
shares of common stock by the selling stockholders under this prospectus.
DIVIDEND POLICY
We have not in the past paid any dividends on our equity securities and
anticipate that we will retain any future earnings for use in the expansion and
operation of our business. We do not anticipate paying any cash dividends in the
foreseeable future. Any determination to pay dividends in the future will be at
the discretion of our Board of Directors and will depend upon our financial
condition, results of operations, working capital requirements and other factors
the Board of Directors deems relevant.
14
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial data are derived from our audited
financial statements presented as of March 31, 1999, 1998 and 1997, and our
unaudited financial information presented as of December 31, 1999. Prior to
incorporating, CD Universe operated as a division of Prime Software, Inc., a
related party. Therefore, the results presented for the years ended March 31,
1999 and 1998 are those of CD Universe, Inc., the predecessor of eUniverse. The
results presented for the year ended March 31, 1997 are those of the CD Universe
division of Prime Software, Inc. The current year's unaudited results represent
the consolidated operations of eUniverse, including its predecessor, CD Universe
(from April 1); and the results of the acquired companies -- Case's Ladder (from
June 1), Gamer's Alliance (from July 1) and Big Network (from September 1) for
both the third quarter and the nine months ended December 31, 1999. In our
opinion, these unaudited financial statements have been prepared on the same
basis as our audited financial statements and reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of our results of operations and financial position for these
periods. The historical results are not necessarily indicative of results to be
expected for any future period. The effect of the merger along with other
acquisitions is presented separately in pro forma statements. The data below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and the related notes to the financial statement included elsewhere
in this prospectus.
eUNIVERSE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
CD UNIVERSE CD UNIVERSE
<S> <C> <C> <C> <C>
Revenue..................................... $ 3,070,912 | $2,571,898 $ 6,950,769 | $6,871,342
Cost of goods sold.......................... 2,191,680 | 2,209,637 5,228,249 | 5,798,313
----------- | ---------- ----------- | ----------
Gross profit................................ 879,232 | 362,261 1,722,520 | 1,073,029
Operating expenses: | |
Marketing and sales (excludes | |
stock-based compensation of $ 107,236, | |
$0, $144,842, $0, $0, $0 and $0, | |
respectively)......................... 1,101,004 | 373,094 2,123,186 | 897,655
Product development (excludes | |
stock-based compensation of $(30,183), | |
$0, $13,341, $0, $0, $0 and $0, | |
respectively)......................... 725,621 | 90,030 1,221,499 | 246,844
General and administrative (excludes | |
stock-based compensation of $1,710, | |
$0, $3,705, $0, $0, $0 and $0, | |
respectively)......................... 1,317,889 | 16,548 3,004,888 | 198,284
Amortization of goodwill and other | |
intangibles........................... 681,413 | 292 1,596,622 | 376
Stock-based compensation................ 78,763 | - 161,888 | -
----------- | ---------- ----------- | ----------
Total operating expenses.................... 3,904,690 | 479,964 8,108,083 | 1,343,159
----------- | ---------- ----------- | ----------
Operating loss...................... (3,025,458) | (117,703) (6,385,563) | (270,130)
----------- | ---------- ----------- | ----------
Non-operating income (expense) | |
Interest and dividend income............ 18,757 | 85 57,753 | 395
Interest expense........................ - | - (355) | -
Loss allocated to minority interest..... - | - 16,438 | -
Other................................... - | - - | -
Income taxes............................ - | - - | -
----------- | ---------- ----------- | ----------
Net income (loss)................... $(3,006,701) | $ (117,618) $(6,311,727) | $ (269,735)
=========== | ========== =========== | ==========
Basic income (loss) per common share........ $ (0.18) | N/A $ (0.42) | N/A
=========== | ========== =========== | ==========
Basic weighted average common shares | |
outstanding............................... 16,272,384 | N/A 15,149,505 | N/A
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
CD UNIVERSE
YEAR ENDED
-------------------------------------------
MARCH 31, MARCH 31, | MARCH 31,
1999 1998 | 1997
---- ---- | ----
| DIVISION
| OF PRIME
| SOFTWARE, INC.
|
<S> <C> <C> <C>
Revenue.....................................|$8,851,713 $5,685,211 | $1,675,815
Cost of goods sold..........................| 7,550,289 4,709,528 | 1,433,766
|---------- ---------- | ----------
Gross profit................................| 1,301,424 975,683 | 242,049
Operating expenses: | |
Marketing and sales (excludes | |
stock-based compensation of $32,204, | |
$0, $37,606, $0, $0, $0 and $0, | |
respectively).........................| 1,182,529 812,156 | 199,455
Product development (excludes | |
stock-based compensation of $37,306, | |
$0, $43,524, $0, $0, $0 and $0, | |
respectively).........................| 332,534 147,973 | 117,542
General and administrative (excludes | |
stock-based compensation of $1,740, | |
$0, $1,995, $0, $0, $0 and $0, | |
respectively).........................| 193,368 151,399 | 117,206
Amortization of goodwill and other | |
intangibles...........................| 170 170 | --
Stock-based compensation................| -- -- | --
| --------- ---------- | ----------
Total operating expenses....................| 1,708,601 1,111,698 | 434,203
| --------- ---------- | ----------
Operating loss......................| (407,177) (136,015)| (192,154)
| --------- ---------- | ----------
Non-operating income (expense) | |
Interest and dividend income............| -- -- | --
Interest expense........................| -- -- | --
Loss allocated to minority interest.....| -- -- | --
Other...................................| 1,013 (15,797)| --
Income taxes............................| -- -- | --
| ---------- ---------- | ----------
Net income (loss)...................|$ (406,164) (151,812)| $ (192,154)
| ========== ===========| ===========
Basic income (loss) per common share........|$ (0.04)(1) N/A | N/A
| ========== ===========| ===========
Basic weighted average common shares | |
outstanding...............................| 11,250,993(1) N/A | N/A
</TABLE>
(1) Pro forma per share and weighted average shares outstanding assuming that
the recapitalization occurred at the beginning of the year. The weighted
average shares outstanding include Entertainment Universe shares of
10,050,000 and shares retained by the former Motorcycle Centers of America
Shareholders of 1,200,993.
BALANCE SHEET DATA
<TABLE>
<CAPTION>
CD UNIVERSE,
CD UNIVERSE DIVISION OF
------------------------------- PRIME SOFTWARE
DECEMBER 31, 1999 MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997
------------------ -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash and cash equivalents............................... $ 891,305 | $ 11,335 $267,214 | $19,558
Working capital (deficit)............................... (441,304) | (783,204) (309,854) | 25,586
Total assets............................................ 29,012,307 | 520,346 494,164 | 32,086
Total shareholders' equity.............................. 26,694,046 | (556,976) (150,812) | 32,086
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
financial statements and the accompanying notes, which appear elsewhere in this
prospectus. The following discussion contains forward-looking statements that
reflect our plans, estimates and beliefs. Our actual results could differ
materially from those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below and elsewhere in this prospectus, particularly in "Risk
Factors."
OVERVIEW
We commenced our current business of online retailing of music, video
and games and operating online interactive entertainment web sites on April 14,
1999, when we reorganized with Motorcycle Centers. Simultaneously with the
reorganization, we acquired CD Universe, Inc., an online retailer of music CDs,
which has been in operation since April 7, 1997. CD Universe is our predecessor
for accounting and financial reporting purposes.
Since April 1999, we have grown rapidly, mainly due to our acquisitions
of Case's Ladder, Gamer's Alliance, The Big Network and Falcon Ventures
Corporation, and several web sites, including funone.com, pokemonvillage.com,
and justsaywow.com. We use the purchase method accounting for our acquisitions.
Because of the early stage of our operations, we believe that
period-to-period comparisons of our operating results are not meaningful and
should not be relied upon as an indication of our future performance. We report
our results on an accrual basis and recognize revenue when we ship products to
our customers. Our net sales are received primarily from customer credit card
payments within three days of our shipments and concurrent billings.
Our fiscal year ends on March 31st of each year. We incurred net losses
of $3.0 million for the quarter ended December 31, 1999 and $6.3 million for the
nine-month period ended December 31, 1999. These losses resulted from
advertising costs, the costs of additional infrastructure, other costs incurred
for the development of our web sites and acquisition of other web sites and a
lack of commensurate net sales. Because of our aggressive expansion plans, we
expect to incur significant operating losses for the foreseeable future.
Although we have experienced revenue growth in recent periods, this growth may
not be sustainable and these recent periods should not be considered indicative
of future performance. We may never achieve substantially increased net sales
or profitability, or if we achieve substantially increased net sales, they may
not be sustained.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the results of operations for eUniverse
for the periods indicated:
<TABLE>
<CAPTION>
Third Quarter Ended December 31, Nine Months Ended December 31,
-------------------------------------------- -----------------------------------------
1999 1998 % Change 1999 1998 % Change
------------ ------------ ------------- ------------ ------------ ------------
(In Thousands) (%) (In Thousands) (%)
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Products, net $2,591 $2,572 1 $6,141 $6,871 (11)
Services, net 480 0 n/a 810 0 n/a
------------ ------------ ------------- ------------ ------------ ------------
Total net sales $3,071 $2,572 19 $6,951 $6,871 1
Cost of revenues:
Products 2,199 2,210 (1) 5,214 5,798 (10)
Services (7) 0 n/a (15) 0 n/a
------------ ------------ ------------- ------------ ------------ ------------
Total cost of revenues 2,192 2,210 (1) 5,199 5,798 (10)
Gross profit:
Products 392 362 8 927 1,073 (14)
Services 487 0 n/a 795 0 n/a
------------ ------------ ------------- ------------ ------------ ------------
Total gross profit 879 362 143 1,722 1,073 61
Operating expenses:
Marketing and sales 1,101 373 195 2,123 898 136
Product development 726 90 707 1,221 247 394
General and administrative 1,318 16 8,138 3,005 198 148
Amortization of intangibles 681 0 n/a 1,597 0 n/a
Stock-based compensation 79 0 n/a 162 0 n/a
------------ ------------ ------------- ------------ ------------ ------------
Total operating expenses 3,905 479 714 8,108 1,343 504
------------ ------------ ------------- ------------ ------------ ------------
Operating loss (3,026) (117) 2,480 (6,386) (270) 2,265
Non-operating income (expense):
Interest and dividend income 19 0 n/a 74 0 n/a
Income taxes 0 0 n/a 0 0 n/a
------------ ------------ ------------- ------------ ------------ ------------
Net income/(loss) ($3,007) ($117) 2,470 ($6,312) ($270) 2,238
============ ============ ============= ============ ============ ============
</TABLE>
18
<PAGE>
THIRD QUARTER ENDED DECEMBER 31, 1999 COMPARED TO THIRD QUARTER ENDED DECEMBER
31,1998
NET SALES
Net product sales represent the gross revenue received from sales of
music, video, games and other products sold by eUniverse, less sales returns,
and outbound shipping and handling charges. Net service sales represent revenue
generated from sales of membership, sponsorship and advertising on our web
sites.
Total net sales increased nearly 20%, or $0.5 million, to 3.0 million
for the quarter ended December 31, 1999, from $2.5 million for the comparable
third quarter of 1998 all due to services sales. Advertising, sponsorship and
membership net sales grew to represent 16% of net sales, having a positive
effect on gross margins. Advertising, sponsorship and membership net sales of
our acquired subsidiaries amounted to $480,000 during the quarter ended December
31, 1999, compared to no net sales of services during the comparable period for
the prior year. For the quarter ended December 31, 1999, total product net sales
were 1% higher than the comparable period for the prior year. Service net sales
include barter advertising, where we exchange banner and other ad impressions on
our sites for similar quantities on our barter partner's sites. Barter
advertising represented 3.5% of net sales for the quarter ended December 31,
1999. eUniverse had no barter transactions for the third quarter of the prior
year.
GROSS PROFIT
Gross profit is calculated as net sales less the cost of net sales,
which consists of the cost of merchandise sold to customers and inbound and
outbound shipping costs.
For the quarter ended December 31, 1999, the gross margin increased to
29% from 14% and, in absolute dollars, the gross profit increased to $879,000
from $362,000 reported for the quarter ended December 31, 1998, reflecting a
$487,000 increase in net sales due to the inclusion of advertising, sponsorship
and membership net sales as noted above. Gross margins on product sales
increased by 8% during the quarter ended December 31, 1999, as compared to the
quarter ended December 31, 1998, as a result of cost reductions in freight and
shipping that went into effect in the third quarter of 1999.
MARKETING AND SALES
Marketing and sales expenses consist primarily of fulfillment,
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.
Marketing and sales expenses totaled $1.1 million for the quarter ended
December 31, 1999, compared to $373,000 for the quarter ended December 31, 1998.
Marketing and sales expenses increased during the third quarter of 1999 due to
inclusion of the marketing and sales expenses of the businesses we acquired
during the 1999 fiscal year. For the three months ended December 31, 1999,
marketing and sales costs included in the operating expenses of our acquired
companies accounted for $476,000 of the $728,000 increase in our marketing and
sales expenses over the comparable period in the prior year. The remainder of
the increase is attributable to marketing and sales expenses related to our
product sales. For the quarter ended December 31, 1999, our product processing
and fulfillment costs increased by $114,000, payroll increased by $84,000 and
advertising and promotion increased by $114,000 over the comparable period in
the prior year. Marketing and sales costs of our acquired companies for the
quarter
19
<PAGE>
ended December 31, 1999, included payroll of $155,000, advertising of $60,000
and consulting and other services of $261,000.
PRODUCT DEVELOPMENT
Product development expenses consist of payroll and related expenses
for developing and maintaining eUniverse's web sites and supporting technology.
Product development expenses totaled $726,000 for the quarter ended
December 31, 1999 compared to $90,000 for the quarter ended December 31, 1998.
Product development expenses increased as a result of increased payroll and
related expenses associated with Case's Ladder, Gamer's Alliance and Big
Network, which we acquired in 1999. The $360,000 of product development expenses
are attributable to our subsidiaries acquired after March 31, 1999. The
remaining of the increase includes $104,000 in payroll related costs, $190,000
in outside services related to the product division, and $342,000 in corporate
web site development and integration of acquired web sites. Product development
costs of our acquired companies included payroll for product development
personnel of $215,000, Internet fees of $75,000 and outside services of $50,000.
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.
G&A expenses totaled $1.3 million for the quarter ended December 31,
1999, compared to $16,000 for the quarter ended December 31, 1998. G&A cost
increases are primarily attributable to increased infrastructure costs
associated with eUniverse's expansion efforts and increased costs to support its
efforts to become registered with the SEC. These include payroll of $370,000,
accounting and legal services of $397,000 and professional consulting services
of $318,000. Other increases for office rents, supplies and support services
added $216,000.
AMORTIZATION OF INTANGIBLES
Amortized expenses on intangible assets totaled $681,000 for the
quarter ended December 31, 1999, compared to no amortized expenses on intangible
assets for the quarter ended December 31, 1998. The amortized expenses on
intangible assets for the quarter ended December 31, 1999 reflect the
acquisitions of CD Universe, Case's Ladder, Gamer's Alliance and Big Network in
1999.
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.
Stock-based compensation expenses totaled $70,000 for the quarter ended
December 31, 1999, compared to no stock-based compensation expenses for the
quarter ended December 31, 1998. The expenses for the quarter ended December 31,
1999 are attributable to stock compensation provided in connection with the
acquisitions of MegaDvd.com and Funone.com and awards under the 1999 Stock
Awards Plan to CD Universe employees.
20
<PAGE>
NON-OPERATING INCOME
Non-operating income totaled $19,000 for the quarter ended December 31,
1999, compared to no non-operating income for the quarter ended December 31,
1998. Interest income increased over the quarter ended December 31, 1999 as
compared to the third quarter of the prior year due to higher cash balances
resulting from eUniverse's financing activities, principally the April 1999
issuance of $6.8 million in Series A 6% Convertible Preferred Stock and $0.9
million in common stock. Loss allocated to minority interest for the quarter
ended December 31, 1999 represents the minority shareholders of Big Network's
share of their losses for the year-to-date period, limited by their investment.
INCOME TAXES
eUniverse has not generated any taxable income to date and therefore
did not pay any federal income taxes in the third quarter of 1999 or of 1998.
Utilization of eUniverse'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, eUniverse has provided a valuation
allowance on the deferred tax asset in an amount necessary to reduce the net
deferred tax asset to zero.
NET LOSS
Net loss totaled $3.0 million for the quarter ended December 31, 1999
compared to $117,000 for the quarter ended December 31, 1998. The increase in
net loss is attributable to an increase in expenses as described above and lack
of a commensurate increase in net sales.
NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1998
NET SALES
Total net sales were approximately $7.0 million for the nine months
ended December 31, 1999, compared to approximately $6.9 million for the nine
months ended December 31, 1998. For the nine-month period ended December 31,
1999, product net sales declined by 11% from the prior year increased
competition and Web site reliability issues in the first half of the year.
The decrease in product sales was more than offset by the increase in services
sales. Net sales attributable to results of businesses we acquired after
December 31, 1998, include all sales of services. Advertising, sponsorship
and membership net sales of our acquired subsidiaries amounted to $810,000
for the nine months ended December 31, 1999, compared to no net sales
of services during the comparable period for the prior year. Barter net sales
represented 1.5% of net sales for the nine months ended December 31, 1999
compared to no barter net sales in the nine months ended December 31, 1998. We
expect that net sales of services will continue to grow as a result of our
emphasis in this area as well as realization of the full period effect of the
results of operations of our acquired subsidiaries to date.
GROSS PROFIT
Gross profit totaled $1.7 million for the nine months ended December
31, 1999, compared to $1.1 million for the nine months ended December 31, 1998.
For the nine months ended December 31, 1999, advertising, sponsorship and
membership net sales represented 46% of the gross margin and product net sales
represented 54% of the gross margin. Gross profits for product sales were
$146,000 lower for the nine months ended December 31, 1999, as compared to the
nine months ended December 31, 1998, due
21
<PAGE>
to increased promotional discounts. However, for the nine months ended December
31, 1999, total gross profits were $649,000 higher than total gross profits for
the comparable period the prior year due to the inclusion of service net sales,
which represented $795,000 of gross profits for the nine months ended December
31, 1999, and partially offset the decline in product sales.
eUniverse 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 services offerings. Gross margins
attributable to new business areas may be lower than those associated with
eUniverse's existing business activities. However, eUniverse over time intends
to continue to focus on increasing advertising revenue, particularly for Case's
Ladder, Gamer's Alliance and Big Network, and improving gross margins.
MARKETING AND SALES
Marketing and sales expenses totaled $2.1 million for the nine months
ended December 31, 1999, compared to $898,000 for the nine months ended December
31, 1998. For the nine months ended December 31, 1999, marketing and sales costs
of our acquired subsidiaries accounted for $694,000 of the $1,227,000 increase
over the comparable period in the prior year. The $694,000 increase in marketing
and sales costs attributable to our acquired subsidiaries consists of $244,000
in payroll, $78,000 in advertising and promotion and $372,000 in consulting and
other services. In the marketing and sales costs for our product segment for
the nine months ended December 31, 1999, there were increases of $220,000 for
payroll, $217,000 in processing and fulfillment costs and $120,000 in
advertising, as compared to the nine months ended December 31, 1998.
PRODUCT DEVELOPMENT
Product development expenses totaled $1.2 million for the nine months
ended December 31, 1999, compared to $247,000 for the nine months ended December
31, 1998. For the nine months ended December 31, 1999, costs attributable to the
acquired companies were $562,000, consisting of product development payroll
costs of $384,000, contractor services costs of $66,000 and facilities costs of
$113,000. In the product segment, payroll increased by $104,000 and contractor
services increased by $160,000 for the nine months ended December 31, 1999 as
compared to the comparable period in the prior year. eUniverse intends to create
a tighter structure among its web sites and design new sites, both of which will
increase expenses.
GENERAL AND ADMINISTRATIVE
G &A expenses totaled $3.0 million for the nine months ended December
31, 1999, compared to $198,000 for the nine months ended December 31, 1998. For
the nine months ended December 31, 1999, increases in G&A costs are primarily
attributable to increased infrastructure costs associated with eUniverse's
expansion efforts and increased costs to support its efforts to become
registered with the SEC. These increases included $833,000 in payroll, $784,000
in accounting and legal and $617,000 in professional services. eUniverse expects
G&A costs to continue to increase commensurate with its expansion plans.
AMORTIZATION OF INTANGIBLES
Amortized expenses on intangible assets totaled $1.6 million for the
nine months ended December 31, 1999, compared to no amortized expenses for the
nine months ended December 31, 1998. The amortized expenses on intangible assets
for the nine-month period ended December 31, 1999 reflect the acquisitions of CD
Universe, Case's Ladder, Gamer's Alliance and Big Network. eUniverse expects
22
<PAGE>
the costs of acquired companies and web sites to increase in the fourth quarter
of 1999 and beyond, because eUniverse will record amortization expense relating
to the acquisitions of Falcon Ventures Corporation and the assets of
pokemonvillage.com and Quake City Gaming Network, which occurred on February 2
and February 1, 2000, respectively. It is likely that eUniverse will continue to
expand its business through acquisitions and investments, which would cause
amortization costs to increase.
STOCK-BASED COMPENSATION
Stock-based compensation expenses totaled $162,000 for the nine months
ended December 31, 1999, compared to no stock-based compensation expenses for
the nine months ended December 31, 1998. The expenses for the nine months ended
December 31, 1999 are attributable to stock compensation provided in connection
with the acquisitions of MegaDvd.com and Funone.com and awards under the 1999
Stock Awards Plan to CD Universe employees.
NON-OPERATING INCOME
Non-operating income totaled $74,000 for the nine months ended December
31, 1999, compared to no non-operating income for the nine months ended December
31, 1998. Interest income increased due to higher cash balances resulting from
eUniverse's financing activities, principally the April 1999 issuance of $6.8
million in Series A 6% Convertible Preferred Stock and $0.9 million in common
stock. Loss allocated to minority interest for the nine months ended December
31, 1999 represents the minority shareholders of Big Network's share of their
losses for the year-to-date period, limited by their investment.
INCOME TAXES
eUniverse has not generated any taxable income to date and therefore
did not pay any federal income taxes in the nine months ended December 31, 1999
or 1998. Utilization of eUniverse'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, eUniverse has provided a valuation
allowance on the deferred tax asset in an amount necessary to reduce the net
deferred tax asset to zero.
NET LOSS
Net loss totaled $6.3 million for the nine months ended December 31,
1999, compared to $270,000 for the nine months ended December 31, 1998. The
increase in net loss is attributable to an increase in expenses as described
above and lack of a commensurate increase in net sales.
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<PAGE>
YEAR ENDED MARCH 31, 1999 COMPARED TO YEAR ENDED MARCH 31, 1998
For the years ended March 31, 1999 and 1998, the results discussed are
those are solely of the operations of CD Universe, our predecessor company. The
following table sets forth the results of operations for CD Universe for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1999 1998 % CHANGE
------ ------ -----------
(In Thousands)
<S> <C> <C> <C>
Net product sales $ 8,852 $ 5,685 56%
Gross Profit 1,301 976 33%
Operating expenses:
Marketing and sales 1,183 812 46%
Product development 333 148 125%
General and administrative 193 151 28%
Net Income/(Loss) $ (408) $ (152) 167%
</TABLE>
NET SALES
Net sales include the selling price of music and video products sold by
eUniverse, net of returns, as well as outbound shipping and handling charges.
Net sales totaled $8.8 million for the year ended March 31, 1999, compared
to $5.7 million for the year ended March 31, 1998. Net sales increased by 56% as
a result of increased purchases of music online and through eUniverse's
increased marketing with its marketing partners and favorable reviews by third
parties.
GROSS PROFIT
Gross profit is calculated as net sales less the cost of net sales,
which consists of the cost of merchandise sold to customers and inbound and
outbound shipping costs.
Gross profit totaled $1.3 million for the year ended March 31, 1999,
compared to $976,000 for the year ended March 31, 1998. Gross profit increased
in absolute dollars but decreased as a percentage of net sales from 17.2% to
14.7%, reflecting a downward change in product pricing needed for CD Universe to
remain competitive with other Internet-based CD retailers.
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.
24
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Marketing and sales expenses totaled $1.2 million for the year ended March
31, 1999, compared to $812,000 for the year ended March 31, 1998. Marketing and
sales expenses increased due to several factors. An increase in marketing and
sales expenses of $201,000 was directly related to costs of fulfilling customer
demand and fees for credit card processing, which vary directly with product
sales. The remaining $170,000 increase was due in equal parts to increases in
eUniverse's advertising and promotional expenditures and in payroll related
costs. For the year ended March 31, 1999, marketing and sales expense
represented 13.3% of product sales, 1% down from 14.3% for the year ended March
31, 1998 because of an increase in net sales.
PRODUCT DEVELOPMENT
Product development expenses consist of payroll and related expenses for
developing and maintaining eUniverse's websites and supporting technology.
Product development expenses totaled $333,000 for the year ended March 31,
1999, compared to $148,000 for the year ended March 31, 1998. Product
development expenses increased in the year ended March 31, 1999, as compared to
the year ended March 31, 1998, due to increased sales activity, which required
continuous web site development. In the year ended March 31, 1999, payroll
related expense increased by $40,000 and expenses for contracted services for
programming work increased by $90,000. Other increases of $55,000 consisted of
minor increases in several product development expense categories such as
Internet fees, software and supplies. For the year ended March 31, 1999, product
development expenses represented 3.8% of product sales, up from 2.6% for the
year ended March 31, 1998 because of the increased sales activity described
above.
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.
G&A expenses totaled $193,000 for the year ended March 31, 1999, compared
to $151,000 for the year ended March 31, 1998. G&A costs increases were
attributable to increased payroll-related costs associated with CD Universe's
expansion. For the year ended March 31, 1999, G&A costs represented 2.1% of
product sales, down from 2.6% for the year ended March 31, 1998 because of an
increase in net sales.
NET LOSS
Net loss totaled $406,000 for the year ended March 31, 1999, compared
to $152,000 for the year ended March 31, 1998. The increase in net loss was due
to expenses described above that increased more than net sales and gross profit.
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
Prior to incorporating on April 7, 1997, CD Universe operated as a division
of Prime Software, Inc., a related party. The following discussion refers to the
operations of CD Universe as a division of Prime Software prior to April 7,
1997.
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<PAGE>
NET SALES
Net sales for the years ended March 31, 1998 and 1997 were $5.7 million and
1.7 million, respectively. Net sales for both periods were derived solely from
online sales of music CD's and tapes. Sales growth of 339% came as a result of
general growth and acceptance of online purchases of merchandise over the
Internet.
GROSS PROFIT
Gross profit was $976,000 and $242,000 for the two years ended March 31,
1998 and 1997, respectively. Growth in profit was due principally to the growth
in product sales, which accounted for 80% of the growth, however, gross margins
expanded to 17.2% from 14.4% as the increased volume allowed CD Universe to
purchase products more cost effectively. This cost savings contributed an
additional $158,000 to gross profits in the year ended March 31, 1998.
OPERATING EXPENSES
CD Universe did not separately account for operating expenses in Marketing,
Product Development and Administration, so a meaningful comparison is not
possible. Operating expenses grew to $1,112,000 for the year ended March 31,
1998, from $434,000 in the same period in 1997, an increase of 256%. Fulfillment
and database costs, which vary directly with product sales, grew by $325,000.
Partner commissions increased by $65,000. Other payroll and related expense grew
by $185,000, and all other office expenses increased $85,000.
NET LOSS
Net losses improved to $152,000 in the year ended March 31, 1998 from
$192,000 in the year ended March 31, 1997, principally from the growth in net
sales and gross margins.
LIQUIDITY AND CAPITAL RESOURCES
For the years ended March 31, 1999 and 1998 net cash used in operating
activities was $10,000 compared to cash generated of $393,000, respectively. In
1999, net operating cash flows were primarily attributable to net losses offset
by increases in accounts payable due to growth in product sales. In 1999, the
cash generated was due to growth in accounts payable of $535,000, which offset
operating losses.
Net cash used in investing activities was $114,000 and $236,000 for the
years ended March 31, 1999 and 1998, respectively, and consisted of purchases of
fixed assets. Net cash used in financing activities of $132,000 for the year
ended March 31, 1999 resulted from repayments of loans from affiliates, the
source of the financing cash for the prior year.
As of March 31, 1999, eUniverse's principal commitments included
obligations for leases amounting to approximately $117,000 annually for the next
3 years and a note payable to an officer of $105,000. At March 31, 1999,
eUniverse had cash resources of $11,000 as compared to $267,000 at the same
point in 1998. eUniverse, formerly known as Motorcycle Centers of America, Inc.,
was under agreement to be acquired by Entertainment Universe at March 31, 1999,
which was consummated on April 14, 1999.
Since April 14, 1999, eUniverse has satisfied its cash requirements
primarily through private placements of equity securities (including the $6.3
million net proceeds raised in April of 1999) and cash flow from sales of music
CDs and videos.
26
<PAGE>
Net cash used in operating activities was $4.1 million and $158,000 for the
nine-month periods ended December 31, 1999 and 1998, respectively. Negative net
operating cash flows were primarily attributable to net losses, merger and
acquisition related costs, increases in non-cash current assets, offset by
increases in current liabilities and by increases in non-cash charges for
depreciation and amortization.
Net cash used in investing activities was $1.3 million and $159,000 for the
nine-month periods ended December 31, 1999 and 1998, respectively. In the
nine-months ended December 31, 1999, $0.9 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 the 1998 period consisted of fixed asset purchases
and loans to a former officer.
Net cash provided by financing activities of $6.3 million for the
nine-month period ended December 31, 1999 resulted from net proceeds of $6.3
million resulting from the sale of 1.8 million shares of preferred stock and
897,835 shares of common stock.
As of December 31, 1999, eUniverse's principal commitments include
obligations for leases amounting to about $180,000, annually. Continued
acquisitions and investments may also require future capital expenditures.
eUniverse believes that cash balances of $0.9 million at December 31, 1999,
and the Take Two Interactive Software investment of $2 million on February 2,
2000 will be sufficient to meet eUniverse's anticipated cash requirements for
the next six months. See "Recent Transactions" on page 30. We anticipate that
we will need to raise additional funds to meet our operating needs, and
eUniverse is currently in discussions with an investment banker, Gerard Klauer
Mattison &Co., 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
eUniverse's liquidity requirements, eUniverse 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 eUniverse's stockholders. In
addition, eUniverse will, from time to time, consider the acquisition of or
investment in complementary businesses, products, services and technologies,
which might impact eUniverse's liquidity requirements or require eUniverse to
issue additional equity. There can be no assurance that financing will be
available in amounts or on terms acceptable to eUniverse, if at all.
THEFT OF CUSTOMER DATA FROM CD UNIVERSE
eUniverse 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. eUniverse 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. We cooperated with the FBI
and other law enforcement officials to discover the extent to which our data may
have been compromised and to identify the extortionist and limit any damage to
eUniverse's customers.
CD Universe has approximately 300,000 registered customers. Apart from
claims made by the perpetrator and the minimal information on card data
released, we cannot yet determine when or how the data was taken or the extent
of the theft. For the purpose of our response to the theft, we assumed that all
customers may have been affected and took the steps identified below to mitigate
our customers' exposure and inconvenience.
Upon learning on January 8, 2000 that customer data had been posted on the
Internet, eUniverse took several steps to secure its customer data. We notified
the credit card issuers of the theft and provided them with the data they need
to take corrective actions with their card members. We have also sent e-mail
messages to our customers to notify them of the risk that their credit card data
may have been stolen and advise them that they should closely monitor their
accounts. We also suggested that they might wish to have their cards reissued
for additional protection. Similar information and suggestions were given to
customers who call our support staff.
A major technology security firm was retained to review eUniverse's
security procedures. Since the extortionist claimed that certain third party
software may have been utilized in connection with the theft, eUniverse
discontinued use of that software for credit card processing and implemented a
new software system.
Information regarding this theft of data 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. There may be
a loss of confidence and loyalty in CD Universe directly and there may be a
broader loss of confidence and loyalty in eUniverse, its e-commerce business and
its brand identity. More generally, e-commerce as a whole could be adversely
affected. eUniverse cannot yet predict the impact, if any, on its sales and
operating results.
eUniverse may be required to defend against lawsuits related to the theft
of data. At this time, eUniverse is unable to determine the extent of any such
effect on sales or exposure to lawsuits or any associated liability. Such
lawsuits could include suits by eUniverse's shareholders, customers and credit
card processor and by credit card issuers and third-party merchants that accept
the fraudulently obtained credit card information. eUniverse has maintained
directors and officers' liability insurance and general liability insurance but
is unable to determine whether such insurance would adequately cover any
liability or expenses associated with potential lawsuits.
YEAR 2000 READINESS DISCLOSURE
Prior to the rollover to the Year 2000, eUniverse determined through
testing that its computer equipment at its Wallingford, Connecticut facility and
its other locations was Y2K compliant or took the steps required to update any
portions that were not compliant. All mission critical third party software
applications at all divisions and subsidiaries were independently tested
(operating systems, web servers, database systems, programming languages) and
determined to be Year 2000 compliant before the Year 2000. All internally
developed software at all divisions is believed to be Year 2000 compliant, and a
full audit using commercially available development tools that are designed to
detect Year 2000 issues has been completed and any problems detected have been
repaired.
eUniverse conducted an analysis to determine the extent to which others
have Year 2000 issues. These include CD Universe's major suppliers' systems,
including the systems of credit card processors, telecommunications providers,
product distributors and companies with whom CD Universe has marketing
agreements. CD Universe's primary distributor for music and video products,
Valley Media,
27
<PAGE>
indicated that it was in compliance before the Year 2000. CD Universe is
currently unable to predict the extent to which the Year 2000 issue will affect
Valley's suppliers, and the extent to which Valley would be vulnerable to its
suppliers' failure to resolve any Year 2000 issues on a timely basis. The
failure of a major supplier subject to the Year 2000 issue to convert its
systems on a timely basis or a conversion that is incompatible with CD
Universe's systems could have a material adverse effect on CD Universe. In
addition, 97% of the purchases from CD Universe's online store are made with
credit cards, and our operations may be materially adversely affected to the
extent customers are unable to use their credit cards due to Year 2000 issues
that are not rectified by their credit card providers.
During December 1999, we sent letters to our major suppliers requesting
their status related to the Year 2000 issue. We received responses related to
our telephone and security systems. We telephonically contacted those suppliers
who had not responded to confirm their readiness for Year 2000 during the final
week of 1999. Prior to beginning operations for the new year, we contacted our
primary and secondary suppliers to confirm their ability to service us. None
expected that there would be any problems. Additionally, we have developed
alternative sources of supply for all lines of products sold.
eUniverse also conducted an analysis to determine the extent to which
any non-information technology systems, e.g., any equipment with embedded chips,
are Year 2000 compliant. We determined that the Year 2000 issue would not affect
non-information technology systems.
YEAR 2000 IMPACTS EXPERIENCED
From the time of the rollover to the Year 2000 up to the date of this
prospectus, none of our operations have experienced any significant disruptions
to their systems operations. Prior to transacting new business with our primary
and secondary suppliers we confirmed with them that they had not experienced any
problems that would prevent their servicing of our business. In our operations
two minor issues were noted; several of the servers for Case's Ladder operated
with incorrect clock dates, and the email interface for the Big Network Daily
Post experienced minor errors. For Case's Ladder no disruption occurred and the
issue was resolved with a software fix. In the case of Big Network, revisions to
the software were required at a cost of less than $3,000. No disruptions have
occurred at CD Universe or Gamer's Alliance.
YEAR 2000 CONTINGENCY PLAN
eUniverse intends to use existing non-Year 2000 specific contingency plans
to address any situations that it believes would arise if eUniverse or third
parties fail to be Year 2000 compliant. These plans consist principally of
having teams of problem resolution staffers on call during non-working hours to
respond to site downtime issues or failures. There is a risk that existing
contingency plans would be inadequate to deal with serious and sustained Year
2000 adverse affects.
YEAR 2000 COSTS
eUniverse has not expended or committed any significant amount of cash
resources on Year 2000 compliance and does not expect to expend any significant
amount of cash resources on Year 2000 compliance in the future.
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BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Entertainment Universe, Inc. was founded in February 1999 by Brad D.
Greenspan for the purpose of developing and acquiring entertainment-related
Internet businesses. Motorcycle Centers of America, Inc., was a Nevada
corporation with no significant operations or revenue since 1995, whose shares
were publicly traded on the OTC Bulletin Board. In March 1999, Entertainment
Universe and Motorcycle Centers entered into a letter of intent to undertake a
reorganization under which the holders of Entertainment Universe common stock
would exchange their Entertainment Universe shares for shares of Motorcycle
Centers common stock on a one-to-one basis. On April 14, 1999, the
reorganization was completed. As a result of the reorganization, Entertainment
Universe shareholders owned 92% of Motorcycle Center's shares of common stock
and Entertainment Universe became a wholly owned subsidiary of Motorcycle
Centers. The reorganization was an arms length transaction between unrelated
parties. The fair market value of the Motorcycle Centers shares issued to the
Entertainment Universe shareholders was $897,835, based upon negotiations
between the parties.
Also on April 14, 1999 but immediately prior to the closing of the
reorganization, Entertainment Universe sold 1,795,024 shares of Series A
Convertible Preferred Stock in a private offering under Regulation D of the
Securities Act of 1933, raising $6,462,086, before offering costs were deducted.
In connection with the reorganization, the holders of the Entertainment Universe
Series A Convertible Preferred Stock exchanged their shares, on a one-to-one
basis, for shares of Motorcycle Centers convertible preferred stock which have
equivalent rights and preferences.
Entertainment Universe used $1,915,000 of the preferred stock offering
proceeds (plus 2,425,000 shares of common stock with a fair market value of
$7,275,000) to acquire CD Universe. The consideration paid was based upon
negotiations between the parties. This was an arms length transaction between
unrelated parties. CD Universe is a Connecticut corporation engaged in the
business of selling audio CDs and videotapes over the Internet. Concurrently
with the closing of the reorganization, Entertainment Universe distributed its
asset, the capital stock of CD Universe, to its sole shareholder, Motorcycle
Centers. Motorcycle Centers, the parent entity following the reorganization,
changed its name to eUniverse, Inc.
The following chart summarizes our corporate organizational structure
immediately following the reorganization:
---------------------------- ----------------------------
92% 8%
Former shareholders of Former shareholders of
Entertainment Universe, Inc. Motorcycle Centers of America,
Inc.
---------------------------- ----------------------------
--------------------------------------
eUniverse, Inc.
(formerly, Motorcycle Centers
of America, Inc.)
---------------------------------------
-------------------------------------------------------
100% 100%
Entertainment CD Universe, Inc.
Universe, Inc.
-------------------------------------------------------
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<PAGE>
As neither Motorcycle Centers nor Entertainment Universe had any
significant operations prior to the acquisition of CD Universe, CD Universe is
considered to be the predecessor entity and its historical financial statements
have been included in this registration statement.
RECENT TRANSACTIONS
ACQUISITION OF ASSETS OF GREEN WILLOW INTERNATIONAL CORP. D/B/A MEGADVD.COM
In an arms length transaction between unrelated parties, as of May 17,
1999, eUniverse acquired all of the assets of Green Willow International Corp.,
consisting primarily of the megadvd.com web site, in exchange for 4,605 shares
of eUniverse common stock valued at $11.40 per share, which was the market price
of the stock on the issue date. The consideration paid was based upon
negotiations between the parties to determine the valuation of the shares
issued. After the closing, Mr. Steve Martin and Ms. Korri Kolesa, the
shareholders of Green Willow, became and remain currently employed by eUniverse.
The MegaDVD.com web site is devoted to the retail sale of DVDs.
ACQUISITION OF CASE'S LADDER, INC.
In an arms length transaction between unrelated parties, on May 31, 1999,
eUniverse acquired all of the outstanding shares of common stock of Case's
Ladder, Inc. in exchange for 700,000 shares of eUniverse common stock with a
fair market value of $10.00 per share. The consideration paid was based upon
negotiations between the parties to determine the valuation of the shares
exchanged pursuant to a Stock Purchase Agreement (the "Case's Ladder
Agreement"). The other parties to the agreement are Case's Ladder, Inc. and its
shareholders--Frank Westall (Chief Executive Officer and Chairman of Case's
Ladder) and Edward Hilts (Chief Operating Officer and Chief Financial Officer of
Case's Ladder). Frank Westall, Edward Hilts and Jeremy Rusnak remain employed by
Case's Ladder, and, in connection with their employment, they were granted
options to purchase 600,000 shares of eUniverse's common stock, in the
aggregate, at a price of $10 per share on June 15, 1999. These options expire on
June 15, 2009 and 1/12 of the options vest over three years on December 16,
March 16, June 16 and September 16 of each year.
The Case's Ladder web site serves primarily as an online game portal,
providing competitive rankings for online gamers in a number of online games and
allowing gamers to compete against one another in a variety of tournaments and
leagues. The Case's Ladder web site currently has over 1.1 million registered
users. Based on a customer survey, approximately 75% of registered users on the
Case's Ladder web site are between the ages of 18 and 50 with the majority of
those visitors having an annual income over $50,000. Case's Ladder currently
derives revenue only from membership fees and advertising. eUniverse believes
that the users of the Case's Ladder web site represent favorable demographics
and expand the customer base for our existing products. With the acquisition of
Case's Ladder, we also diversified our product offerings into the computer games
area.
ACQUISITION OF GAMER'S ALLIANCE, INC.
In an arms length transaction between unrelated parties, as of June 30,
1999, eUniverse acquired all of the outstanding shares of Gamer's Alliance stock
in exchange for 78,125 shares of eUniverse's common stock with a fair market
value of $1,000,000. eUniverse may make additional payments to the sellers of up
to an aggregate of 97,656 additional shares of eUniverse's common stock over a
period of five calendar quarters through June 30, 2000, contingent upon Gamer's
Alliance achieving specified milestones with respect to revenue, the number of
unique site visitors and other factors. The consideration paid was based upon
negotiations between the parties to determine the valuation of the
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Gamer's Alliance shares. Three members of management of Gamer's Alliance -- Adam
Goldenberg (President), Matthew Rowell, and Anthony Wyss -- remain employed by
Gamer's Alliance under employment agreements.
Gamer's Alliance has been online since January 1997, and operates a network
of gaming-related sites on the Internet. On a monthly basis, Gamer's Alliance
receives over 750,000 unique visitors and generates over 10 million banner
impressions. It owns and operates a network of more than 50 web sites, including
GA-games, GA-Source (a gaming news site which provides game previews, product
reviews and interviews), and GA-Sports (a network of news on computer sports
gaming).
ACQUISITION OF THE BIG NETWORK, INC.
As of August 31, 1999, eUniverse acquired 80% of the outstanding
capital stock of The Big Network, Inc. in exchange for 1,440,000 shares of
eUniverse common stock, with a fair market value of $8,820,000. After the
closing and as of the date of this prospectus, eUniverse has acquired additional
outstanding Big Network shares in exchange for 354,600 shares of
eUniverse, with a fair market value of $2,168,250. As of March 16, 2000,
eUniverse owns 99.7% of the outstanding capital stock of Big Network. Each of
these stock exchanges were arms length transactions between unrelated parties.
The consideration paid was based upon negotiations between the parties to
determine the value of the Big Network and eUniverse shares. Subsequent to the
closing, shareholders and principal officers of Big Network -- Stephen Sellers
and John Hanke -- became Vice Presidents of eUniverse. On January 6, 2000,
Mr. Hanke resigned his position to pursue other business opportunities. For a
summary of Mr. Seller's employment terms with eUniverse, see "MANAGEMENT --
Executive Compensation."
The Big Network site provides a full suite of classic board and card
games, including spades, checkers, chess, backgammon, reversi and morph,
allowing thousands of simultaneous players to meet, chat and play parlor games
in a friendly setting. The site's gaming system is based on a sophisticated Java
client-server architecture designed to support over 10,000 users. Big Network
currently hosts over 210,000 registered members and generates almost three
million advertising impressions per month.
As of April 5, 2000, former shareholders of Big Network who hold a total of
1,597,078 shares of eUniverse common stock entered into an agreement with
eUniverse which provides eUniverse with the right to purchase a minimum of
500,000 shares of eUniverse common stock, on a pro rata basis, from all of the
former shareholders of Big Network who, as of the closing of such agreement,
are shareholders of eUniverse and counter-signatories to such agreement. The
closing is scheduled to occur on or before April 24, 2000.
ACQUISITION OF FUNONE.COM
In an arms length transaction between unrelated parties, as of October 1,
1999, eUniverse acquired funone.com from Don Burgess in exchange for 8,733
shares of eUniverse common stock with a value of $50,000. After the closing, Mr.
Don Burgess became and remains employed by eUniverse. eUniverse will make a
contingent payments to Mr. Burgess of up to $350,000 in additional shares of
eUniverse's common stock over the period of six calendar months from the
closing, contingent upon funone.com achieving specified milestones with respect
to unique site visitors.
The funone.com web site provides online greetings, cartoons, joke lists and
gags. Subscribers can receive weekly jokes and send fun electronic greetings to
their friends.
ACQUISITION OF POKEMONVILLAGE AND QUAKE CITY GAMING NETWORK
As of February 1, 2000, in an arms length transaction between unrelated
third parties, eUniverse completed its acquisition of the Pokemonvillage.com and
Quake City Gaming Network from D. Scott Smith. The purchase price of this
transaction was $250,000 payable in shares of eUniverse common stock, based upon
negotiations between the parties. After the closing, Mr. Scott became and
remains employed by eUniverse. Under Mr. Smith's employment agreement with
eUniverse, additional payments of up to $190,000 in cash and up to an aggregate
value of $450,000 in stock options, based upon a fair market exercise price at
the date of grant, may be payable upon achievement of targeted numbers of
ACQUISITION OF DUSTCLOUD MEDIA
On April 14, 2000, eUniverse, Inc. ("eUniverse") acquired all of the assets
of Dustcloud Media, an entity doing business on the internet through the web
site Dustcloud.com. eUniverse acquired all of the assets of Dustcloud Media from
Erik MacKinnon and Dan Barnes in exchange for a principal payment of 23,668
shares of eUniverse common stock, valued at $150,000, and up to an additional
$150,000 in contingent payments of eUniverse common stock, over the period of
12 months after the closing, contingent upon Dustcloud.com achieving specified
milestones with respect to the number of page view requests received by the
Dustcloud.com web site. The contingent payments will be made in additional
shares of eUniverse's common stock based upon the fair market value of the stock
at the time the performance objectives are met. After the closing, Messrs.
MacKinnon and Barnes were and are engaged as independent contractors to perform
development, editorial and web-master related services for the Dustcloud.com
web site.
Dustcloud.com is a web site that enables users to search the internet for
celebrity images and movie clips and trailers, while also providing a community
filled with current movie reviews, popular images, and other forms of
entertainment focused content.
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banner advertisements displayed on the web pages of the Pokemonvillage.com and
its related web sites through August 1, 2001.
Domain names included in this transaction include Pokemonvillage.com,
Forumnation.com, and Reverseauction.com. Pokemonvillage.com, with over 370,000
unique visitors in December 1999, as reported by Media Matrix, is one of the
largest online communities for enthusiasts of Pokemon, computer/video games, and
other collectibles. Forumnation.com is youth focused web site allowing the users
to discuss a variety of subjects such as music, comics, and games that are of
interest to them. ReverseAuction.com site allows the owners of Pokemon cards,
comics, and other collectibles to meet and auction off their items.
ACQUISITION OF FALCON VENTURES CORPORATION
In an arms length transaction between unrelated parties, as of February
2, 2000, eUniverse acquired all of the outstanding capital stock of Falcon
Ventures Corporation from Take-Two Interactive Software, Inc. in exchange for
310,000 shares of eUniverse's common stock. The consideration paid was based
upon negotiations between the parties to determine the value of Falcon Ventures'
shares and the shares issued by eUniverse.
Falcon Ventures is an online retailer of DVD movies, music CDs and VHS
movies through its web site at dvdwave.com. Falcon Ventures has significant
liabilities of $500,000 in accounts payable. Falcon Ventures loans of $600,000
due to Take Two were cancelled prior to our acquisition of Falcon Ventures.
ACQUISITION OF JUSTSAYWOW
As of March 1, 2000, eUniverse acquired Justsaywow.com from Christian
Walter in exchange for $200,000 cash and 11,696 shares of eUniverse common stock
with a value of $100,000, based upon negotiations between the parties. This was
an arms length transaction between unrelated parties. After the closing, Mr.
Walter became and remains employed by eUniverse. Under Mr. Walter's employment
agreement with eUniverse, eUniverse will make contingent payments to Mr. Walter,
over the period of six calendar months from the closing, contingent upon
justsaywow.com achieving specified milestones with respect to the number of page
view requests received by the Justsaywow.com web site. The contingent payments
will be made in shares of eUniverse's common stock and have an aggregate total
value of up to $200,000, based upon the fair market value of eUniverse's common
stock at the time of issuance.
Justsaywow.com is a web site that provides fun and humorous electronic
greetings with animated graphics.
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The following chart summarizes eUniverse's current corporate organizational
structure:
--------------------------------- ----------------------------
54.6% 45.4%
Directors and Executive Officers of eUniverse as a Other Non-Affiliated
group (See "Principal Shareholders") Shareholders
--------------------------------- ------------------------
----------------------------
eUniverse, Inc.(1)
----------------------------
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
100% 100% 100% 100% 99.7% 100%
Entertainment CD Universe, Inc. Case's Ladder, Inc. Gamer's Alliance, Inc. The Big Network, Inc. Falcon Ventures
Universe, Inc. (2) Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) eUniverse operates the assets of funone, pokemonvillage, Quake City
Gaming Network and Justsaywow.
(2) Currently inactive.
DESCRIPTION OF THE BUSINESS
eUniverse's current emphasis is on acquiring businesses in the field of
entertainment, primarily games (including board, card, computer, arcade and
console video games), music and movies, with the following key characteristics:
(1) strategic content, management or technology, (2) product offerings
compatible with the Generation X and Y demographics of eUniverse's sites, and
(3) the ability to leverage eUniverse's strategic advantages such as order
fulfillment, hardware capacity and economies of scale. eUniverse's strategy is
based on the acquisition and/or development of Internet-based businesses in
several sectors of the entertainment industry, and utilizing their synergies to
generate cross traffic and increased revenues. This strategy includes the
integration of a worldwide distribution of Internet-based entertainment
programming. eUniverse is presently exploring expansion into Internet-based
entertainment in a form that is similar to television and radio programming. Its
long-term strategic plans include taking advantage of a world-wide distribution
network comprised of the installed base of personal computers and televisions,
making use of existing and emerging technologies to deliver this targeted
programming.
At the present time, eUniverse is primarily engaged in the retail sale
of music and video products and accessories, including audio CDs, videotapes and
DVDs via the Internet and the maintenance and operation of interactive games
sites. eUniverse, does not offer and does not intend to offer online gambling or
other activities associated with gambling. CD Universe, currently a subsidiary
of eUniverse, has been in the music and video sales business since April 1997.
The Big Network, Inc., also currently a subsidiary of eUniverse, has been in the
interactive games business since early 1998. Neither eUniverse nor any of its
subsidiaries has ever made a profit in any fiscal quarter.
eUniverse's CD Universe online store (www.cduniverse.com) currently
offers customers a selection of over 240,000 audio CD titles as well as
proprietary content and features. eUniverse's CD Universe web site currently has
over 290,000 registered users, attracts almost 1,000,000 unique visitors
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per month and processes over 20,000 orders each month. eUniverse has used its
experience in online retailing to enter other e-commerce areas, such as online
games, by acquiring community-based web sites that have experienced high growth
in unique visitors each month, selling advertising space on their web pages, and
enhancing the retail capabilities of these sites in order to diversify its
product offerings.
eUniverse sells interactive games through one of eUniverse's web sites,
GamesUniverse.com, an online retailer of single- and multiplayer games, with
links to eUniverse subsidiaries as follows: (1) Case's Ladder, which offers
online ranking and tournament offerings for people who play games on the
Internet; (2) Gamer's Alliance, which owns a network of online gaming editorial
web sites; and (3) The Big Network, which provides multiplayer classic games
(e.g., chess, checkers, backgammon, spades) and a suite of multiplayer
Java-based parlor games. eUniverse also provides a unique library of proprietary
community-building software technologies, named LivePlace. LivePlace combines
group browsing, chat, instant messaging and a host of other advanced features to
introduce social interaction to browsing the web and the shopping experience.
Additions to eUniverse's games will include other classic board and card games
(e.g., Battleship, Hearts) and other online strategy, role-playing or action
games.
Additionally, eUniverse plans to build upon its affiliate network of
third-party entertainment and retail web sites, which would license the
LivePlace community-building software. eUniverse currently licenses its
LivePlace software to five businesses in exchange for a portion of advertising
revenues. eUniverse believes that its plans to superimpose LivePlace on these
affiliate sites will generate additional traffic and e-commerce sales for
eUniverse's network.
eUniverse's acquisition of Cases Ladder, Gamer's Alliance, Big Network,
Falcon Ventures and the web sites of megadvd.com, funone.com,
pokemonvillage.com, forumnation.com, reverseauction.com and justsaywow.com,
represents steps towards its goal of using strategic acquisitions as well as
internal growth to develop a diverse but synergistic portfolio of Internet-based
entertainment offerings for a world-wide customer base. (See "BUSINESS -- Recent
Transactions")
Prior to becoming part of eUniverse, CD Universe only generated revenue
from merchandise sales. In contemplation of eUniverse's plans to use its site
traffic to generate advertising revenues, eUniverse implemented a program to
accept paid third-party advertising. This program began generating advertising
revenues in the quarter ended June 30, 1999. In order for eUniverse to generate
future advertising revenues, advertisers and advertising agencies must be
willing to direct a portion of their budgets to the Internet and, specifically,
to eUniverse's web sites.
eUniverse plans to enhance its position as an online music destination
by providing digital music distribution and proprietary content on its CD
Universe site. Using the Internet as a distribution medium in conjunction with
audio compression and delivery technologies, eUniverse plans to enable a growing
number of artists to distribute and to promote their music broadly and to enable
customers to conveniently access an expanding music catalog. In recent years,
with the proliferation of multimedia PCs, consumers have increasingly used their
computers to play music. The recent introduction of compression formats such as
MP3 has led to the widespread use of the Internet for the transmission of music.
eUniverse has a customer base of over 1.5 million registered members
based on its own records. This customer base may allow eUniverse to attract
artists who are interested in broadly distributing and promoting their music.
eUniverse currently creates its own proprietary content for the CD Universe
site, including the Big Bang newsletter, a personalized newsletter for
customers, and CD University, a content-driven area that provides information
about specific music genres.
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WEB SITES OF eUNIVERSE
MUSIC
CD Universe
The CD Universe online store is designed to be informative, and to
allow customers to discover, learn about and purchase CDs, videos and other
music and video-related products. The store is designed to be intuitive and easy
to use and to enable customers to complete the ordering process with a minimum
amount of effort. Customers enter the CD Universe store through its web site,
cduniverse.com, and in addition to ordering music and video products, can
conduct searches, browse among top sellers and other featured titles, read
reviews, listen to music samples, register for a personalized newsletter,
participate in promotions and check order status.
The CD Universe web site provides a search engine that enables
customers to navigate the store to find CDs or other products of interest.
Customers can search for CDs based on artist, album title, song title, record
label or musical genre. Upon clicking on an album title, the site visitor is
provided with information about the artist and the specific album, a list of
tracks on the album, sound samples and a list of reviews.
eUniverse believes that effective use of content encourages purchases
by customers who may be browsing the site without a specific title in mind. The
CD Universe web site provides sound samples, information about specific artists,
albums and types of music, ratings, articles on music topics and other
information. To help customers browse and discover CDs, the web site has eight
music spaces organized by genre. These include rock, jazz, R & B, classical,
country, Christian, world music and miscellaneous. The main page of each space
features links to more specific genre pages that list new releases as well as
alphabetical listings of the artists and albums available within that genre. In
addition to these regular online store content features, CD Universe's web site
offers several other features to encourage customers to learn about and discover
CDs that might be of interest to the customer. The web site's CD University
feature provides links to genre-specific areas where customers are provided with
information about specific musical offerings and biographies of featured
musicians in that genre. CD University currently offers links for classical,
jazz and blues and is in the process of adding more musical genres to this area.
In addition, the CD Universe web site has a feature called RockOnTV, provided by
RockOnTV.com, where customers can read a listing of music and musician-related
programs available on TV during that week. Once a CD has been selected,
customers are prompted to click on the price to add products to their virtual
shopping carts. Customers can add and remove products from their shopping carts
as they browse, prior to finalizing their purchase. The shopping cart page
displays each item that has been placed in the cart, including title, price and
availability. To execute orders, customers can choose from a secure or standard
purchasing mode depending on the capabilities of the customer's web browser.
After choosing a purchasing mode, the customer is prompted to enter his or her
name and password or to create an account on CD Universe's web site that can be
used to make repeat purchases.
FILMED ENTERTAINMENT
VIDEO UNIVERSE
eUniverse's Video Universe online store (www.videouniverse.com) offers
customers a selection of over 40,000 movie titles in videocassette, DVD and
laser disc formats. The Video Universe web site was expanded to include DVD
titles with the acquisition of MegaDVD.com web site (www.megadvd.com).
MegaDVD.com was founded in June 1997 and, when acquired by eUniverse, had a
customer base of 3,000 registered users. The acquisition of the assets of Green
Willow provided
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eUniverse with additional management resources and expertise necessary to
effectively promote its online video store. The domain name www.MegaDVD.com
takes customers to eUniverse's Video Universe online store.
The Video Universe online store operates in conjunction with the CD
Universe store and allows customers the ability to purchase products from either
site using a common shopping cart.
FALCON VENTURES CORPORATION
With the acquisition of Falcon Ventures Corporation, we acquired the
dvdwave.com web site, which offers customers a selection of over 5,000 movie
titles in DVD format and also offers music CD and VHS videos.
INTERACTIVE ENTERTAINMENT
GAMES UNIVERSE
Through its Games Universe online store (www.gamesuniverse.com)
eUniverse sells to customers a selection of single- and multi-player games and
provides links to eUniverse's other web sites, featuring the web sites of
eUniverse's subsidiaries that provide other online games. eUniverse does not
offer and does not intend to offer online gambling or other activities
associated with gambling.
CASE'S LADDER
Case's Ladder is an online gaming portal, which provides competitive
rankings for online gamers and allows gamers to compete against one another in a
variety of tournaments and leagues. Approximately 1.1 million users are
registered with Case's Ladder interactive entertainment communities on the
Internet. Case's Ladder primarily derives revenues from membership fees and
advertising. According to a survey of Case's Ladder's registered users,
approximately 75% of registered users on the Case's Ladder web site are between
the ages of 18 and 50, with the majority of those visitors having an annual
income over $50,000. In addition, 46% of Case's Ladder's users have purchased
products or services over the Internet. eUniverse continues to use Case's
Ladder's audience to expand eUniverse's customer base and to diversify its
retail offerings into new business areas such as computer games.
GAMER'S ALLIANCE
Launched in 1996, Gamer's Alliance is a network of interactive
entertainment community sites on the Internet that receives over 1.2 million
unique monthly visitors and 20 million impressions per month. Gamer's Alliance
has aggregated a collection of sites covering several platforms, game genres and
topics. The Gamer's Alliance Network spans over 50 sites, including GA-Source,
GA-Sports, GA-Strategy, GA-RPG and Dreamcast.net, owned and operated by
eUniverse. GA-Source is an interactive game site on the web that incorporates
daily gaming news, interviews, game previews and product reviews. GA-Sports is a
web-community site focused on PC sports games. Other Gamer's Alliance properties
include:
- Dreamcast.net, a site dedicated to the Sega Dreamcast console
platform;
- GA-Strategy, a site dedicated to PC strategy games; and
- GA-RPG, a hub site focused on daily role playing games gaming news.
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The acquisition of Gamer's Alliance provides eUniverse with a valuable source of
proprietary content that can be offered to Case's Ladder's users.
The Gamer's Alliance content development team consists of gaming
enthusiasts from around the world. This content development approach has been
effective in attracting a viewership of avid gamers. Furthermore, the Gamer's
Alliance network of sites seeks to encourage customer loyalty by allowing
visitors to become actively involved in content creation through forums and chat
services.
BIG NETWORK
The Big Network site provides a full suite of classic board and card
games, including spades, checkers, chess, backgammon, reversi and morph,
allowing thousands of players simultaneously to meet, chat and play parlor games
in a friendly setting. The site's gaming system is based on a sophisticated Java
client-server architecture designed to support very large numbers of users. The
Big Network currently hosts over 210,000 registered members and generates almost
three million advertising impressions per month.
The Big Network operates an entertainment and community site at
www.bignetwork.com. The site offers multiplayer classic games (e.g., chess,
checkers, spades), as well as other forms of entertainment and information to
its members and users. The Big Network also developed LivePlace, a software
program written in the JAVA programming language that provides users with an
overview of activity around them on the site, and allows them to follow public
conversation and send private messages to other users. LivePlace also uses
proprietary technology to map users to their web location and to control the
browser window to allow for co-navigation of the web. A map view allows users to
see where other users are, across the eUniverse site and its associated network.
Users can move instantly to any other location within the network.
eUniverse's Big Network site includes Play4Prizes, a game show channel
where players can win cash and prizes. No purchase is necessary to play the
games or to win prizes. Play4Prizes' games are sponsored by advertisers and used
as a promotional vehicle for the advertisers' products and services. Play4Prizes
caters to a predominantly female audience. In addition, the Big Network
publishes the Daily Post, a collection of eight daily e-mail newsletters
providing news, facts and trivia on a variety of topics such as cinema, sports,
star gazing, cooking recipes, jokes and holidays. The Big Network reaches over
85,000 people daily through its Daily Post e-mail newsletters.
eUniverse plans to continue to take advantage of the audience of its
newly acquired interactive entertainment sites by pursuing e-commerce and
merchandising opportunities in the interactive entertainment arena. These
opportunities include online retailing of interactive entertainment products and
the exclusive online distribution of titles developed by smaller game
developers.
COMMUNITY-BUILDING TECHNOLOGIES
With the acquisition of the Big Network, Inc., we acquired LiveSuite, a
suite of multi-user, Internet-based software modules. The core module of
LiveSuite, LivePlace, takes the form of a Java applet that allows users to chat,
send instant messages, set up friends lists and co-browse a site. LiveSuite
modules work together using a shared technology core to provide instant
messaging, co-browsing, online sales assistance and game-playing through a
pop-up window that appears on the user's computer screen. LivePlace is designed
to integrate into any existing web site quickly and easily. Its components can
be deployed individually or as an integrated solution that combines
entertainment, community and commerce through a common user interface.
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eUniverse plans to build an affiliate network of third-party
entertainment and retail web sites that would license eUniverse's LivePlace
community-building software to third parties for a portion of the affiliate's
advertisement revenues. eUniverse believes the implementation of LivePlace,
which places a link on these affiliate sites to eUniverse's web site, will allow
eUniverse to generate additional traffic and e-commerce sales for eUniverse's
network.
eUniverse believes that its strategic assets include customer loyalty,
proprietary content and user-friendly technology, and that these assets will
enable it to grow web site traffic, retain customers, expand revenue
opportunities and attract strategic acquisition candidates. eUniverse also plans
to develop strategic relationships with traditional media partners that will
enable it to build awareness of its sites and e-commerce services and increase
traffic to its sites.
DOMAIN NAMES, PATENTS AND TRADEMARKS
The Domain names of eUniverse's web sites constitute important intellectual
property for eUniverse. Domain names registered to eUniverse include the
following:
<TABLE>
<S> <C> <C> <C>
euniverse.com gasource.net pokemonvillage.com dvdwave.com
cduniverse.com ga-source.com nhl2k.com dvdwave.net
videouniverse.com ga-source.net sanitybycain.com dvdwave.co.uk
gamesuniverse.com ga-strategy.com ta-k.com dvdmoviereviews.net
gagames.com highheatbaseball.com voodoo3.net dvdmoviereviews.org
megadvd.com messiahpress.com wrestling-games.com sfbayads.com
casesladder.com metalgear.net experience3d.com quakecity.net
aoe2.net myth2.com frontofficefootball.com forumnation.com
cavenews.com ionrpg.com frontofficefootball.net clansite.com
dknation.com ga-sports.com frontofficefootball.org reserveauction.com
ga-rpg.com coursedepot.com 3dracing.net flymp3.com
gasource.com grandprix2.com rallychamp.com. digimonvillage.com
Bignetwork.com highheatbaseball.com afflicted.net dragonballvillage.com
Play4prizes.com maddencentral.com ctimes.net justsaywow.com
Liveplace.com simracingnews.net indy3d.net
Livestore.com the-fastlane.com prey.net
Livesuite.com nflfever.com war3.com
goldenbearsden.net Live-store.com eqrealms.com
nfscheats.com Shop-Live.com acrealms.com
nfs4.com Shop-Live.net mygamelobby.com
wcw-meyhem.com funone.com Big-network.com
gp500.net Gamelets.com online-alchemy.com
</TABLE>
At the present time, eUniverse does not own any patents. eUniverse has filed
service mark registrations for "eUniverse", "Games Universe", "CD Universe",
"Video Universe", "Gamer's Alliance", "Play4Prizes" and "funone.com" and
trademark applications for "LiveSuite" and "LivePlace" with the US Patent and
Trademark Office. eUniverse is in the process of filing service mark
applications for "dvdwave.com" and "dvdmoviereviews.com". eUniverse believes
that it presently has, or is capable of acquiring, ownership and/or control of
the intellectual property rights, which are necessary to conduct its operations
and to carry out its strategic plans.
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OPERATIONS AND TECHNOLOGY
eUniverse maintains a technology center, with in-house technical staff, at
each of its main business units: CD Universe, Case's Ladder, Gamer's Alliance,
Big Network and Falcon Ventures.
CD Universe
CD Universe has developed proprietary technologies and systems that provide
for reliable online retailing in a secure and easy-to-use format. Using a
combination of proprietary solutions and commercially available, licensed
technologies, eUniverse has deployed systems for online content dissemination,
online transaction processing, customer service, market analysis and electronic
data interchange.
CD Universe uses Microsoft SQL Server 7.0 as its database management
technology. Web pages are served by Microsoft's Internet Information Server and
use Microsoft's Active Server Page technology. The web pages themselves are
designed, programmed, tested, implemented, and maintained by on-staff designers
and programmers. The system is flexible enough to allow new product lines to be
integrated. Computer games were added in August 1999. A "server farm" of
redundant web servers was brought on-line in August 1999 to provide extremely
high site availability to our customers. The site is monitored twenty-four hours
a day, seven days a week, by an outside company that provides alerts to on-call
technicians in the event that the site is not operating correctly. CD Universe's
on-site data center is connected via a point-to-point digital transmission link
to its Internet service provider, Internet Media Corporation. This service is
provided under a two-year contract.
CD Universe uses Secure Socket Layers (SSL) for secure electronic
transactions over the Internet and uses proprietary Electronic Data Interchange
interfaces and private networks to ensure the security of customer order
information and credit card transactions shared with its vendors and credit card
processor.
Fulfillment
CD Universe has developed proprietary software to manage its onsite
fulfillment operation. This software allows CD Universe to order product from
multiple vendors, receive product into its warehouse, pick and pack individual
customer orders, and electronically manifest the product for shipping. This
system allows eUniverse to aggregate product from multiple vendors into a single
shipment to its customers. Partially filled shipments can be held for a
customer-selectable number of days to reduce the number of shipments needed to
fill a single order, thus saving the customer shipping charges.
Customer Service
CD Universe has developed proprietary software for use by its in-house
customer service department to access real time order information.
Case's Ladder
Case's Ladder utilizes multiple servers running the RedHat Linux operating
system, MySQL database backend, the Apache web server, Perl programming
language, and other software. Proprietary software developed in-house allows
staff to easily manage the over one hundred and fifty gaming leagues we operate,
handling over 3,500 online tournaments each month. In addition, a proprietary
technical support system allows staff members to have real-time access to
queries with full logging of requests, ensuring top of the line customer
service. Servers are co-located with Exodus Communications, Inc. under a yearly
contract. Utilizing a network connection, Case's Ladder is tied into a
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private nationwide network that feeds into every major Internet network in the
United States. High performance hosting, custom applications, and the proven
software packages listed above have given Case's Ladder the ability to have its
services available to the public with reliability above 99%.
Gamer's Alliance
Gamer's Alliance utilizes Linux operating system distribution Red Hat 6.0
to power the majority of its PC web servers. NT Server 4.0 is used for web
applications requiring a Windows based operating system. A new backup system has
been implemented to protect mission critical data from hardware and software
failure, and other unpredictable circumstances. Bandwidth is rented from
Valuenet Inc. Gamer's Alliance has internally developed several Internet-based
applications that increase the efficiency of administrating servers and updating
web sites. Among these programs is a database driven content system for Linux
and NT which allow web site content to be stored into databases, such as mySQL
and Microsoft Access, and then be dynamically recalled based upon specific user
preferences. This allows users to customize certain Gamer's Alliance web sites
to only display news, previews, reviews, interviews and other information that
meet certain criteria such as type of content or date added. These user
preferences are then stored as text in the user's computer through an Internet
mechanism known as a "cookie" for use in later viewing sessions.
Big Network
BigNetwork.com is built on several servers running the Sun Solaris
operating system and an Oracle database. The servers are co-located at Exodus in
Santa Clara, California. Exodus provides unlimited bandwidth and redundant power
and network connectivity as well as advanced fire suppression and other
emergency provisions. Connectivity cost is approximately $4,500 per month. Key
hardware is a Sun Enterprise Server 450, a Sparc 20, and several Intel Pentium
II class machines, also running Solaris.
The Big Network multiplayer gaming system and the LivePlace instant
messaging system are built on a highly scalable proprietary Java client-server
system. The system is capable of supporting thousands of simultaneous users
using relatively small amounts of server-side computer processing units and
bandwidth per user. Because the server is written in Java software programming
language, it is portable and can run on any machine capable of supporting Java,
including Solaris on Sun or Intel hardware and Windows NT.
Falcon Ventures
DVDWave.com sells digital videodisks, videotapes, and audio compact disks
to retail purchasers over the Internet. Customers create an e-account with their
personal information before ordering and do not need to re-enter this
information for any subsequent orders. Once created orders are sent to a
fulfillment house, which compiles a daily list of product shipped out. This list
is used by DVDWave to update the status of orders on the site, and customers are
billed for items only after they have appeared on this list. A list of returned
product is also compiled, and any necessary refunds are processed accordingly.
SALES AND MARKETING
At the present time, eUniverse receives and processes over 25,000 orders in
a typical month, with an average order size of about $35-40, exclusive of
shipping charges.
eUniverse makes use of strategic partnerships and proprietary content to
attract and retain
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traffic on its web sites. CD Universe's "Partner Program" increases its market
presence by allowing "partner" web sites ("eUniverse Partners") to offer CDs to
their audience, for which CD Universe provides fulfillment. The eUniverse
Partner site provides a hyperlink to the CD Universe web site that leads the
consumer to more information about a specific artist or title. This hyperlink
automatically connects the customer to the CD Universe online store where the
eUniverse Partner's customer may place an order to purchase a CD. In this
manner, the eUniverse Partner can offer enhanced services and product
recommendations, while avoiding ordering and fulfillment costs. eUniverse
Partners receive a commission of 7% to 15% on sales of eUniverse's products that
originate from the eUniverse Partner's web site.
eUniverse recently entered into a strategic partnership with LinkShare
Corporation to dramatically expand the scope of its partner program. LinkShare
offers affiliate, marketing programs to companies doing business on the
Internet. As part of the partnership, LinkShare will introduce eUniverse's
online retailing sites to its network of over 65,000 partner sites. LinkShare
operates a network on the Internet, servicing clients such as Dell Computers,
Cyberian Outpost, Borders, 1-800-FLOWERS, Virtual Vineyards, Omaha Steaks and
others. eUniverse also plans to develop strategic partnerships with other media
partners that will enable it to build greater awareness of its sites and expand
traffic and e-commerce activity on its network.
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive, and eUniverse expects that competition will further intensify in
the future. Barriers to entry are minimal, and current and new competitors can
launch new sites at a relatively low cost. With respect to recorded music sales,
eUniverse currently competes with numerous Internet retailers, including music
retail chains, record labels, independent retailers with web sites on the
Internet and online stores retailing music and video titles such as CDnow,
Amazon.com., Buy.com, Blockbuster.com and ColumbiaHouse.com. CD Universe is
substantially smaller than these online stores. In addition, eUniverse competes
with traditional music retailers, as well as megastores, mass merchandisers,
consumer electronics stores and music clubs.
With respect to online sales of video and DVD products, there are
numerous competitors. The larger competitors include those same music retailers
listed above and also include DVDExpress.com, Reel.com, DVDempire.com,
Amazon.com and Buy.com.
The primary competitive factors in providing music, video, DVD and
other entertainment products and services via the Internet are name recognition,
variety of value-added services, ease of use, price, quality of service,
availability of customer support and technical expertise. eUniverse's prospects
for achieving its business objectives will depend heavily upon its ability to
provide high quality, entertaining content, along with user-friendly web site
features and value-added Internet services. Other factors that will affect
eUniverse's prospects for success include its ability to attract experienced and
qualified personnel, particularly in the areas of management, sales and
marketing, and web site design. If eUniverse is unable to compete successfully
in its retailing businesses, there will be a material adverse impact on its
business, results of operations and financial condition due to decrease in
revenue. In addition, the competition for advertising revenues, both on Internet
web sites and in more traditional media, is intense. If eUniverse fails to
attract and retain significant sources of revenue from paid advertisements and
sponsorships on its web sites, eUniverse's business, results of operations and
financial condition will be materially adversely affected by such decreased
revenue.
Many of eUniverse's current and potential competitors in the area of
online music, video, DVD and other entertainment retailing, such as CDNow.com
and Amazon.com, have longer operating histories, significantly greater
financial, technical and marketing resources, greater name recognition and
larger
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existing customer bases than eUniverse. These competitors may be able to respond
more quickly than eUniverse to new or emerging technologies and changes in the
economy or the marketplace affecting the products and services that eUniverse
offers. In addition, some of eUniverse's competitors can be expected to devote
greater resources, both human and financial, to the development, promotion and
sale of music, video and other entertainment products and services. Accordingly,
there can be no assurance that eUniverse will be able to compete successfully
and achieve its objectives with respect to growth in revenue and profit.
Within eUniverse's interactive segment, Case's Ladder was virtually
alone in the arena of providing player ranking and ladders. However, recently,
other game networks such as MSN Zone and Yahoo!, who previously provided online
game playing formats, have begun their own ranking services.
In the interactive entertainment field, competition among "news and
content" gaming websites can be divided into two main categories: networks and
individual gaming sites. On the network level companies compete to build either
the largest, high quality, or thorough network in order generate the most
advertising revenue possible. On the individual gaming site front, Webmasters
attempt to create the most popular individual website (by unique visitors,
banner impressions, content, graphical quality, etc.) that covers a specific
segment of the computer/console gaming industry.
While numerous small gaming networks exist, those generating less than
2-3 million page views per month, there are mainly five large gaming networks
that indirectly compete with Gamer's Alliance, Inc. in some fashion: IGN, UGO,
Game Fan, Future Games Network, and Game Spy Industries. Based on estimations
on the amount of page impressions per month of the competition, Gamer's
Alliance, Inc. is significantly smaller than both UGO and IGN, similar in size
to Game Fan and Game Spy Industries, and larger than Future Games.
Gamer's Alliance differs from the competition in its approach of
developing most new sites internally. This strategy allows Gamer's Alliance to
enter new gaming segments quickly with a high quality website.
The following table sets forth the total revenue of eUniverse from the sale
of products in the last three fiscal years, expressed by product category:
Revenue by Product Category
(In Thousands)
<TABLE>
<CAPTION>
CD Universe
Year Ended Year Ended Year Ended | Nine Months Ended
3/31/97 3/31/98 3/31/99 | 12/31/99
------- ------- ------- --------
<S> <C> <C> <C> <C>
Music $1,676 $5,685 $8,387 | $5,641
Videos - - 464 | 550
Services - - - | 810
------- ------- ------- | ------
Total $1,676 $5,685 $8,851 | $7,001
======= ======= ======= | ======
</TABLE>
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EMPLOYEES
eUniverse currently employs six officers, 51 full-time associates and up to
16 part-time staffers. Of eUniverse's 51 full-time associates, 21 are in
marketing, 22 are in programming and operations, and 8 are in administration.
The part-time staffers work in the packing and customer service areas.
FACILITIES
eUniverse currently leases a 19,500 sq. ft. office, warehouse and order
fulfillment center in Wallingford, Connecticut at a monthly rent of $9,750.
eUniverse's lease with respect to this facility expires in March 2002 and
eUniverse has the right and option to extend the lease for an additional five
year term. eUniverse believes that the Wallingford Facility will be adequate to
meet its office space and order fulfillment needs for the foreseeable future.
eUniverse leases approximately 500 sq. feet of office space, through its
Gamer's Alliance subsidiary, on a month-to-month basis in Bridgeton, Missouri,
at a monthly rent of $475.
eUniverse leases 2,300 sq. ft. of office space in San Francisco,
California, for its technological research and development, business development
and sales and marketing divisions. The terms of the agreement provide for
monthly payments of $5,350 initially, increasing to $5,650 in the final year of
the term. eUniverse's lease with respect to this facility expires on June 30,
2002, and has no provisions for renewal. eUniverse believes that the San
Francisco Facility will be adequate to meet eUniverse's research and
development, business development and sales and marketing needs for the
foreseeable future.
eUniverse leases additional office space in San Francisco, California of
approximately 3,000 sq. ft. for the operations its Falcon Ventures subsidiary
(the "Falcon Facility"). The lease terms provide for monthly payments of $8,700.
eUniverse's lease with respect to this facility expires on August 9, 2002 and
has no provisions for renewal. eUniverse believes that the Falcon Facility will
be adequate to meet the needs of Falcon Ventures for the foreseeable future.
The following table summarizes our current properties:
<TABLE>
<CAPTION>
LOCATION SIZE (SQ. FT.) MONTHLY RENT
<S> <C> <C>
Wallingford, Connecticut 13,500 $9,750
Bridgeton, Missouri 500 $ 475
San Francisco, California 2,300 $5,300
San Francisco, California 3,000 $8,700
</TABLE>
eUNIVERSE'S STRATEGY AND PLANS
eUniverse plans to implement the following strategies in its efforts to
become a leading provider of content, commerce and community services on the
Internet.
EXPAND EXISTING ONLINE RETAIL BUSINESS INTO OTHER E-COMMERCE ACTIVITIES.
eUniverse plans to use its technology and fulfillment expertise to expand
into other e-commerce activities, such as eUniverse's recent expansion into
games. In addition, eUniverse plans to use information obtained through customer
tracking technology and user customization of certain services on its web sites
to provide its customers with targeted complementary e-commerce offerings.
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ACQUIRE COMPLEMENTARY ENTERTAINMENT-RELATED WEB SITES.
eUniverse plans to acquire music, movie, and interactive entertainment-
related web sites that are complementary to its existing network. These sites
will have several of the following key characteristics such as: (1) strategic
content, management or technology, (2) product offerings compatible with the
Generation X and Y demographics of eUniverse's sites, and (3) the ability to
gain from eUniverse's strategic advantages, such as order fulfillment, hardware
capacity and economies of scale. eUniverse plans to acquire web sites that have
experienced high growth in unique monthly visitors and add its retail
capabilities and fulfillment expertise to sell additional products to the
acquired sites' audiences. eUniverse believes that it can leverage its core
technology expertise, existing web site traffic, management experience,
fulfillment, systems and warehousing capabilities to continue to grow through
strategic acquisitions.
PROVIDE ORIGINAL, COMPELLING AND TARGETED SITES.
eUniverse's web sites focus on commerce, community and interactivity and
address what eUniverse believes are among the most popular areas of interest on
the Internet including music, film and interactive entertainment. These
entertainment-related web sites offer eUniverse an opportunity to deliver
premium advertising and e-commerce services to an attractive demographic of
Generation X and Generation Y consumers. eUniverse plans to enhance its online
stores by adding additional editorial content, increasing the time its customers
spend on its web sites as well as the likelihood and frequency of subsequent
visits and purchases. Examples of eUniverse's editorial content include reviews,
biographies of entertainers, news, photos and other editorial programming.
eUniverse plans to license compelling third-party editorial content in addition
to its internally developed content in order to enhance the overall user
experience on eUniverse's web sites.
USE COMMUNITY-BUILDING TECHNOLOGIES TO EXTEND REACH TO OTHER ENTERTAINMENT
AND RETAIL SITES.
eUniverse licenses its LiveSuite community-building software to a partner
network of currently five third-party entertainment and retail web sites in
exchange for a portion of advertising revenues. LiveSuite's Java-based user
interface creates a pop-up window containing eUniverse information on user's
desktops when they are visiting a licensee's site. eUniverse intends to continue
to use this network of LiveSuite licensor sites to increase traffic to its
network of music, filmed entertainment and interactive entertainment sites.
DIVERSIFY REVENUE STREAMS ACROSS ADVERTISING, E-COMMERCE AND DIRECT
MARKETING.
Historically, eUniverse's revenue stream has been from music and video
sales. eUniverse plans to leverage its user base to generate revenues from other
revenue streams from advertising, e-commerce and direct marketing. For example,
eUniverse believes that the traffic flow generated on its web sites provides an
attractive platform for measurable, targeted, cost-effective and interactive
advertising on the Internet and that eUniverse can increase revenues from
advertising, sponsorships and promotions. eUniverse plans to use both in-house
and third party representatives to sell its advertising inventory and
promotional opportunities. eUniverse also plans to provide customized solutions
to advertisers through its LivePlace applet, newsletters and multiple community
sites, helping them exploit the capabilities of the Internet as an advertising
medium. In addition, eUniverse plans to expand its e-commerce initiatives
through additional storefronts, such as the addition of Games Universe, the
introduction and promotion of interactive entertainment software, collectable
products and other entertainment-related merchandise on its retail sites.
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INCREASE MARKET PENETRATION THROUGH STRATEGIC PARTNERSHIPS.
eUniverse intends to increase market penetration through strategic
partnerships that expand awareness of eUniverse's network of web sites.
eUniverse plans to develop strategic relationships with traditional media
partners to build awareness of its sites and expand traffic and e-commerce
activity on its network. The combination of fulfillment expertise,
visitor-tracking technology, flexible software and customer preference
information make eUniverse an attractive partner for Internet-based businesses.
eUniverse offers Internet-based partners the opportunity to establish links from
titles and artists on their web site to the corresponding area within the CD
Universe site. eUniverse believes that the combination of its capability in
order fulfillment, visitor-tracking technology, flexible software and customer
preference information makes a partnership with eUniverse attractive for other
Internet-based businesses.
EXPAND WEB PRESENCE.
eUniverse has been able to successfully increase site traffic, and thereby
increase sales. eUniverse has entered into arrangements with other web sites as
part of its partner programs. It will continue to seek cost-effective ways to
increase traffic at its web sites and has discussions underway with potential
strategic partners, which may increase traffic at the CD Universe web site.
eUniverse plans to expand its international presence, and as part of that effort
CD Universe has recently introduced a localized version of the CD Universe site
for the Japanese market, marketed directly to Japanese consumers through a
revenue sharing partnership with US-style.com. In addition, eUniverse continues
to develop proprietary content to attract and retain traffic. eUniverse plans to
offer new products, services and incentives to attract and retain traffic and to
increase the size of profit margins on online purchases.
PROVIDE INNOVATIVE AND EASY-TO-USE WEB SITES.
eUniverse plans to make its customer experience informative, efficient and
intuitive by constantly improving its store format and features. For example,
eUniverse's CD Universe store incorporates "point and click" options, supported
by technical enhancements, including easy-to-use search capabilities (by artist,
album, title, song title or record label), personalized music suggestions, and
order tracking and confirmation. The CD Universe store also promotes music
learning and discovery by enabling visitors to create customized versions of CDs
and through its Big Bang newsletter. Site visitors are prompted to register and
choose from a checklist of options and musical preferences. Each registrant may
select the genre or genres he or she is interested in as well as the content he
or she desires to receive (i.e., press releases, charts, reviews, tour info and
CD Universe news). These features are designed to make shopping at the store
entertaining and informative and encourage purchases and repeat visits.
LEGAL PROCEEDINGS
On September 23, 1999, Arie Grossman, former Vice President of
Technology of The Big Network, Inc., filed suit in the Superior Court of
California against Big Network, eUniverse and various unnamed individuals. Mr.
Grossman sought an unspecified amount of compensatory and punitive damages based
on claims related to Grossman's salary, stock options and proposed terms of
employment with eUniverse following the acquisition of Big Network. On December
20, 1999, the parties reached agreement in mediation providing for Mr. Grossman
to receive 23,980 shares of eUniverse common stock. Exercised its right of
indemnification from the former shareholders of Big Network, eUniverse issued
the 23,980 shares to Mr. Grossman and deducted the same number of shares from
the escrow fund established in connection with the acquisition of Big Network by
eUniverse. This settlement does not affect the aggregate purchase price of
1,800,000 shares of eUniverse's common stock paid by eUniverse for the shares of
Big Network common stock. This lawsuit was dismissed on March 7, 2000.
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On December 9, 1999, The Isosceles Fund Limited, a Bahamian corporation,
filed suit in the Superior Court of California against eUniverse, Brad
Greenspan, Gerard Klauer Mattison & Co., Inc. ("GKM") and ten unnamed
individuals. Isosceles seeks damages based on (1) breach of an alleged
subscription agreement between Isosceles and eUniverse to purchase common stock
of eUniverse, (2) breach of an implied covenant of good faith and fair dealing
in connection with the alleged subscription agreement, and (3) 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 other relief as the
court may deem fair, just, equitable and proper. eUniverse believes the
allegations in the complaint are without merit and will defend the suit
vigorously.
eUniverse is not a party to any other pending legal proceedings that in the
opinion of management of eUniverse would have a material adverse effect on
eUniverse's results of operations or consolidated financial condition.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and position of each of the
executive officers and directors of eUniverse.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Brad D. Greenspan(1) 26 Chairman of the Board of Directors
Leland N. Silvas(1) 44 President, Chief Executive Officer and Director
Charles Beilman 40 Vice President, Special Projects and Director
William R. Wagner 52 Vice President, Chief Financial Officer and Secretary
James Haiduck 36 Vice President, Sales
Stephen D. Sellers 40 Vice President, Business Affairs and Director
Gordon Landies 43 Director
Dan Mosher 27 Director
</TABLE>
- ----------------------
(1) Member of the Compensation Committee.
Brad D. Greenspan, Chairman of the Board of Directors of eUniverse since April
14, 1999. In 1997, Mr. Greenspan founded Palisades Capital, Inc., a private
Beverly Hills merchant bank, and served as its President until March 1999. Mr.
Greenspan received a BA degree in political science/business from UCLA in 1997.
Leland N. Silvas, President and Chief Executive Officer of eUniverse since April
1999. Mr. Silvas is a principal member of Label-add, LLC, a Connecticut-based
advertising and direct marketing company, and was employed there until being
recruited by eUniverse, Inc. in 1999. Mr. Silvas was President and Chief
Operating Officer of McPhersons global housewares division from 1994 to 1998.
From 1992 to 1994, Mr. Silvas was a board member for Partners In Computing, a
New York City-based software solutions company. He currently sits on the
advisory board to the Adept Group, a computer consulting company based in New
York City, and is a board member of ADV MARKETING, a marketing and consulting
company, and 1-800-adagency, an ad agency.
Charles Beilman, Vice President, Special Projects and Director of eUniverse
since October 25, 1999. Between April 14, 1999 and October 25, 1999, Mr. Beilman
was Chief Operating Officer, Chief
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Technical Officer and Director of eUniverse. Mr. Beilman founded CD Universe,
Inc. in April 1997 and was its sole shareholder and Chief Executive Officer
until the sale of CD Universe, Inc. to eUniverse in April 1999. Since 1985,
Mr. Beilman has served as President and Director of Trak Systems, Inc., which
supplies proprietary inventory control computer systems to retail music stores
throughout the United States and Canada.
William R. Wagner, Vice President, Chief Financial Officer and Secretary of
eUniverse since April 1999. Prior to joining eUniverse, Mr. Wagner was Chief
Financial Officer of Heritage Marketing and Incentives, Inc., a Massachusetts-
based marketing incentives company. From 1995 to 1997, he was Chief Financial
Officer of ServiceSoft Corporation, a Massachusetts Internet software company,
and from 1990 to 1994, he was Chief Financial Officer of General Scanning, Inc.,
a pioneer in laser technology and systems.
James Haiduck, Vice President of Sales since August 1999. Prior to joining
eUniverse, Mr. Haiduck was Vice President of OEM Sales for The Learning Company,
a division of Mattel. His 13 years of sales experience in the
technology/software industry covered the original equipment manufacturer (OEM),
retail, corporate, and direct channels. Having established relationships with
nearly every major OEM or value-added reseller in the US, including HP, Compaq,
IBM, Canon, and Gateway, Mr. Haiduck was responsible for more than $200 million
in licensing revenue over the last 10 years.
Stephen D. Sellers, Vice President Business Affairs and Business Development
since September 1999. Prior to joining eUniverse with the acquisition of the Big
Network, Mr. Sellers was CEO and co-founder of The Big Network. Previous to
that, he was co-founder and CEO of Archetype Interactive where he assembled a
diverse team of creative talent to create Meridian 59, the first graphical
internet multiplayer game. After the acquisition of Archetype by the 3DO
Company, he worked as head of Internet Business Development. He has advised
startup businesses in a variety of technology markets. He holds an MBA from the
University of California, Berkley and a BA from Stanford University.
Gordon Landies, Director since August 1999. Mr. Landies is currently General
Manager of the Home and Entertainment group of Mattel Interactive and has been
in consumer software for 16 years, spending 10 years at Software Toolworks,
Mindscape, and the Learning Company, which was acquired by Mattel. Most of Mr.
Landies' career has been in sales and business development, where he helped
drive sales growth and build product categories such as National Geographic,
Printshop, and Chessmaster.
Dan Mosher, Director since December 7, 1999. Dan Mosher has been employed by
Webvan Group, Inc. since May 1999, most recently as Director, Business
Development. From January 1998 to May 1999, Mr. Mosher served in the Mergers
and Acquisitions Department of Morgan Stanley Dean Witter Technology Group,
an investment banking firm. From February 1996 to January 1998, Mr. Mosher
held several positions in the Corporate Finance Group of Arthur Andersen,
focused on technology private placements. Mr. Mosher holds a B.S. in Business
Administration from the University of California at Berkeley.
BOARD OF DIRECTORS AND BOARD COMMITTEES
Our Board of Directors is comprised of six directors. Our bylaws provide
that we may have up to a maximum of nine directors. Directors are elected by the
shareholders at each annual meeting or at special meetings of shareholders and
serve until their successors are duly elected and qualified. All executive
officers are elected by, and serve at the discretion of, the Board of Directors.
The Compensation Committee consists of Messrs. Greenspan and Silvas. The
Compensation Committee administers eUniverse's 1999 Stock Awards Plan and
reviews and recommends to the Board of Directors the compensation and benefits
of the employees of eUniverse.
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The Audit Committee consists of Messrs. Landies and Mosher. Both Mr.
Landies and Mr. Mosher are independent directors. The Audit Committee oversees
eUniverse's financial reporting process and internal controls.
The Executive Committee consists of Messrs. Greenspan and Silvas. The
Executive Committee has authority to exercise all of the powers of the Board of
Directors during the time periods between Board meetings, provided that it shall
not have the power to do any of the following:
1. amend or repeal any resolution of the Board of Directors that by its
terms shall not be subject to amendment or repeal by the Executive Committee;
2. take any action that, by the statutes of eUniverse's state of
incorporation governing eUniverse, may be taken only by the Board of Directors
or the shareholders of eUniverse;
3. take any action to amend, alter or repeal the Certificate of
Incorporation or By-laws of eUniverse, as amended;
4. elect any person to fill vacancies on the Board of Directors or any
Committee thereof or remove any person from the same;
5. fix the compensation of any Director for services in any capacity;
6. adopt a plan of merger or adopt a plan of consolidation with another
entity or entities;
7. recommend to the shareholders of eUniverse the sale, lease,
exchange, mortgage, pledge or other disposition of all or substantially all of
the property or assets of eUniverse or a voluntary dissolution of eUniverse or a
revocation thereof;
8. authorize any transaction involving over $3 million of eUniverse's
revenues;
9. authorize any purchase over $1 million; or
10. take any action prohibited by resolution of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing the Compensation Committee, the Board of
Directors as a whole performed the functions delegated to the Compensation
Committee. No member of the Board of Directors or the Compensation Committee
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of
eUniverse's Board of Directors or Compensation Committee.
AGREEMENT CONCERNING ELECTION OF DIRECTORS
In connection with the purchase by E. P. Opportunity Fund, LLC of
235,000 shares of preferred stock of Entertainment Universe, a letter agreement
dated April 6, 1999 was entered into between E. P., Entertainment Universe and
Brad D. Greenspan which, in effect, gave E. P. the right to select one of the
Directors of Entertainment Universe during the period that it owns shares of
Entertainment Universe preferred stock. On April 16, 1999, in connection with
the reorganization between Motorcycle Centers and Entertainment Universe, the E.
P. letter agreement was assigned by Entertainment Universe to
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eUniverse, which assumed the obligations to E.P. of Entertainment Universe.
As a result, as long as it owns our preferred stock, E. P. has the right to
appoint a member of the Board of Directors of eUniverse. E. P. has not
exercised its right as of the date hereof.
In connection with the acquisition of The Big Network, Inc., an
agreement dated July 30, 1999 was entered into among Brad D. Greenspan, Charles
Beilman, Stephen Sellers and John Hanke which, in effect, gives Messrs. Sellers
and Hanke the right to select one of the directors of eUniverse during the
period that either Mr. Sellers or Mr. Hanke are employed by eUniverse. Messrs.
Hanke and Sellers exercised this right and selected Mr. Sellers to be a director
of eUniverse. Mr. Sellers was appointed as a director of eUniverse on December
7, 1999. Mr. Hanke resigned his employment with eUniverse on January 6, 2000 to
pursue other business opportunities.
In connection with the acquisition of Falcon Ventures, an agreement
dated December 16, 1999 was entered into by and between Brad D. Greenspan and
Take-Two Interactive Software, which in effect gives Take-Two the right to
select an individual to serve as a member of the Board of Directors of eUniverse
for a period of three years from February 2, 2000. As of the date of this
prospectus, Take Two has not exercised its right to select a director.
DIRECTOR COMPENSATION
Directors of eUniverse who are also employees or officers of eUniverse do
not receive any compensation specifically related to their activities as
directors, other than reimbursement for expenses incurred in connection with
their attendance at Board of Directors meetings. For each year of service as a
director, independent directors receive, upon becoming a director, options for
62,500 shares of common stock at an exercise price of $6.00 per share, which
vest after one year and expire ten years after the date of grant. Mr. Landies
and Mr. Mosher received these options as independent directors. For each board
meeting they attend, these independent directors will be reimbursed for their
expenses incurred in connection with the meeting.
EXECUTIVE COMPENSATION
At the end of its most recent fiscal year, eUniverse's President and Chief
Executive Officer and other officers had not yet been employed and compensation
had not yet been paid. As of April 14, 1999, eUniverse entered into an
employment agreement with Leland Silvas, Chief Executive Officer and President.
The contract with Mr. Silvas is for an initial term expiring April 30, 2000 and
automatically renews for additional one-year periods unless terminated on three
months notice. eUniverse may terminate Mr. Silvas' employment for cause and upon
death or disability. Mr. Silvas may terminate his employment with eUniverse upon
45 days prior written notice in the event (1) any duty assigned to Mr. Silvas is
inconsistent with his positions and the assignment continues for ten days; (2)
eUniverse fails to pay for a period of ten days after the due date any
compensation owed to Mr. Silvas; and (3) of any purported termination by
eUniverse except for cause, death or disability. The Silvas contract stipulates
an annual base salary of $200,000, to be reviewed annually, with a bonus
opportunity of up to 50% of base salary upon achievement of goals determined by
the Compensation Committee of the Board of Directors. eUniverse issued to Mr.
Silvas 200,000 shares of common stock of eUniverse as partial consideration for
entering into a letter agreement with Palisades Capital, Inc. as of January 21,
1999 in which he agreed to become CEO of eUniverse following the acquisition of
CD Universe, Inc. and in consideration of consulting services performed on
behalf of eUniverse prior to the date of the CD Universe acquisition. The letter
agreement was subsequently superceded by the employment agreement. As additional
consideration for his employment, commitment and consulting services, Mr. Silvas
was granted to options to purchase 825,000 shares of common stock of eUniverse
at an exercise of $3.00 per share, which options vest and become exercisable as
follows: 91,667 of the options were immediately vested
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and fully exercisable on April 14, 1999 and 66,667 options vest and become
exercisable on the 22nd of each July, October, January and April thereafter
through January 22, 2002 or until Mr. Silvas is no longer employed by eUniverse.
Upon a 50% or greater change in ownership control in eUniverse or a disposition
of all or substantially all of the assets of eUniverse, all of the unvested
stock options granted to Mr. Silvas vest immediately. As a member of the
Compensation Committee, Mr. Silvas participates in reviewing his annual salary
and setting his bonus, subject to the review and approval of the Board of
Directors.
As of April 5, 1999, eUniverse entered into an employment agreement with
William R. Wagner, employing him as Chief Financial Officer of eUniverse. As of
April 14, 1999, the Board of Directors of eUniverse also appointed Mr. Wagner as
Vice President and Secretary of eUniverse. The contract with Mr. Wagner is for
an indefinite term, subject to termination on three months notice, and
stipulates an annual salary of $125,000. As additional consideration for his
employment, Mr. Wagner was granted options to purchase 100,000 shares of common
stock at an exercise price of $3.00 per share under the Stock Option Plan. These
options vest in 1/12 increments every three months beginning July 5, 1999 until
the earlier of April 6, 2002 or until Mr. Wagner is no longer employed by
eUniverse. On June 15, 1999, Mr. Wagner was granted options to purchase 50,000
shares at an exercise price of $9.50 per share. These options were canceled and
repriced on September 15, 1999. On September 15, 1999 Mr. Wagner was granted
options to purchase 42,500 shares of common stock at an exercise price of $6.00
under the Stock Option Plan, which vest and become exercisable as follows:
14,167 one year from September 15, 1999 and 1/12 of the remaining option shares
each quarter thereafter until all 42,500 option shares are vested or until Mr.
Wagner is no longer employed by eUniverse. Upon a 50% or greater change in
ownership control in eUniverse or a disposition of all or substantially all of
the assets of eUniverse, all of the unvested stock options granted to Mr. Wagner
vest immediately. On an annual basis, eUniverse reviews Mr. Wagner's performance
and other relevant factors relating to salary, and at the time of the review,
his salary may be increased as determined in the sole discretion of the
Compensation Committee of the Board of Directors of eUniverse.
eUniverse's subsidiary, CD Universe, Inc., entered into an employment
contract with Mr. Beilman as of October 1, 1998 for an initial period of three
years, subject to termination on ten days notice, and stipulates an annual
compensation of $135,000. On September 15, 1999 Mr. Beilman was granted options
to purchase 75,000 shares of common stock at an exercise price of $6.00 per
share under the Stock Option Plan.
Effective August 1, 1999, eUniverse entered into a contract with James
Haiduck, Vice President of Sales. The contract with Mr. Haiduck is for an
initial term of one year and stipulates an annual salary of $108,000 and options
to purchase 170,000 shares of common stock at an exercise price of $6.00 per
share. These options vest as follows: 14,167 vest on the last day of each
January, April, July and October, commencing on October 31, 1999 and continuing
until the first to occur of (i) all 170,000 of said options have vested, or (ii)
Mr. Haiduck is no longer employed by eUniverse. Upon a 50% or greater change in
ownership control in eUniverse or a disposition of all or substantially all of
the assets of eUniverse, all of the unvested stock options granted to Mr.
Haiduck vest immediately. On an annual basis, eUniverse reviews Mr. Haiduck's
performance and other relevant factors relating to salary, and at the time of
the review, his salary may be increased as determined in the sole discretion of
the Compensation Committee of the Board of Directors of eUniverse. Mr. Haiduck's
employment contract may be terminated by either party upon 30 days written
notice.
In conjunction with the acquisition of Big Network, eUniverse entered into
an employment agreement with Mr. Stephen D. Sellers, Vice President of Business
Development. The contract is for an initial term of 12 months from August 31,
1999, and stipulates an annual salary of $96,000. Mr. Sellers was granted
options to purchase 255,000 shares at an exercise price of $6.00 per share.
These vest in 1/12 increments every three months beginning December 16, 1999. On
an annual basis, eUniverse reviews Mr. Sellers'
50
<PAGE>
performance and other relevant factors relating to salary, and at the time of
the review, Mr. Sellers' salary may be increased as determined in the sole
discretion of the Compensation Committee of the Board of Directors of eUniverse.
eUniverse may terminate Mr. Sellers' employment for cause and upon death or
disability. If eUniverse terminates Mr. Sellers other than for cause, the
terminated executive shall be entitled to receive the remainder of his
compensation due under his employment agreement for its initial one-year term.
However, if a registration statement registering any shares of common stock
owned by the terminated executive has been filed with the Securities and
Exchange Commission, and the registration statement has become effective prior
to the termination of the executive by eUniverse without cause, the terminated
executive shall not receive any remaining compensation.
The table below summarizes the compensation to be paid under agreements for
services to be rendered to eUniverse in all capacities for the fiscal year
ending March 31, 2000. These executives are referred to as the Named Executive
Officers elsewhere in this prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------------------------
AWARDS PAYOUTS
------------------------ -------
OTHER ANNUAL RESTRICTED SECURITIES LTIP ALL OTHER
FISCAL SALARY BONUS COMPENSATION STOCK AWARD UNDERLYING PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) OPTIONS # ($) ($)
- --------------------------- ---- ------ ----- ------------ ----------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brad D. Greenspan .......... 2000 -- -- 50,000(4) -- -- -- --
Chairman of the Board
Leland Silvas .............. 2000 200,000 (1) 6,307(2) -- 291,668(3) -- --
President, Chief Executive
Officer and Director
Charles Beilman(5) ......... 2000 135,000 (1) -- -- -- -- --
Vice President 1999 77,250 -- 91,711 -- -- -- --
Special Projects and
Director
William R. Wagner .......... 2000 125,000 (1) -- -- 24,999(3) -- --
Chief Financial Officer
James Haiduck .............. 2000 108,000 (1) -- -- 50,000 -- --
Vice President Sales
Stephen D. Sellers ......... 2000 96,000 (1) -- -- 42,500 -- --
Vice President
Business Development
</TABLE>
- ----------------------
Note 1: Incentive compensation awards and payments shall be defined by the
Board of Directors.
Note 2: Mr. Silvas was issued 200,000 shares in conjunction with his
employment with eUniverse. These have been valued at $.315 per share, based upon
the initial capitalization of Entertainment Universe.
Note 3: Option shares are represented as those options that are exercisable
within 60 days after December 27, 1999. The same options are shown in the
following table in their vested and unvested entirety.
Note 4: Mr. Greenspan receives non-employee compensation as a consultant to
eUniverse.
Note 5: The compensation paid to Mr. Beilman in 1999 was paid by CD
Universe to Mr. Beilman in his capacity as Chief Executive Officer and President
of CD Universe. eUniverse will pay the same compensation to Mr. Beilman in his
capacity as Vice President, Special Projects.
51
<PAGE>
The following table summarizes the option grants to the Named Executive
Officers in the current fiscal year:
Summary of Option Grants in Current Fiscal Year
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL RATES
NUMBER OF GRANTED TO OF STOCK PRICE APRECIATION
SECURITIES EMPLOYEES EXERCISE FOR OPTION TERM
UNDERLYING IN FISCAL PRICE EXPIRATION ------------------------
NAME AND PRINCIPAL POSITION OPTIONS GRANTED YEAR $/SHARE DATE 5% 10%
--------------------------- --------------- ---- ------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Brad D. Greenspan ................... 340,000(1) 14.0% $6.00 9/15/09 $ 3,502,000 $ 6,766,000
Chairman of the Board of Directors
Leland Silvas ....................... 825,000(2) 28.8% $3.00 4/22/09 $10,972,500 $18,892,500
President, Chief Executive Officer
and Director
Charles Beilman ..................... 63,750(1) 2.6% $6.00 9/15/09 $ 656,625 $ 1,268,625
Vice President, Special Projects
and Director
William R. Wagner ..................... 142,500(2) 5.2% $3.00 9/15/09 $ 1,867,750 $ 3,135,750
Vice President, to
Chief Financial Officer and Secretary $6.00
James Haiduck ......................... 170,000(2) 7.0% $6.00 8/01/09 $ 1,751,000 $ 3,383,000
Vice President Sales
Stephen D. Sellers .................. 255,000(2) 10.5% $6.00 9/01/09 $ 2,626,500 $ 5,074,500
Vice President, Business Affairs
and Business Development
</TABLE>
- ----------------------------------
Note 1: One third of the options vest and are exercisable one year from the
date of grant. Thereafter, one twelfth of the options vest and are exercisable
each three months until all optioned shares are vested.
Note 2: These options vest and are exercisable as described in "Executive
Compensation" beginning on page 49.
1999 STOCK AWARDS PLAN
The 1999 Stock Awards Plan was adopted by the Board of Directors of
eUniverse on July 15, 1999 and will be submitted to the shareholders at the next
annual meeting. The Plan provides for the grant of stock options, stock
appreciation rights ("SARs") and restricted stock (collectively, "Awards") with
respect to up to 5,000,000 shares of eUniverse's common stock. Awards under the
Plan may be granted to employees, directors or consultants of eUniverse or its
affiliates, provided that consultants shall not have provided services in
connection with the offer or sale of securities in a capital-raising
transaction.
The Plan is administered by the Compensation Committee of the Board of
Directors ("Committee"). The Committee has the authority, in its sole
discretion, to select participants, to make awards in the form and amount it
desires, to impose limitations, restrictions and conditions on the awards
granted and the exercise of the grants not otherwise inconsistent with the terms
of the Plan, and to interpret the Plan. The selection of Directors as
participants and the terms of their awards are determined, however, by vote of
the Board of Directors as a whole instead of by the Compensation Committee.
The terms of the Plan permit the Committee to make stock option grants
which may be Incentive Stock Options within the meaning of Section 422 of the
Internal Revenue Code or other forms of nonqualified stock options as the
Committee may determine. The exercise price of the options granted
52
<PAGE>
under the Plan is determined by the Committee, provided that the exercise price
of Incentive Stock Options must be at not less than 100 percent of the fair
market value of the common stock on the date of grant. The vesting schedule and
term of each option is set by the Committee, provided that the term of Incentive
Stock Options shall not be more than 10 years. Options may be exercised in whole
or in part during the term of the grant in cash, common stock with fair market
value on the date of delivery equal to the aggregate exercise price, a
combination of cash and common stock, or other consideration determined by the
Committee pursuant to the Plan.
The Plan also permits the Committee to grant SARs, subject to the shares
remaining available under the Plan, on terms and conditions not inconsistent
with the terms of the Plan at not less than 100 percent of the fair market value
of the common stock on the date of grant. SARs may be issued in tandem with an
option. The amount payable by eUniverse must be paid in common stock valued at
the fair market value on the date of exercise, cash, or a combination of both.
In addition, the Plan permits the Committee to issue restricted stock on
the terms and conditions as the Committee may determine not inconsistent with
the terms of the Plan.
All awards made by the committee shall be made by written agreement, which
in the case of Incentive Stock Options shall contain terms and conditions that
are consistent with Section 422 of the Internal Revenue Code. Generally no award
made under the Plan shall be transferable by a participant except by will or
pursuant to the laws of descent and distribution or a qualified domestic
relations order as defined by the Employee Retirement Income Security Act of
1974, as amended. The Committee has the power to withhold taxes or require
participants to remit to eUniverse amounts as required to satisfy tax
withholding obligations either in cash or common stock or a combination of both.
Awards are subject to adjustment to reflect any changes in the outstanding
common stock or other changes affecting shares, including adjustments in the
number of shares available for issuance, shares covered by an outstanding Award,
or adjustments in price that become necessary to prevent a dilution or
enlargement of benefits or potential benefits under the Plan.
The Plan will terminate on April 15, 2009. The Board of Directors or the
Committee may amend or terminate the Plan, provided, however, that the amendment
or termination shall be subject to shareholder approval to the extent required
by law or the rules of any stock exchanges on which the common stock is listed.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our voting securities by the following individuals or
groups: (a) each person who is known by eUniverse to own beneficially more than
5% of our common stock, (b) each Director of eUniverse, (c) each Named Executive
Officer of eUniverse, and (d) all executive officers and Directors of eUniverse
as a group.
<TABLE>
<CAPTION>
Name of Beneficial Shares Percentage
Owner Beneficially Beneficially
Owned/(1)/ Owned/(2)/
<S> <C> <C>
Brad D. Greenspan 7,841,000 37.8%
Charles Beilman 2,425,000 11.7%
Leland N. Silvas 491,668/(4)/ 2.4%
William R. Wagner 24,999/(5)/ *
</TABLE>
53
<PAGE>
<TABLE>
<S> <C> <C>
James Haiduck 51,501/(6)/ *
Stephen D. Sellers 339,680/(7)/ 1.6%
Gordon E. Landies 127,939/(8)/ *
Dan Mosher 0 *
Directors and 11,303,412 54.6%
Executive Officers
as a Group
</TABLE>
* less than one percent.
/(1)/ Unless otherwise noted, all of the shares shown are held by individuals or
entities possessing sole voting and investment power with respect to the shares.
Shares not outstanding but deemed beneficially owned by virtue of the right of a
person to acquire them within 60 days, whether by the exercise of options or
warrants or the conversion of shares of preferred stock into shares of common
stock, are deemed outstanding in determining the number of shares beneficially
owned by the person or group. We are treating our Series A Preferred Stock and
common stock as voting securities because the holders of our Series A Preferred
Stock have the right to vote their shares on an as converted basis. For a
description of the conversion terms of our Series A Preferred Stock, see
"DESCRIPTION OF CAPITAL STOCK -- Preferred Stock." The address of each
individual or group listed in the table is 101 North Plains Industrial Road,
Wallingford, Connecticut 06492.
/(2)/ The "Percentage Beneficially Owned" is calculated by dividing the "Number
of Shares Beneficially Owned" by the total outstanding shares of common stock
including shares beneficially owned by the person with respect to whom the
percentage is calculated.
/(4)/ Includes 291,668 shares represented by options exercisable within 60 days.
/(5)/ Consists entirely of shares represented by options exercisable within 60
days.
/(6)/ Includes 6,000 shares issuable upon conversion of Series A Convertible
Preferred Stock and 42,501 represented by options exercisable within 60 days.
/(7)/ Includes 42,500 shares represented by options exercisable within 60 days.
/(8)/ Includes 6,000 shares issuable upon conversion of Series A Convertible
Preferred Stock, and 102,201 shares of common stock beneficially owned by Mr.
Landies as co-trustee under the Barbara Landies Living Trust 8/27/96.
SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of eUniverse common stock as of March 21, 2000 by persons whom:
54
<PAGE>
- acquired shares in connection with eUniverse's acquisition of
Falcon Ventures in February 2000. See "BUSINESS -- Recent
Transactions"
The shares are being registered to permit public secondary trading of these
shares. Each of the selling stockholders listed below may, under this
prospectus, from time to time offer and sell the number of shares of common
stock set opposite their names below.
<TABLE>
<CAPTION>
Before the Offering After the Offering
------------------------------------- -----------------------------------
Number of Percent of Shares Number of Number of Percent of Shares
Name of Beneficial Owner Shares Owned Beneficially Owned Shares Offered Shares Owned Beneficially Owned
- ------------------------ ------------ ------------------ -------------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Take-Two Interactive Software, 910,000 4.1% 125,000 0 0
Inc.
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 14, 1999, eUniverse 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 eUniverse common stock. The rights to acquire CD Universe were
originally held by Palisades Capital, Inc., a private merchant bank owned and
operated by Brad D. Greenspan. On February 11, 1999, Palisades assigned its
rights to acquire CD Universe to Entertainment Universe for consideration of
8,061,000 shares of Entertainment Universe common stock, which were issued to
Mr. Greenspan, making him the sole shareholder of Entertainment Universe (See
"PRINCIPAL SHAREHOLDERS"). The assignment of the right to acquire CD Universe
has been recorded on the books of Entertainment Universe at Palisades'
historical cost pursuant to the accounting treatment for transfers of assets
between entities under common control, as proscribed by APB 16. In connection
with the reorganization between Motorcycle Centers and Entertainment Universe,
those shares of Entertainment Universe common stock were exchanged for an
equivalent number of shares of eUniverse's common stock.
PLAN OF DISTRIBUTION
The shares being offered under this prospectus may be sold from time to
time by the selling stockholders, or by pledgees, donees, transferees or other
successors in interest. These sales may be made on one or more exchanges or in
the over-the-counter market, or otherwise at prices and at terms then prevailing
or at prices related to the then current market price, or in negotiated
transactions. The shares may be sold by one or more of the following: (a) a
block trade in which the broker or dealer so engaged will attempt to sell the
shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction; (b) purchases by the broker or dealer as
principal and resale by the broker or dealer for its account under this
prospectus; (c) an exchange distribution in accordance with the rules of the
exchange, and (d) orders brokerage transactions and transactions in which the
broker solicits purchasers. From time to time the selling stockholders may
engage in short sales, short sales versus the box, puts and calls and other
transactions in securities of the issuer or derivatives of the securities, and
may sell and deliver the shares under these transactions.
The selling stockholders may effect the transactions directly, or
indirectly through underwriters, broker-dealers or agents acting on their
behalf, and under these sales, the broker-dealers or agents may receive
compensation in the form of commissions, concessions, allowances or discounts
from the selling
55
<PAGE>
stockholders and/or the purchasers of the shares for whom they may act as agent
or to whom they sell shares as principal or both (which commissions,
concessions, allowances or discounts might be in excess of customary amounts).
To the extent required, the names of any agents, broker-dealers or underwriters
and applicable commissions, concessions, allowances or discounts and any other
required information with respect to any particular offer of the shares by the
selling stockholders, will be set forth in a supplement to this prospectus. Any
statement contained in this prospectus will be deemed to be modified or
superseded by any inconsistent statement contained in any prospectus supplement.
Unless this prospectus is accompanied by a prospectus supplement stating
otherwise, offers and sales may be made under this prospectus only in ordinary
broker's transactions made on the OTC Electronic Bulletin Board or any other
exchange or market in which the stock is listed in transactions involving
ordinary and customary brokerage commissions. See "SELLING STOCKHOLDERS" and
"PLAN OF DISTRIBUTION."
In affecting sales, brokers or dealers engaged by the selling stockholders
may arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from selling stockholders in amounts to be
negotiated immediately prior to the sale. The selling stockholders and agents
who execute orders on their behalf may be deemed to be underwriters as that term
is defined in Section 2(11) of the Act and a portion of any proceeds of sales
and discounts, commissions or other compensation may be deemed to be
underwriting compensation for purposes of the Act.
In the event the selling stockholders engage an underwriter to sell the
shares, to the extent required, a prospectus supplement will be distributed,
which will set forth the number of shares being offered and the terms of the
offering, including the names of the underwriters, any discounts, commissions
and other items constituting compensation to underwriters, dealers or agents,
the public offering price with any discounts, commissions or concessions allowed
or reallowed or paid by underwriters to dealers.
DESCRIPTION OF CAPITAL STOCK
We have authorized capital stock consisting of 250,000,000 shares of common
stock, $0.001 par value per share, and 40,000,000 shares of preferred stock,
$0.10 par value per share. The following is a summary description of eUniverse's
capital stock. For a complete description of our capital stock, you should read
our Articles of Incorporation, Amended and Restated Bylaws, and the Registration
Rights Agreements that are included as exhibits to our Form 10 filed with the
Securities and Exchange Commission on June 14, 1999.
COMMON STOCK
Holders of common stock are entitled to one vote per share on all matters
to be voted upon by the shareholders. Subject to preferences that may be
applicable to the holders of outstanding shares of preferred stock, if any, the
holders of common stock are entitled to receive ratably the dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of eUniverse, and subject to the prior distribution rights of the holders of
outstanding shares of preferred stock, if any, the holders of shares of common
stock shall be entitled to receive pro rata all of the remaining assets of
eUniverse available for distribution to its shareholders. The common stock has
no preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock.
PREFERRED STOCK
On April 14, 1999, eUniverse sold 1,795,024 shares of its Series A 6%
Convertible Preferred Stock in a private offering under Section 4(2) of the
Securities Act and Rule 506 of Regulation D adopted under
56
<PAGE>
the Securities Act. The eUniverse preferred stock was sold to a group of
approximately 40 purchasers, including Lehman Brothers, Eisenberg Partners and
principals of Gerard Klauer Mattison & Co., Inc., all of whom were accredited
investors as defined in Rule 501 of Regulation D. The aggregate offering price
for the preferred stock was $6,598,122. In the reorganization, the holders of
the eUniverse preferred stock exchanged their shares, on a one-to-one basis, for
shares of eUniverse's preferred stock having equivalent rights and preferences,
as set forth in the Designation of Preferred Stock of Motorcycle Centers of
America, Inc. dated April 7, 1999 (the "Designation of Preferred Stock").
Holders of eUniverse's preferred stock have the right to convert all or any
portion of their stock into shares of eUniverse's common stock at any time after
October 15, 1999 until all shares of preferred stock have been converted, at a
one-to-one ratio, unless the market price of the common stock is below $3.60
during various periods prior to the date of conversion, as set forth in the
Designation of Preferred Stock, in which case the conversion ratio would be
greater than one-to-one. On February 2, 2000, 82.9% of our preferred
stockholders and 50.095% of the outstanding shares of our preferred stock
agreed to delay conversion of their preferred stock shares until August 15,
2000. See "Registration Rights Agreement of Entertainment Universe, Inc."
on page 60.
eUniverse's preferred stock does not pay dividends, and the holders of the
preferred stock are not entitled to receive any dividends on their stock. In the
event of the liquidation or dissolution of eUniverse, the holders of the
preferred stock will be entitled to receive, prior in preference to any
distribution to the holders of the common stock and any other class of stock
which has been designated as junior in rank to the preferred stock, an amount
per share equal to the original issue price of the preferred stock ($3.60) plus
6% of the original issue price per annum from the date of issuance. The holders
of preferred stock are entitled to cast the number of votes per share on each
matter submitted to eUniverse's holders of common stock that equals the number
of votes which could be cast on the shares of common stock that could have been
converted immediately prior to the taking of the vote. Votes of the preferred
stock holders shall be cast together with those cast by the holders of common
stock and not as a separate class except as otherwise provided in the
Designation of Preferred Stock on matters directly affecting the rights of the
holders of preferred stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Corporate Stock
Transfer, Inc. Its address is 3200 Cherry Creek South Drive, Ste. 430, Denver,
Colorado 80209, and its telephone number at this location is (303) 595-3300.
LISTING
Our common stock is currently traded on the OTC Electronic Bulletin Board
under the trading symbol "EUNI". We have applied to list our common stock on The
Nasdaq Small Cap Market('r') under the trading symbol "EUNI".
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
SHAREHOLDERS AND DIVIDENDS
As of March 3, 2000 there were 17,140,354 shares of common stock
outstanding, which were held by 179 shareholders of record.
To date, eUniverse has paid no cash dividends and has no intention to pay
cash dividends on its common stock in the foreseeable future.
57
<PAGE>
MARKET INFORMATION
From April 30, 1999 to present, the common stock of eUniverse has been
traded on the OTC Electronic Bulletin Board under the symbol EUNI.
The market price data provided in the following table includes data for
eUniverse, Motorcycle Centers and NABCO, Inc. Prior to April 23, 1998, the
market prices listed below are for NABCO, Inc., traded under the symbol NBCO. On
April 23, 1998, NABCO merged with Motorcycle Centers. The market prices provided
in the table between April 23, 1998 to April 14, 1999 are for Motorcycle
Centers, traded under the symbol MCAM. After the reorganization of Entertainment
Universe and Motorcycle Centers on April 14, 1999, eUniverse began trading on
the OTC under the symbol MCAMD. The name of eUniverse was changed to eUniverse,
Inc. and eUniverse began trading under the symbol EUNI on April 30, 1999. The
market price data prior to April 14, 1999 only provides the market price of NBCO
and MCAM. However, the historical information provided in other sections of this
prospectus pertains to Entertainment Universe and its acquired subsidiaries,
including CD Universe. As a result, the market information provided below does
not relate to the historical information provided in other sections hereof prior
to April 14, 1999.
The chart below sets forth the range of reported high and low bid
quotations for the common stock of eUniverse for each full quarterly period from
October 31, 1997 through December 31, 1999. The source of the quotations is
Prophet Financial Systems. The quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions. The closing price for the common stock of eUniverse on March
21, 2000 was $8.000.
<TABLE>
<CAPTION>
RANGE OF HIGH AND
QUARTERLY PERIOD ENDING LOW BID QUOTATIONS
- ----------------------- ------------------
<S> <C>
December 31, 1999 (EUNI) $ 3.937 - 6.500
September 30, 1999 (EUNI) $ 5.00 - 9.875
June 30, 1999 (MCAM/EUNI)(5) $ 1.875 - 14.00
March 31, 1999 (MCAM) $ 5.00 - 18.00(1)(3)
December 31, 1998 (MCAM) $ 0.62 - 25.00(1)
September 30, 1998 (MCAM) $ 2.00 - 5.00(1)
June 30, 1998 (NBCO/MCAM)(4) $ 50.00 - 95.00(1)
March 30, 1998 (NBCO) $ 65.00 - 90.00(1)
December 31, 1997 (NBCO) $1,300.00 - 1,600.00(2)(3)
</TABLE>
- ---------------------------------
(1) Quotes reflect a 1 for 20 reverse split of eUniverse's common stock
effective March 31, 1999.
(2) Quotes reflect a 1 for 20 reverse split of eUniverse's common stock
effective August 1, 1997.
(3) The stock split occurred prior to the operation of eUniverse's current
business that commenced upon Motorcycle Centers' reorganization with
Entertainment Universe in April 1999.
(4) NABCO merged with Motorcycle Centers on April 23, 1998. Accordingly, in this
quarter, the market price data from April 1 to April 23, 1998 is for NABCO and
from April 24 to June 30, 1998 is for Motorcycle Centers.
58
<PAGE>
(5) The reorganization of Motorcycle Centers and Entertainment Universe closed
on April 14, 1999. Thereafter, Motorcycle Centers changed its name to eUniverse,
Inc. on April 26, 1999 and its symbol to EUNI as of April 30, 1999.
SHARES ELIGIBLE FOR FUTURE SALE
On December 31, 1999, approximately 15,256,000 shares of eUniverse's common
stock (approximately 94% of the shares outstanding) are restricted shares that
may be sold only in the event that these shares are registered under the
Securities Act or are sold under an exemption thereunder, including Rule 144,
which permits the resale of limited amounts of restricted securities after a
12-month initial holding period. Subject to the volume limitations of Rule 144,
12,809,000 shares will become available for resale under Rule 144 on April 14,
2000, an additional 700,000 shares will become available on May 31, 2000, an
additional 78,125 will become available on June 30, 2000, and an additional
1,440,000 shares will become available on August 31, 2000. See
"PRINCIPAL SHAREHOLDERS."
eUniverse has reserved 5,000,000 shares of common stock for future issuance
under the 1999 Stock Awards Plan. There are 1,795,024 shares of preferred stock
outstanding which are convertible into shares of common stock at a one-to-one
ratio unless the market price of the common stock is less than $3.60 during
certain periods prior to conversion. eUniverse has granted the holders of
preferred stock registration rights so that they may sell their shares of common
stock received upon conversion of the preferred stock. The shares of common
stock received upon conversion also may be sold on the market under Rule 144
without registration under the Securities Act commencing 12 months after the
date of issuance of the preferred stock, subject to the volume limitations of
Rule 144. See "DESCRIPTION OF CAPITAL STOCK--Registration Rights."
eUniverse has granted options to employees and one advisor to purchase an
aggregate of up to 4,232,500 shares of common stock at exercise prices ranging
from $3.00 to $13.00 per share as of December 31, 1999. Options representing
375,833 of the shares are vested and exercisable. The remaining options vest in
equal amounts each calendar quarter over the next two (2) years. Warrants to
purchase an additional 731,865 shares of common stock at exercise prices ranging
from $2.75 to $10.00 have been issued to various entities in exchange for
financing and public relations services. Warrants and options representing
400,000 of the shares are vested and exercisable. eUniverse intends to file a
registration statement on Form S-8 covering the shares issued pursuant to the
Plan. During the effectiveness of the S-8, common stock issued upon exercise of
outstanding vested options or issued under eUniverse's 1999 Stock Awards Plan
will be available for resale on the public market.
Up to 1,800,000 restricted shares of common stock may be issued in
connection with our acquisition of The Big Network, which may be sold only in
the event the shares are registered, or exempted from registration, under the
Securities Act.
RULE 144. In general, under Rule 144 as currently in effect a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
-1% of the number of shares of common stock then outstanding,
or
-the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to the
sale.
59
<PAGE>
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(K). Under Rule 144(k), a person who is not deemed to have been an
affiliate of eUniverse at any time during the three months preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, including the holding period of any prior owner except an affiliate, is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
REGISTRATION RIGHTS.
REGISTRATION RIGHTS AGREEMENT OF ENTERTAINMENT UNIVERSE, INC.
Under the Registration Rights Agreement of Entertainment Universe Inc.
dated April 1999 which was assigned to and assumed by eUniverse pursuant to the
Assignment and Assumption Agreement by and between Entertainment Universe, Inc.
and Motorcycle Centers of America, Inc., dated as of April 14, 1999 (the
"Registration Rights Agreement"), eUniverse is required to file a registration
statement under the Securities Act of 1933, covering the resale of common stock
issuable upon conversion of the preferred stock. eUniverse timely filed a
registration statement on Form SB-2 on September 13, 1999 (SEC File No.
333-86959) (the "Registration Statement"). Additionally, we agreed to use our
best efforts to have the Registration Statement declared effective by November
15, 1999, and to maintain the effectiveness of the Registration Statement until
all securities covered thereby have been sold.
As of February 2, 2000, eUniverse received the requisite consent of the holders
of our Series A Convertible Preferred Stock (the "Preferred Stockholders") to
(1) modify the terms of our Certificate of Designation of Series A Convertible
Preferred Stock to clarify that we are not required to notify the Preferred
Stockholders at least thirty days prior to acquiring the stock or assets of
another company and that this type of transaction does not constitute a
liquidation event so long as eUniverse is the surviving entity in such a
transaction; (2) modify the terms of the Registration Rights Agreement and the
Regulation D Subscription Agreement between eUniverse and each of the Preferred
Stockholders to remove our obligation to file a Registration Statement to
register the shares of its common stock issuable upon conversion of preferred
stock; provided that the registration obligation will be reinstated in the event
that eUniverse has not raised additional capital contributions or proceeds from
debt issuances of at least $5 million within 6 months of December 1999, of which
at least $3 million shall have been raised within 4 months of December 1999 (the
"Minimum Proceeds"); and (3) to delay the conversion of their shares of
preferred stock to shares of common stock until August 15, 2000; provided that
eUniverse raises the Minimum Proceeds. However, each Preferred Stockholder may
convert and sell up to 20% of its shares of preferred stock during any 30 day
period beginning April 15, 2000 in the event that eUniverse's common stock
average weekly Closing Bid Price is greater than $12.00 per share during such
period.
In consideration for the Preferred Stockholders' consent to items 1 through
3 above, eUniverse issued to each of the Preferred Stockholders (a) a warrant to
purchase a number of shares of common stock equal to 10% of the number of shares
of preferred stock beneficially owned by the Preferred Stockholder at an
exercise price of $6.00 per share; and (b) a warrant to purchase a number of
shares of common stock equal to 10% of the number of shares of preferred stock
beneficially owned by the Preferred Stockholder at an exercise price of $8.00
per share.
The Registration Rights Agreement sets forth registration obligations of
eUniverse that, when not met, are events of default by eUniverse (a
"Registration Default"). A Registration Default occurs: (1) if eUniverse does
not use its best efforts to have the Registration Statement effective on or
prior to
60
<PAGE>
November 15, 1999; (2) if a new Registration Statement or amended Registration
Statement is not declared effective within seven business days of the three
consecutive trading days the Registration Statement does not cover a sufficient
number of shares of common stock to effect the resales of a number of shares of
Common stock equal to 200% of the number of shares of common stock issuable to
each Subscriber upon conversion of all outstanding preferred stock then eligible
for conversion; or (3) if the Registration Statement has been declared defective
and thereafter ceases to be effective or usable for any reason in excess of 60
days.
In the event of a Registration Default, eUniverse has agreed to pay
liquidated damages to each holder of preferred stock in an amount equal to
$0.036 per share for the first 30-day period, or part of the 30-day period, and
$0.072 per share for each subsequent 30-day period, or part of the 30-day
period, in cash, or at the holder's option, in the number of shares of common
stock equal to the quotient of (x) the dollar amount of the liquidated damages
divided by (y) $3.60 plus 6% of the original purchase price per annum on the
date of the Registration Default, accruing daily, until all Registration
Defaults have been cured.
If eUniverse proposes to register any of its common stock in a public
offering of its securities solely for cash (other than a registration relating
solely to the sale of securities to participants in a company stock plan or a
registration on Form S-4 or similar form registering stock issuable upon a
reclassification, a business combination involving an exchange of securities or
an exchange offer for securities of the issuer or another entity), the holders
of preferred stock may require that the shares of common stock underlying the
preferred stock be included in the registration statement, unless the managing
underwriter determines and advises in writing that the inclusion in the
registration statement of all of the securities proposed to be included would
interfere with the successful marketing of the securities proposed to be
registered by eUniverse in an underwritten public offering by eUniverse.
If, during the time that the Registration Statement is effective, eUniverse
reasonably determines, based upon advice of counsel, that due to the existence
of material non-public information, disclosure of the material non-public
information would be required to make the statements contained in the
Registration Statement not misleading, and eUniverse has a bona fide business
purpose for preserving as confidential the material non-public information,
eUniverse shall have the one-time right to suspend the effectiveness of the
Registration Statement for up to 60 days, and no holder of preferred stock shall
be permitted to sell any securities pursuant thereto, until a time as the
suspension is no longer advisable.
All fees and expenses incident to the performance of or compliance with the
Registration Rights Agreement by eUniverse shall be borne by eUniverse.
Additionally, eUniverse shall reimburse the holders of preferred stock for the
reasonable fees and disbursements, not to exceed $25,000 in the aggregate, of
not more than one firm of attorneys representing the selling holders (in
addition to any local counsel for which reimbursement shall be separate), which
firm, if any, shall be chosen by the majority number of shares of preferred
stock of holders (on a fully diluted basis).
Any provision of the Registration Rights Agreement may be amended or waived
by obtaining the written consent of eUniverse and the Holders of a majority of
the preferred stock provided that the amendment treats all holders equally.
eUniverse is not currently paying any liquidated damages to preferred
stockholders since we obtained the requisite consent of the Preferred
Stockholders to amend the Registration Rights Agreement. Accordingly, the
registration statement on Form S-1 was withdrawn before being declared effective
and eUniverse has not paid any damages to date to any Preferred Stockholder.
61
<PAGE>
REGISTRATION RIGHTS UNDER CASE'S LADDER AGREEMENT
Under the Case's Ladder Agreement the selling shareholders of Case's Ladder
(the "Case's Ladder Shareholders") have the right to request that their
restricted shares of common stock be registered for sale by eUniverse as part of
any registration eUniverse files with the SEC for the offering of common stock
to the public, to the extent that any other officer or director of eUniverse has
the same registration rights and sale privileges. However, if the Case's Ladder
Shareholders can sell their restricted shares under Rule 144, then they must do
so before exercising their registration rights, which terminate on May 31, 2000.
All expenses of any registration of the Case's Ladder Shareholders' restricted
shares shall be paid by eUniverse, except for commissions to brokers or
underwriters. The former shareholders of Case's Ladder have not elected to
eUniverse to use their registration rights to register their shares of common
stock as part of eUniverse's current registration statement on Form S-1.
REGISTRATION RIGHTS AGREEMENT WITH BIG NETWORK SHAREHOLDERS
In connection with the acquisition of Big Network, eUniverse entered into a
Registration Rights Agreement (the "BNI Registration Rights Agreement") with
each of the shareholders of Big Network (the "Big Network Shareholders")
participating in the transaction. The BNI Registration Rights Agreement provides
that after September 14, 1999, any Big Network Shareholders holding 25% or more
of the restricted securities issued in the acquisition of Big Network by
eUniverse have the right to require eUniverse to effect a registration of part
or all of the shareholder's restricted securities and allow all other Big
Network Shareholders the opportunity to register their restricted shares. The
Big Network Shareholders, collectively, may request this registration only once.
eUniverse is obligated to have the registration statement declared effective by
April 14, 2000. However, eUniverse may refrain from filing any registration
statement covering the Big Network Shareholders' restricted shares (a "BNI
Registration Statement") during the period from the date eUniverse files a
registration statement covering an offering of eUniverse's common stock to the
public and ending 60 days after the effective date of the registration
statement. Additionally, once each year, eUniverse may postpone the filing of
any BNI Registration Statement if eUniverse is involved in a secondary offering
of securities or private placement and if the filing of a BNI Registration
Statement would interfere with the financing. eUniverse will pay all expenses of
the filing of a registration statement registering the restricted shares held by
the Big Network Shareholders, except for underwriting discounts or commissions.
The BNI Registration Rights Agreement terminates on August 31, 2000, unless a
BNI Registration Statement has not been filed or declared effective, in which
case the agreement continues until such time as the BNI Registration Statement
has been filed, declared effective, and remained effective for a period of at
least 120 days.
As of April 5, 2000, former shareholders of Big Network who hold a total of
1,597,078 shares of eUniverse common stock entered into an agreement with
eUniverse which provides eUniverse with the right to purchase a minimum of
500,000 shares of eUniverse common stock, on a pro rata basis, from all of the
former shareholders of Big Network who, as of the closing of such agreement, are
shareholders of eUniverse and counter-signatories to such agreement. The
closing is scheduled to occur on or before April 24, 2000.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
eUniverse, Inc. by Martin, Gasparrini & Chioffi, LLP, Stamford, Connecticut.
EXPERTS
The financial statements and schedules of eUniverse appearing in this
prospectus and registration statement have been audited by Merdinger, Fruchter,
Rosen and Corso, LLP, Cordovano and Harvey, PC and Jonathon P. Reuben, CPA,
independent public accountants, as indicated in their reports, and are included
herein in reliance upon the report given on the authority of the firm as experts
in accounting and auditing.
62
<PAGE>
SOURCES OF ADDITIONAL INFORMATION
eUniverse has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 with respect to the common
stock offered by this prospectus. This prospectus, which constitutes a part of
the registration statement, does not contain all of the information set forth in
the registration statement or the exhibits and schedules which are parts of the
registration statement. For further information with respect to eUniverse and
its common stock, see the Registration Statement and the exhibits and schedules
thereto. Whenever we make reference in this prospectus to any of our agreements
or other documents, you should refer to the exhibits attached to the
registration statement for copies of the actual agreement or other document.
You can read our Commission filings, including this registration statement,
through a web browser over the Internet at the Commission's web site at
URL:http://www.sec.gov. You may also read and copy any document we file with the
Commission at its public reference facilities in Washington, D.C., New York, NY,
and Chicago, IL at 450 Fifth Street, Washington, D.C. 20549, 7 World Trade
Center, Suite 1300, New York, NY 10048, and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, respectively. You may also
obtain copies of the documents at prescribed rates by writing to the Public
Reference Section of the Commission at 450 Fifth Street, Washington, D.C. 20549.
Please call the Commission at 1-800-SEC-0330 for further information on the
operation of the public reference facilities.
eUniverse is subject to the information and periodic reporting requirements
of the Securities and Exchange Act and, accordingly, files periodic reports,
proxy statements and other information with the Commission. Such periodic
reports, proxy statements and other information will be available for inspection
and copying at the Commission's public reference room, and the web site of the
Commission referred to above.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Pro Formas................................................................... F-1
eUniverse, Inc. Unaudited Financials......................................... F-6
Motorcycle Centers of America, Inc. Financials .............................. F-23
CD Universe, Inc. Financials................................................. F-37
Case's Ladder, Inc. Financials............................................... F-49
The Big Network, Inc. Financials............................................. F-59
Gamer's Alliance, Inc. Financials............................................ F-73
Falcon Ventures Corporation Financials....................................... F-82
Pokemon Village Financials................................................... F-94
Just Say Wow Financials...................................................... F-102
</TABLE>
64
<PAGE>
EUniverse, Inc.
Pro forma Financial Information
During the nine month period ended December 31, 1999, the registrant completed
the reverse acquisition of Motorcycle Centers of America, Inc. by Entertainment
Universe, Inc., the acquisition of CD Universe, Inc.(the Predecessor), the
acquisition of Cases Ladder, Inc., the acquisition of Gamers Alliance, Inc. and
the acquisition of The Big Network, Inc. The details of the acquisitions are
presented in the notes to the December 31, 1999 financial statements presented
elsewhere in this registration statement. The proforma information also includes
the acquisitions of Falcon Ventures Corporation, Pokemon Village and Just Say
Wow. These acquisitions are discussed in the section "Recent Transactions".
The pro forma income statement for the nine month period ended December 31, 1999
reflects the historical consolidated income statement of the registrant and the
subsequent acquisitions of Falcon Ventures Corporation, Pokemon Village and Just
Say Wow. Pro forma adjustments have been made to give effect to all of the
acquisitions as if they had occurred as of the beginning of the fiscal year
presented (April 1, 1998) and carried forward through the interim period
presented.
The pro forma income statement for the twelve month period ended March 31, 1999
reflects the historical income statement for CD Universe, Inc.(the predecessor)
for the year ended March 31, 1999, the historical income statements for
Motorcycle Centers of America, Inc., Cases Ladder, Inc., Gamers Alliance, Inc.
and The Big Network, Inc. for the year ended December 31, 1998 and the
historical income statement of Falcon Ventures Corporation for the initial
period May 12, 1998 to February 24, 1999. There is no significant activity for
Entertainment Universe, Inc., as it came into existence in February, 1999.
Pokemon Village and Just Say Wow commenced operations in August, 1999 and
November, 1999, respectively. Since Motorcycle Centers of America, Inc. and
Entertainment Universe, Inc. had minimal operations, CD Universe Inc is
considered to be the predecessor to the Registrant. Entertainment Universe, Inc.
acquired Motorcycle Centers of America in a reverse acquisition, which then
changed its name to eUniverse, Inc. Pro forma adjustments have been made to give
effect to all of the above transactions as if they had occurred at the beginning
of the twelve month period presented.
A summary of the acquisitions is as follows:
<TABLE>
<CAPTION>
Transaction Date
- ----------- ------
<S> <C>
Entertainment Universe, Inc acquires CD Universe, Inc. April 14, 1999
Entertainment Universe, Inc. acquires Motorcycle Centers of
America, Inc. in a reverse acquisition, and the name is changed
to eUniverse, Inc. April 14, 1999
eUniverse , Inc. acquires Cases Ladder, Inc. May 31, 1999
eUniverse, Inc. acquires Gamers Alliance, Inc. June 30, 1999
eUniverse, Inc. acquires 80% of The Big Network, Inc. August 31, 1999
eUniverse, Inc. acquires Pokemon Village February 1, 2000
eUniverse, Inc. acquires Falcon Ventures Corporation February 2, 2000
eUniverse, Inc. acquires Just Say Wow March 1, 2000
</TABLE>
F-1
<PAGE>
eUniverse, Inc.
PROFORMA BALANCE SHEET
December 31, 1999
<TABLE>
<CAPTION>
Falcon
Consolidated Ventures Pokemon
Balance Sheet Corporation Village JustSayWow Combined
-------------- ----------- --------- ----------- -----------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 891,305 $ 1,856 $ - - $ 893,161
Accounts receivable 602,610 73,742 18,512 33,164 728,028
Inventory 111,412 274,222 - - 385,634
Due from employees 158,555 - - - 158,555
Prepaid expenses and other current assets 110,479 11,010 - - 121,489
----------- ---------- --------- --------- -----------
Total current assets 1,874,361 360,830 18,512 33,164 2,286,867
Furniture and equipment, less accumulated depreciation 590,865 73,956 10,540 2,456 677,817
Goodwill, less accumulated amortization 25,709,813 458,868 - - 26,168,681 1
2
3
Other intangibles, less accumulated amortization 708,143 - - - 708,143 2
3
Other assets 129,125 27,154 - - 156,279
----------- ---------- --------- --------- -----------
Total assets $29,012,307 $ 920,808 $ 29,052 $ 35,620 $29,997,787
=========== ========== ========= ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,576,222 $ 508,014 $ - $ - $2,084,236
Accrued expenses 728,358 - - - 728,358
Due to affiliates 2,500 789,796 - - 792,296 1
Short term portion of lease obligations 8,585 - - - 8,585
----------- ---------- --------- --------- -----------
Total current liabilities 2,315,665 1,297,810 - - 3,613,475
----------- ---------- --------- --------- -----------
Long term liabilities
Long term portion of lease obligations 2,596 - - - 2,596
Shareholders' equity (deficit)
Preferred stock 179,502 - - - 179,502
Common stock 16,292 506,250 - - 522,542 1
Additional paid in capital 32,851,106 - - - 32,851,106
Deferred stock compensation cost (41,127) - - - (41,127)
3
Retained deficit (6,311,727) (883,252) 29,052 35,620 (7,130,307) 2
----------- ---------- --------- --------- ------------
Total shareholders' equity $26,694,046 (377,002) $ 29,052 35,620 26,381,716
----------- ---------- --------- --------- ------------
Total liabilities and shareholders' equity 29,012,307 $ 920,808 29,052 $ 35,620 $29,997,787
=========== ========== ========= ========= ============
<CAPTION>
Pro Forma Adjustment
To Record Acquisitions
At December 31, 1999
Combined Dr Cr Pro Forma
----------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 893,161 $ 3 $ 100,000 $ 793,161
Accounts receivable 728,028 728,028
Inventory 385,634 385,634
Due from employees 158,555 158,555
Prepaid expenses and other current assets 121,489 121,489
----------- ----------
Total current assets 2,286,867 2,186,867
Furniture and equipment, less accumulated depreciation 677,817 2 10,540 667,277
Goodwill, less accumulated amortization 26,168,681 1 1,828,574 1 458,868 28,036,865
2 309,098
3 189,380
Other intangibles, less accumulated amortization 708,143 2 90,000 873,143
3 75,000
Other assets 156,279 156,279
----------- -----------
Total assets $29,997,787 $31,920,431
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $2,084,236 3 100,000 $ 2,184,236
Accounts payable 728,358 728,358
Accrued expenses 792,296 1 789,796 2,500
Due to affiliates 8,585 8,585
Short term portion of lease obligations ---------- -----------
3,613,475 2,923,679
Total current liabilities ---------- -----------
Long term liabilities 2,596 2,596
Long term portion of lease obligations
Shareholders' equity (deficit) 179,502 179,502
Preferred stock 522,542 1 506,250 1 310 16,661
Common stock 2 47
3 12
32,851,106 1 1,782,190 35,150,847
Additional paid in capital 2 417,563
3 99,988
(41,127) (41,127)
Deferred stock compensation cost -
3 35,620
(7,130,307) 2 29,052 1 883,252 (6,311,727)
Retained deficit ----------- -----------
26,381,716 28,994,156
Total shareholders' equity ----------- -----------
Total liabilities and shareholders' equity $29,997,787 $31,920,431
=========== ===========
</TABLE>
F-2
<PAGE>
eUniverse, Inc
PROFORMA STATEMENT OF OPERATIONS
For the Nine Months Ended December 31, 1999
<TABLE>
<CAPTION>
Consolidated
Income Statement
for the
Nine Months Ended Falcon Ventures
December 31, 1999 Corporation Pokemon Village JustSayWow Combined
----------------- -------------- --------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenue $ 6,950,769 $717,680 $40,939 $33,164 $ 7,742,552
4
Cost of sales 5,228,249 820,743 - - 6,048,992 5
----------- -------- ------- ------- -----------
Gross profit 1,722,520 (103,063) 40,939 33,164 1,693,560
----------- -------- ------- ------- -----------
Marketing and sales 2,123,186 37,804 14,332 - 2,175,322 5
6
Product development 1,221,499 163,454 - - 1,384,953 6
General and administrative 3,004,888 568,218 2,225 7,799 3,583,130 4
5
6
Amortization of goodwill and
other 1,596,622 10,713 - - 1,607,335 7
8
9
Stock based compensation 161,888 - - - 161,888
----------- -------- ------- ------- -----------
Total 8,108,083 780,189 16,557 7,799 8,912,628
----------- -------- ------- ------- -----------
Loss from operations $(6,385,563) (883,252) 24,382 25,365 (7,219,068)
Interest income and other 57,753 - - - 57,753
Interest expense (355) - - - (355) 6
Loss allocated to minority
interest 16,438 - - - 16,438
----------- ------- ------- ------- -----------
Loss before income taxes (6,311,727) (883,252) 24,382 25,365 (7,145,232)
Income tax expense - - - - -
----------- --------- ------- ------- -----------
Net loss $(6,311,727) $(883,252) $24,382 $25,365 $(7,145,232)
=========== ========= ======= ======= ===========
Basic and diluted loss per
share (0.42) (0.88) $ (0.44)
Weighted average shares
outstanding $15,149,505 1,000,000 16,149,505 10
<CAPTION>
Pro Forma Adjustments to
Reflect Acquisitions Income Statement
for the for the
Nine Months Ended Nine Months Ended
December 31, 1999 December 31, 1999
Combined Dr Cr Pro Forma
-------- ------------------------ -- ------------------
<S> <C> <C> <C> <C>
Revenue $ 7,742,552 $ 4 $ 50,148 $ 7,951,846
5 143,464
6 15,682
4 10,139
Cost of sales 6,048,992 5 27,688 6,086,819
--------- -----------
Gross profit 1,693,560 1,865,027
--------- -----------
Marketing and sales 2,175,322 5 20,143 2,205,590
6 10,125
Product development 1,384,953 6 260,910 1,645,863
General and administrative 3,583,130 4 44,271 3,906,539
5 146,082
6 133,056
Amortization of goodwill
and other 1,607,335 7 667,550 2,297,266
8 5,556
9 16,825
Stock based compensation 161,888 161,888
--------- -----------
Total 8,912,628 10,217,146
--------- -----------
Loss from operations (7,219,068) (8,352,119)
Interest income and other 57,753 6 1,115 58,868
Interest expense (355) 6 (3,022) (3,377)
Loss allocated to minority
interest 16,438 16,438
--------- -----------
Loss before income taxes (7,145,232) (8,280,190)
Income tax expense - -
--------- -----------
Net loss $(7,145,232) $(8,280,190)
========= ===========
Basic and diluted loss per
share $ (0.44) $ (0.50)
Weighted average shares
outstanding 16,149,505 10 484,881 16,634,386
</TABLE>
F-3
<PAGE>
eUniverse, Inc
PROFORMA STATEMENT OF OPERATIONS
March 31, 1999
<TABLE>
<CAPTION>
Motorcycle
Centers of
America CD Universe Case's Ladder
Year End Year End Year End
December 31, 1998 March 31, 1999 December 31, 1998
---------------------- --------------------- -----------------------
<S> <C> <C> <C>
Revenue $ - $8,851,713 $378,345
Cost of sales - 7,550,289 -
------------- ---------- -----------
Gross profit - 1,301,424 378,345
------------- ---------- -----------
General and administrative 5,944,340 1,708,601 394,141
Amortization -
------------- ---------- -----------
Total 5,944,340 1,708,601 394,141
------------- ---------- -----------
Loss from operations (5,944,340) (407,177) (15,796)
Other income (expense) (57,290) 1,013 -
Loss allocated to minority interest - - -
------------- ---------- -----------
Loss before income taxes (6,001,630) (406,164) (15,796)
Income tax expense (benefit) - - (1,372)
------------- ---------- -----------
Net loss $ (6,001,630) (406,164) $(14,424)
============= ========== ===========
Basic and diluted loss per share (85.94)
Weighted average shares outstanding 69,833
<CAPTION>
Entertainment
Universe Gamers Alliance The Big
(Initial Period) (Initial Period) Network, Inc
February 28,1999 June 1, 1998 to Year End
to March 31, 1999 December 31, 1998 December 31, 1998
----------------------- ----------------------- ----------------------
<S> <C> <C> <C>
Revenue $ $108,347 $ 83,883
Cost of sales 20,671 56,375
------------- --------- ---------
Gross profit - 87,676 27,508
------------- --------- ---------
General and administrative 90 85,291 765,430
Amortization
------------- --------- ---------
Total 90 85,291 765,430
------------- --------- ---------
Loss from operations (90) 2,385 (737,922)
Other income (expense) - - 1,857
Loss allocated to minority interest - - -
------------- --------- ---------
Loss before income taxes (90) 2,385 (736,065)
Income tax expense (benefit) - - -
------------- --------- ---------
Net loss $ (90) $2,385 $(736,065)
============= ========= =========
Basic and diluted loss per share $ (0.00)
Weighted average shares outstanding 10,050,000
<CAPTION>
Falcon Ventures
Corporation Pro Forma Adjustments
(Initial Period) to Reflect Acquisitions
May 12, 1998 to as of March 31, 1999
February 24, 1999 Combined Dr
--------------------- ------------------------ ---------------------
<S> <C> <C> <C>
Revenue $ 102,872 $ 9,525,160 $ 11
Cost of sales 91,788 7,719,123 11 11,898
---------- -------------
Gross profit 11,084 1,806,037
---------- -------------
General and administrative 319,167 9,217,060 11 6,508
Amortization 12 2,952,626
13 116,667
14 45,400
---------- -------------
Total 319,167 9,217,060
---------- -------------
Loss from operations (308,083) (7,411,023)
Other income (expense) (54,420)
Loss allocated to minority interest - - 15
---------- -------------
Loss before income taxes (308,083) (7,465,443)
Income tax expense (benefit) - (1,372)
---------- -------------
Net loss $(308,083) $(7,464,071)
========== =============
Basic and diluted loss per share $ (0.74)
Weighted average shares outstanding 10,119,833 16 6,478,611
<CAPTION>
Cr Pro Forma
-------------------- ------------------------
<S> <C> <C>
Revenue $ 15,570 $ 9,540,730
Cost of sales 7,731,021
-------------
Gross profit 1,809,709
-------------
General and administrative 9,223,568
Amortization 3,114,693
-------------
Total 12,338,261
-------------
Loss from operations (10,528,552)
Other income (expense) (54,420)
Loss allocated to minority interest 47,104 147,104
-------------
Loss before income taxes (10,435,868)
Income tax expense (benefit) (1,372)
-------------
Net loss $ (10,434,496)
=============
Basic and diluted loss per share $ (0.63)
Weighted average shares outstanding 16,598,444
</TABLE>
F-4
<PAGE>
EUniverse, Inc.
Notes to pro forma financial statements
Balance Sheet, December 31, 1999
1) To record acquisition of Falcon Ventures Corporation for a purchase price of
$1,782,500. Liabilities assumed exceed fair value of assets acquired by
$46,074, resulting in goodwill of $1,828,574 being recorded in the financial
statements.
2) To record acquisition of certain assets of Pokemon Village for a purchase
price of $417,610. The purchase price has been allocated as follows:
Receivables, $18,512; Domain Names, $90,000; Goodwill, $309,098.
3) To record acquisition of the assets of Just Say Wow for a purchase price of
$300,000. The purchase price is being paid $200,000 at closing in cash and
stock and $100,000 in cash over the next ten months. The purchase price has
been allocated as follows: Receivables, $33,164; Fixed Assets, $2,456;
Domain Names, $75,000; Goodwill, $189,380.
Income Statement, nine months ended December 31, 1999
4) To record the activity of Gamers Alliance, Inc for the period from April 1
through June 30, 1999, the date of the acquisition.
5) To record the activity of Cases Ladder, Inc. for the period from April 1
through May 31, 1999, the date of acquisition.
6) To record the activity of The Big Network, Inc. for the period from April 1
through August 31, 1999, the date of acquisition.
7) To reflect amortization of goodwill as if the acquisitions had been
consummated at the beginning of the period. Goodwill is being amortized
over ten years from the date of acquisition using the straight line method.
8) To reflect amortization of customer lists as if the acquisitions had been
consummated at the beginning of the six month period. Customer lists are
being amortized over three years from the date of acquisition using the
straight line method.
9) To reflect amortization of domain names as if the acquisitions had been
consummated at the beginning of the six month period. Domain names are
being amortized over ten years from the date of acquisition using the
straight line method.
10) To adjust outstanding shares as if the acquisitions had been consummated at
the beginning of the six month period and the shares issued pursuant to
the acquisitions were outstanding for the entire period.
Income Statement, twelve months ended March 31, 1999
11) To reflect activity of Falcon Ventures Corporation for the period February
25 to March 31, 1999.
12) To reflect amortization of goodwill as if the acquisitions had been
consummated at the beginning of the twelve month period. Goodwill is being
amortized over ten years using the straight line method.
13) To reflect amortization of customer lists as if the acquisitions had been
consummated at the beginning of the twelve month period. Customer lists
are being amortized over three years using the straight line method.
14) To reflect amortization of domain names as if the acquisitions had been
consummated at the beginning of the twelve month period. Domain names are
being amortized over ten years using the straight line method.
15) To record minority interest in loss of The Big Network, Inc.
16) To adjust outstanding shares as if the acquisitions had been consummated at
the beginning of the fiscal year presented and the shares issued pursuant
to the acquisitions were outstanding for the entire year. Total pro forma
weighted average shares outstanding on completed acquisitions is computed
as follows:
<TABLE>
<S> <C>
Entertainment Universe shares outstanding at March 31, 1999 10,050,000
Shares retained by former MCA shareholders 1,200,993
Shares issued for CD Universe 2,425,000
Shares issued for Cases Ladder 700,000
Shares issued for Gamers Alliance 78,125
Shares issued for The Big Network 1,440,000
Shares issued for eUniverse Website 15,000
Shares issued for services in connection with stock offerings 319,000
Shares issued for Falcon Ventures Corporation 310,000
Shares issued for Pokemon Village 48,630
Shares issued for Just Say Wow 11,696
----------
16,598,444
==========
</TABLE>
F-5
<PAGE>
eUNIVERSE, INC.
Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
| CD Universe CD Universe
December 31, | March 31, March 31,
1999 | 1999 1998
------------ | ------------- -------------
Unaudited |
<S> <C> | <C> <C>
ASSETS |
CURRENT ASSETS |
Cash and cash equivalents................................... $ 891,305 | $ 11,335 $ 267,214
Accounts receivable, net of allowances for |
doubtful accounts of $46,800 and $0, respectively....... 602,610 | 92,938 -
Inventory.................................................. 111,412 | 22,647 23,877
Due from Officers.......................................... - | 157,569 1,000
Due from employees......................................... 158,555 | - -
Prepaid expenses and other current assets ................. 110,479 | 9,629 43,031
------------ | ------------- -------------
Total Current Assets 1,874,361 | 294,118 335,122
|
FURNITURE AND EQUIPMENT, less accumulated depreciation |
of $205,123, $83,052, and $36,900 respectively ............. 590,865 | 225,718 158,362
|
GOODWILL, net of amortization of $1,489,387...................... 25,709,813 | - -
|
OTHER INTANGIBLES, net of amortization of $107,894, |
$340, and $170, respectively................................. 708,143 | 510 680
|
Other Assets..................................................... 129,125 | - -
------------ | ------------- -------------
|
TOTAL ASSETS $ 29,012,307 | $ 520,346 $ 494,164
============ | ============= =============
|
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) |
CURRENT LIABILITIES |
Accounts payable............................................ $ 1,576,222 | $ 828,718 $ 435,015
Accrued liabilities......................................... 518,059 | 113,604 99,566
Accrued Advertising......................................... 210,299 |
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 2,315,665 | 1,077,322 644,976
------------ | ------------- -------------
|
CURRENT LIABILITIES |
Long-term portion of lease obligations ..................... 2,596 | - -
|
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; 16,291,744 issued and outstanding............. 16,292 | 1,000 1,000
Additional paid-in capital.................................. 32,851,106 | - -
Deferred stock compensation cost............................ (41,127) | - -
Retained deficit............................................ (6,311,727) | (557,976) (151,812)
------------ | ------------- -------------
Total Shareholders' Equity 26,694,046 | (556,976) (150,812)
------------ | ------------- -------------
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 29,012,307 | $ 520,346 $ 494,164
============ | ============= =============
</TABLE>
See accompanying notes to the financial statements
F-6
<PAGE>
eUNIVERSE, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------------- --------------------------
1999 | 1998 1999 | 1998
-------------- | ------------- ------------ | ------------
| CD Universe | CD Universe
<S> <C> | <C> <C> | <C>
REVENUE: | |
Products....................................... $ 2,591,193 | $ 2,571,898 $ 6,140,928 | $ 6,871,342
Services....................................... 479,719 | - 809,841 | -
-------------- | ------------- ------------ | ------------
| |
TOTAL REVENUE 3,070,912 | 2,571,898 6,950,769 | 6,871,342
| |
COST OF GOODS SOLD | |
Products....................................... 2,199,369 | 2,209,637 5,213,818 | 5,798,313
Services....................................... (7,689)| - 14,431 | -
-------------- | ------------- ------------ | ------------
| |
TOTAL COST OF GOODS SOLD 2,191,680 | 2,209,637 5,228,249 | 5,798,313
| |
GROSS PROFIT | |
Products....................................... 391,824 | 362,261 927,110 | 1,073,029
Services....................................... 487,408 | - 795,410 | -
-------------- | ------------- ------------ | ------------
| |
TOTAL GROSS PROFIT 879,232 | 362,261 1,722,520 | 1,073,029
| |
OPERATING EXPENSES: | |
Marketing and sales (excludes stock-based | |
compensation of $107,236, $0, $144,842 | |
and $0, respectively)........................ 1,101,004 | 373,094 2,123,186 | 897,655
Product development (excludes stock-based | |
compensation of $(30,183), $0, $13,341 | |
and $0, respectively)........................ 725,621 | 90,030 1,221,499 | 246,844
General and administrative (excludes | |
stock-based compensation of $1,710, $0, | |
$3,705 and $0 respectively................... 1,317,889 | 16,548 3,004,888 | 198,284
Amortization of goodwill | |
and other intangibles........................ 681,413 | 292 1,596,622 | 376
Stock-based compensation....................... 78,763 | - 161,888 | -
-------------- | ------------- ------------ | ------------
TOTAL OPERATING EXPENSES........................... 3,904,690 | 479,964 8,108,083 | 1,343,159
-------------- | ------------- ------------ | ------------
OPERATING LOSS (3,025,458)| (117,703) (6,385,563) | (270,130)
| |
NONOPERATING INCOME (EXPENSE) | |
Interest and dividend income................... 18,757 | 85 57,753 | 395
Interest expense............................... - | - (355) | -
Loss allocated to minority interest............ - | - 16,438 | -
-------------- | ------------- ------------ | ------------
LOSS BEFORE INCOME TAXES (3,006,701)| (117,618) (6,311,727) | (269,735)
| |
INCOME TAXES ...................................... - | - - | -
-------------- | ------------- ------------ | ------------
NET LOSS $ (3,006,701)| $ (117,618) $ (6,311,727) | $ (269,735)
============== | ============= ============ | ============
| |
| |
Basic loss per common share........................ $ (0.18)| N/A $ (0.42) | N/A
============== | ============= ============ | ============
| |
Basic weighted average common | |
shares outstanding................................ 16,272,384 | N/A 15,149,505 | N/A
============== | ============= ============ | ============
</TABLE>
See accompanying notes to the financial statements
F-7
<PAGE>
eUNIVERSE, INC.
Statements of Cash flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
--------------------------
1999 | 1998
---- | ----
| CD Universe
<S> <C> | <C>
OPERATING ACTIVITIES |
Net income (loss).............................. $(6,311,727) | $(269,735)
|
Transactions not requiring cash: |
Depreciation................................ 84,910 | 34,614
Amortization................................ 1,596,622 | 376
Bad Debt Reserve............................ 27,625 |
Common stock issued to employees ........... 161,888 |
Common stock issued to outside consultants.. 62,874 | -
Common stock issued to |
outside consultants..................... 79,872 |
Non-cash interest income.................... (5,355) |
Loss allocated to minority interest......... (16,438) |
Changes in current assets...................... (817,639) | 7,871
Changes in other assets........................ (117,900) |
Changes in current liabilities................. 1,198,519 | 68,068
----------- | ---------
NET CASH USED IN OPERATING ACTIVITIES (4,056,749) | (158,806)
----------- | ---------
INVESTING ACTIVITIES |
Acquisitions................................... (1,915,000) | -
Proceeds through acquisitions.................. 136,419 | -
Proceeds through reverse acquisition........... 858,477 |
Purchases of fixed assets...................... (321,470) | (41,364)
Repayment of advances from officers............ (105,000) | -
Advance to Officers............................ - | (118,119)
Receipt of advances to officers................ 157,769 | -
Advances made to Employees..................... (153,200) | -
----------- | ---------
NET CASH USED IN INVESTING ACTIVITIES (1,342,005) | (159,483)
----------- | ---------
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................ 879,970 | (318,289)
Cash and cash equivalents, |
beginning of period............................... 11,335 | 267,214
----------- | ---------
CASH AND CASH EQUIVALENTS |
AT END OF PERIOD............................... $ 891,305 | $ (51,075)
=========== | =========
</TABLE>
See accompanying notes to the financial statements
F-8
<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
Additional shares issued for
services....................... - - 9,129 9 52,865 52,874
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
Cases Ladder, Inc.............. - - 700,000 700 6,999,300 7,000,000
Stock options issued in connection
with acquisition of Cases
Ladder, Inc.................... - - - - 1,111,100 1,111,100
Stock options issued in connection
with services performed........ - - - - 1,000 1,000
New stock options issued in
connection with services
performed...................... - - - - 79,872 79,872
Fair Value of the warrants issued. - - - - 1,214,567 1,214,567
Shares issued in acquisition of
Gamers Alliance, Inc........... - - 78,125 78 999,922 1,000,000
Additional Shares issued in
acquisition of Gamers
Alliance, Inc.................. - - 8,789 9 112,490 112,499
Shares issued to employees of CD
Universe as compensation
expense........................ - - 25,000 25 237,475 (237,500) -
Shares issued and cancelled to
employees of CD Universe as
compensation expense........... - - (12,630) (13) (119,972) 119,985 -
Amortization of deferred stock
compensation................... - - - - - 76,388 76,388
Shares issued in acquisition of
The Big Network, Inc........... - 1,440,000 1,440 8,818,560 8,820,000
Shares issued in acquisition of
FunOne.com..................... - - 8,733 9 49,991 50,000
Net loss for the nine months ended
December 31, 1999............... - - - - - (6,311,727) (6,311,727)
--------- --------- ----------- --------- ----------- ---------- ---------- -----------
BALANCE, December 31, 1999 1,795,024 $ 179,502 16,291,744 $ 16,292 $32,851,106 $ (41,127) $(6,311,727 $26,694,046
========= ========= =========== ========= =========== ========== ========== ===========
</TABLE>
F-9
<PAGE>
eUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 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. These financial
statements also include the accounts of The Big Network, Inc., 80% of which was
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 December 31, 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 nine months ended
December 31, 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
F-10
<PAGE>
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. 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:
Leasehold improvements...................................... 3 years
Computer equipment.......................................... 5 years
Telephone equipment......................................... 5 years
Furniture, fixtures and other............................... 10 years
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
F-11
<PAGE>
the facts and circumstances suggest that they may be impaired. Negative
operating results and negative cash flows from operations, 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. 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
F-12
<PAGE>
During the nine months ended December 31, 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 acquisition 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 $1,112,150, which have been added to the acquisition price.
Of this amount, $1,111,100 is attributable to 400,000 options issued
(subsequently repriced) for services rendered. 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. The
Black-Scholes option-pricing model with a risk free interest rate of 5.86%, an
annualized volatility of 78%, no expected dividend yield and an exercise term of
three years was used to estimate the fair value of these options ($1,111,100).
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. On December 17, 1999, an additional
8,789 of such shares valued at $12.80 per share (the market price on acquisition
date) were issued. 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.
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).
F-13
<PAGE>
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 7,888,855 1,035,791 8,817,374
---------- ---------- ---------- ----------
$9,250,215 $8,112,150 $1,139,386 $8,907,124
========== ========== ========== ==========
</TABLE>
Total goodwill recorded through the acquisitions is $27,199,210 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
NINE MONTHS ENDING
DECEMBER 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Revenue............................................ $ 7,150,063 $ 7,023,389
Net loss........................................... (7,270,495) (2,008,724)
Loss per share..................................... (.48) (.13)
</TABLE>
(5) OTHER NON-CASH FINANCIAL ACTIVITIES
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................................ 1,111,100
Acquisition Gamer's Alliance........................... 1,112,499
Acquisition of eUniverse.com website(1)................ 60,000
Acquisition of MegaDVD(1).............................. 52,500
Acquisition of FunOne.com(1)........................... 50,000
Stock options issued in connection with services
performed................................................. 80,872
Stock issued in connection with the preferred stock
offering, 319,000 shares(2)............................... 159,500
F-14
<PAGE>
Stock issued in connection with services performed, 20,000
shares(2)................................................. 10,000
Stock issued in connection with services performed, 9,129
shares(2)................................................. 52,874
Stock issued to employees of CD Universe 12,370 shares...... 117,515
(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).
Acquisition of FunOne.com website was accomplished on October 1, 1999,
through issuance of 8,733 shares of common stock valued at $5.73 per
share(market price onclosing date). The Company also incurred direct costs
related to this acquisition totaling $3,564, which have been added to the
acquisition price. Additional payments of up to $300,000 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.
These additional payments will be recorded as stock based compensation by
the Company.
(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.
Moreover, 9,129 shares were issued in the third quarter, 1999 for various
public relations consulting services.
Additionally, 12,370 shares of common stock are issued to key employees of
CD Universe, Inc. currently employed by the company 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>
December 31, 1999 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
Furniture and fixture................................. $ 40,993 $ 29,069
Computers and equipment............................... 646,829 238,622
Purchased Software.................................... 59,623 1,079
Leasehold Improvements................................ 48,543 40,000
-------- --------
795,988 308,770
Less accumulated depreciation and amortization........ 205,123 83,052
-------- --------
Fixed assets, Net................................ $590,865 $225,718
======== ========
</TABLE>
F-15
<PAGE>
Depreciation expense for the reporting period were as follows:
<TABLE>
<CAPTION>
Three Months Nine Monhts
Ended Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Depreciation expense............ .............. $34,631 $11,538 $84,909 $34,614
</TABLE>
(8) OTHER INTANGIBLES
Other Intangibles primarily consists of purchase price of web sites
acquired:
<TABLE>
<CAPTION>
December 31, 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
FunOne.com............................................ 53,564
Customer list -- CD Universe, Inc. ................... 250,000
Customer list -- Cases Ladder, Inc. .................. 100,000
Other................................................. 10,973 850
-------- ----
816,037 850
Less accumulated amortization......................... 107,894 340
-------- ----
Other Intangible, Net................................. $697,356 $510
======== ====
</TABLE>
The above Web sites and customer lists are valued at their fair value based
on management's 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 December 31, 1999
was $1,596,622.
(9) INCOME TAXES
The components of the provision for income taxes for the nine months period
ended December 31, 1999 and 1998 are as follows:
1999 1998
---- ----
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.......... $ -- $ --
======== ========
F-16
<PAGE>
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
1999 1998
---- ----
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%
==== ====
(10) MAJOR VENDOR
Traditionally, the Company have purchased approximately 90% of its
merchandise from one vendor. The Company is in process of diversifying its
sources for product procurement. As of December 31, 1999, three major vendors
were owed a total of $977,000, distributed almost evenly, which are being paid
through February 2000.
(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 nine months ended December 31, 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:
MARCH 31,
--------
2000...................................................... $ 91,500
2001...................................................... 183,900
2002...................................................... 175,050
2003...................................................... 16,950
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 20, 1999, the parties reached agreement in
F-17
<PAGE>
mediation providing for the former employee of TBN to receive the equivalent of
an additional 55,000 shares of TBN stock. This settlement does not affect the
aggregate number of shares to be issued by the Company (1,800,000) in exchange
for all of the outstanding stock of TBN. This lawsuit was dismissed on March 7,
2000.
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. During the quarter
ended December 31, 1999, employees holding 12,630 stock certificates left the
company and their shares were cancelled. At December 31, 1999, 12,370 of these
shares remain outstanding.
Additionally shares totaling $25,500 and $60,000 are to be issued to the
principals of MegaDVD and FunOne.com as compensation for achieving performance
targets. The related compensation expense of these shares has been accrued in
the December 31, 1999 balance sheet.
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 Nine Months
Ended Ended
December 31, December 31,
----------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Marketing and Sales............................. $107,236 $ -- $144,842 $ --
Product Development............................. (30,183) -- 13,341 --
General and Administrative...................... 1,710 -- 3,705 --
------- ------- ------- -------
Total stock based compensation............. $ 78,763 $ -- $161,888 $ --
======= ======= ======= =======
</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 nine
months ended December 31, 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............................................... 4,659,750 $3.00-13.00 $7.00
Cancelled............................................. (2,069,450) 6.00-11.40 9.51
Reissued.............................................. 1,642,200 6.00 6.00
Exercised............................................. --
Forfeited............................................. --
---------- --------------- -----
Outstanding at 12-31-1999............................. 4,232,500 $3.00-13.00 $5.38
---------- --------------- -----
Options exercisable at 12-31-1999..................... 375,833 $3.00-13.00 $4.56
---------- --------------- -----
</TABLE>
F-18
<PAGE>
Weighted average of remaining life of the options is 31 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 valued
$1,111,100 using the Black-Scholes option pricing model and have been included
as part of the acquisition cost. Moreover, 95,000 options with exercise prices
ranging from $6.00 to $13.00 Have been granted to three firms for investor
relation and consulting services. These options have been recorded pursuant to
SFAS 123 based on the fair market value of the equity instrument issued.
The Company uses the intrinsic value method (APB Opinion 25) to account for
its stock options granted to officers, directors, and 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 to employees
has been recorded.
Had the Company chosen the fair value method of accounting for transactions
involving stock option issuance (SFAS No. 123), the Company would have recorded
an additional $1,119,805 in compensation cost for the nine months ended December
31, 1999 as presented by the pro forma statement below:
<TABLE>
<CAPTION>
Nine Months
Ended
December 31,
1999
----
<S> <C>
Net loss as reported........................................ $(6,311,727)
-----------
Pro forma net loss.......................................... $(7,431,532)
-----------
Net loss per common share................................... $ (0.42)
-----------
Pro forma loss per share.................................... $ (0.49)
-----------
</TABLE>
The Black-Scholes option-pricing model with a risk free interest rate
ranging from 4.5% to 6.125%, a weighted average volatility of 78%, 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 12-31-1999........................ 671,865 $ 2.75-2.75
------- --------------
Options exercisable at 12-31-1999................ 400,000 $2.75
------- --------------
</TABLE>
F-19
<PAGE>
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. Our preferred stockholders have agreed to delay
conversion of their shares of preferred stock until August 15, 2000.
The shares of preferred stock have a liquidation preference of $3.60 per
share, which increases at a rate of 6% per annum. Each share of preferred stock
may be converted to common stock at an initial rate of one share of common stock
for each $3.60 of liquidation preference. If the common stock's market price at
the time of conversion is less than $3.60 per share, the conversion rate is
determined by reference to such lower price. Because of the variable conversion
rate and the 6% accretion factor, each share of preferred stock may be converted
into greater than one share of common stock. Prior to any conversion, the
conversion price is adjusted to account for any increase or decrease in the
number of outstanding shares of common stock by 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 December 31, 1999. There were no identifiable reportable segments during
the similar period last year.
F-20
<PAGE>
<TABLE>
<CAPTION>
PRODUCT SERVICES CORPORATE TOTAL
------- -------- --------- -----
(000'S)
<S> <C> <C> <C> <C>
Revenue................................................. $ 6,141 $ 810 $ -- $ 6,951
Operating loss.......................................... (2,365) (1,829) (2,191) (6,385)
Interest income......................................... 57 57
Minority interest....................................... 16 16
------- ------- ------- -------
Pre tax loss............................................ (2,365) (1,813) (2,134) (6,312)
Net loss................................................ (2,365) (1,813) (2,134) (6,312)
Assets.................................................. 10,029 17,903 1,080 29,012
Depreciation and amortization........................... 801 869 11 966
Fixed assets additions.................................. 220 90 12 322
</TABLE>
Significant reconciling items in the corporate columns are as follows:
Operating loss: Professional fees $660; Compensation $449; Consulting $227;
Investor and public relations $508.
Assets: Cash $680; Loans $156; Prepaid Expense $58; and Deposits $116.
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
THEFT OF CUSTOMER DATA FROM CD UNIVERSE
The Company was contacted in late December 1999 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. We have
been cooperating with the FBI and other law enforcement officials to discover
the extent to which our data may have been compromised and to identify the
extortionist and limit any damage to the Company's customers.
CD Universe has approximately 300,000 registered customers. Apart from
claims made by the perpetrator and the minimal information on card data
released, we cannot yet determine when or how the data was taken or the extent
of the theft. For the purpose of our response to the theft, we have assumed that
all customers may have been affected and have taken steps to mitigate our
customers' exposure and inconvenience.
Upon learning on January 8, 2000 that customer data had been posted on the
Internet, the Company took several steps to secure its customer data. We
notified the credit card issuers of the theft and provided them with the data
they need to take corrective actions with their card members. We have also sent
e-mail messages to our customers to notify them of the risk that their credit
card data may have been stolen and advise them that they should closely monitor
their accounts. We also suggested that they might wish to have their cards
reissued for additional protection. Similar information and suggestions are
being given to customers who call our support staff.
Information regarding this theft of data 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. As a result of the theft of data, there may be some adverse impact on
our customer base. There may be a loss of confidence and loyalty in CD Universe
directly and there may be a broader loss of confidence and loyalty in eUniverse,
its e-commerce business and its brand identity. More generally, e-commerce as a
whole could be adversely affected. The Company cannot yet predict the impact, if
any, on its sales and operating results. However, we are developing marketing
and customer relations programs to win back our customers' confidence following
the implementation of our additional security enhancements.
The Company may be required to defend against lawsuits related to 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. Such
lawsuits could include suits by the Company's shareholders, customers and credit
card processor and by credit card issuers and third-party merchants that accept
the fraudulently obtained credit card information. The Company has maintained
directors and officers' liability insurance and general liability insurance but
is unable to determine whether such insurance would adequately cover any
liability or expenses associated with potential lawsuits.
ACQUISITION OF FALCON VENTURES CORPORATION
In an arms length transaction between unrelated parties, as of February 2, 2000,
the Company acquired all of the outstanding capital stock of Falcon Ventures
Corporation ("Falcon") from Take-Two Interactive Software, Inc. ("T2"), an
unaffiliated third party, in exchange for 310,000 shares of the Company's
common stock. The consideration paid was based upon negotiations between the
parties to determine the value of the Falcon's shares and the shares issued.
Falcon is an online retailer of DVDs through the web site dvdwave.com.
F-21
<PAGE>
Falcon is an online retailer of DVD movies, music CDs and VHS movies
through its Web site at DVDwave.com. Falcon was incorporated on November 4, 1998
in California. As of February 25, 1999, T2 acquired all of the issued and
outstanding stock of Falcon in exchange for 50,000 shares of T2 common stock.
The fair market value of the transaction was $506,250, which was determined in
an arms length negotiation between unrelated parties. Falcon has significant
liabilities of $1,100,000 consisting of $500,000 in accounts payable which are
ordinary and consistent with Falcon's line of business and $600,000 in loans due
to T2. The loans from T2 will not be assumed by the Company.
ACQUISITION OF ASSETS OF D. SCOTT SMITH D/B/A POKEMONVILLAGE.COM AND QUAKE CITY
GAMING NETWORK
On February 1, 2000, The Company completed its acquisition of
Pokemonvillage.com, a network of network of Generation Y (ages 10-20) focused
sites. Domain names included in this transaction include Pokemonvillage.com,
Forumnation.com, and Reverseauction.com. Pokemonvillage.com, with over 370,000
unique visitors in December 1999, as reported by Media Matrix, is one of the
largest online communities for enthusiasts of Pokemon, computer/video games, and
other collectables. Forumnation.com is youth focused web site allowing the users
to discuss a variety of subjects such as music, comics, and games that is of
interest to them. ReverseAuction.com site allows the owners of Pokemon cards,
comics, and other collectibles to meet and auction off their items. The purchase
price of this transaction was $250,000 payable in shares of the Company common
stock. Additional payments of $190,000 in cash and $450,000 in stock options may
be payable upon achievement of targeted numbers of banner advertisements
displayed on the web pages of the Pokemonvillage.com and its related web sites
through August 1, 2001. The former owner of Pokemonvillage.com is currently
employed by the company and any additional earnings through the achievement of
targeted goals will be treated as compensation expense in the period earned.
F-22
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent auditors' report................................ F-24
Balance sheets, March 31, 1999 and December 31, 1998 and
1997...................................................... F-25
Statements of operations, for the three months ended
March 31, 1999, the years ended December 31, 1998, 1997
and 1996 and the three months ended March 31, 1998
(unaudited)............................................... F-26
Statement of shareholders' equity (deficit), for the period
from January 1, 1996 through March 31, 1999............... F-27
Statements of cash flows, for the three months ended
March 31, 1999, the years ended December 31, 1998, 1997
and 1996 and the three months ended March 31, 1998
(unaudited)............................................... F-28
Summary of significant accounting policies.................. F-29
Notes to financial statements............................... F-31
</TABLE>
F-23
<PAGE>
<TABLE>
<S> <C>
Cordovano and Harvey, P.C. Certified Public Accountants
201 Steele Street
Suite 300
Denver, Colorado 80206
(303) 329-0220 Phone
(303) 316-7493 Fax
</TABLE>
To the Board of Directors and Shareholders
MOTORCYCLE CENTERS OF AMERICA, INC.
INDEPENDENT AUDITORS' REPORT
We have audited the balance sheets of Motorcycle Centers of America, Inc.
as of March 31, 1999 and December 31, 1998 and 1997, and the related statements
of operations, shareholders' equity (deficit) and cash flows for the three
months ended March 31, 1999 and for the years ended December 31, 1998, 1997 and
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Motorcycle Centers of
America, Inc. as of March 31, 1999 and December 31, 1998 and 1997, and the
results of its operations and its cash flows for the three months ended
March 31, 1999 and for the years ended December 31, 1998, 1997 and 1996, in
conformity with generally accepted accounting principles.
As discussed to Note J to the financial statements, on April 9, 1999, the
Company entered into an Agreement and Plan of Reorganization with Entertainment
Universe, Inc. (EUI). As a result of the reorganization, EUI became a wholly
owned subsidiary of the Company and the former shareholders of EUI own
approximately 91.6 percent of the Company.
CORDOVANO AND HARVEY, P.C.
June 3, 1999
F-24
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
MARCH 31, ------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents..................... $ 101,568 $ 887 $ 12,071
Marketable securities (Note C)................ -- 8,000 58,000
------------ ------------ -----------
Total current assets..................... 101,568 8,887 70,071
Furniture and equipment, less accumulated
depreciation of $2,792, $2,667 and $1,944,
respectively (Note D)............................ 708 833 1,556
------------ ------------ -----------
$ 102,276 $ 9,720 $ 71,627
============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.............................. $ -- $ 1,497 $ 918
Accrued liabilities........................... 7,000 367,390 8,320
Due to officer (Note B)....................... 66,300 11,139,771 5,546,667
------------ ------------ -----------
Total current liabilities................ 73,300 11,508,658 5,555,905
------------ ------------ -----------
Commitment and contingency (Note G)................ -- -- --
Shareholders' equity (deficit) (Note F)
Preferred stock, $.10 par value; 40,000,000
shares authorized; -0- and -0- shares issued
and outstanding, respectively............... -- -- --
Common stock, $.001 par value; 250,000,000
shares authorized; 2,148,098, 70,098 and
52,905 shares issued and outstanding,
respectively................................ 2,148 70 53
Additional paid-in capital.................... 12,975,456 103,814 111,127
Deferred offering costs....................... (5,734) (5,734) --
Retained deficit.............................. (12,942,894) (11,597,088) (5,595,458)
------------ ------------ -----------
Total shareholders equity (deficit)...... 28,976 (11,498,938) (5,484,278)
------------ ------------ -----------
$ 102,276 $ 9,720 $ 71,627
============ ============ ===========
</TABLE>
See accompanying summary of significant accounting policies and
notes to the financial statements.
F-25
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
ENDED YEARS ENDED DECEMBER 31, ENDED
MARCH 31, --------------------------------------- MARCH 31,
1999 1998 1997 1996 1998
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Costs and expenses
Occupancy................. $ 1,398 $ 5,256 $ 7,542 $ 6,275 $ 1,314
Consulting, related
parties (consisting
entirely of stock based
compensation;
Note B)................. 1,419,996 5,898,737 5,554,987 -- 988,331
Consulting................ 2,936 -- 9,000 -- --
Legal and accounting...... -- 16,495 5,350 2,500 2,000
Stock transfer fees....... 50 2,180 1,593 864 --
Brokerage charges......... 3,721 -- 1,213 2,397 15
Office.................... 2,158 6,991 1,419 3,210 920
Depreciation.............. 125 722 833 833 181
Earnest money paid in
failed merger (Note
H)...................... -- 10,000 -- -- --
Other..................... 26 3,959 89 1,525 833
----------- ----------- ----------- ----------- -----------
Operating loss....... (1,430,409) (5,944,340) (5,582,026) (17,604) (993,594)
----------- ----------- ----------- ----------- -----------
Nonoperating income (expense)
Interest and dividend
income.................. 530 150 63 1,531 15
Interest expense.......... -- -- (87) (904) --
Trading gains and
(losses), net
(Note C)................ 84,073 (57,440) 19,337 (7,988) (56,845)
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes........................ (1,345,806) (6,001,630) (5,562,713) (24,965) (1,050,424)
Income taxes Note E)........... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss............. $(1,345,806) $(6,001,630) $(5,562,713) $ (24,965) $(1,050,424)
=========== =========== =========== =========== ============
Basic income (loss) per common
share........................ $ (14.19) $ (85.94) $ (380.83) $ (3.73) $ (17.76)
=========== =========== =========== =========== ============
Basic weighted average common
shares outstanding........... 94,854 69,833 14,607 6,690 59,155
====== ====== ====== ===== ======
</TABLE>
See accompanying summary of significant accounting policies and
notes to the financial statements.
F-26
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
JANUARY 1, 1996 THROUGH MARCH 31, 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL DEFERRED
------------------ --------------------- ---------------- PAID-IN OFFERING
SHARES PAR VALUE SHARES PAR VALUE SHARES AMOUNT CAPITAL COSTS
------ --------- ------ --------- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996..... -- $-- 5,405* $ 5 15* $(9,750) $ 106,412
Sale of treasury stock
(Note F)................... -- -- -- -- (8)* 4,875 (1,500) $ --
Purchase of treasury stock
(Note F)................... -- -- -- -- 8* (3,375) --
Sale of treasury stock
(Note F)................... -- -- -- -- (13)* 7,125 (875)
Net loss..................... -- -- -- -- -- -- --
--- ---- --------- ------ ---- ------- ----------- -------
Balance, December 31, 1996... -- -- 5,405* 5 2* (1,125) 104,037 --
Treasury stock contributed by
officer (Notes B & F)...... -- -- -- -- 3* (2,600) -- --
Sale of treasury stock
(Note F)................... -- -- -- -- (5)* 3,725 (2,362) --
Sale of common stock......... -- -- 47,500* 48 -- -- 9,452 --
Net loss..................... -- -- -- -- -- -- -- --
--- ---- --------- ------ ---- ------- ----------- -------
Balance, December 31, 1997... -- -- 52,905* 53 -- -- 111,127 --
Sale of common stock......... -- -- 18,750* 19 -- -- 3,731 --
Repurchase common stock,
subsequently cancelled..... -- -- (1,557)* (2) -- -- (11,044) --
Deferred offering costs...... -- -- -- -- -- -- -- (5,734)
Net loss..................... -- -- -- -- -- -- -- --
--- ---- --------- ------ ---- ------- ----------- -------
Balance December 31, 1998.... -- -- 70,098 70 -- -- 103,814 (5,734)
Common stock issued for
services (Note F).......... -- -- 2,078,000 2,078 -- -- 12,871,642 --
Net loss for the three months
ended March 31, 1999....... -- -- -- -- -- -- -- --
--- ---- --------- ------ ---- ------- ----------- -------
Balance, March 31, 1999...... -- $-- 2,148,098 $2,148 -- $ -- $12,975,456 $(5,734)
=== ==== ========= ====== ==== ======= =========== =======
<CAPTION>
RETAINED
DEFICIT TOTAL
------- -----
<S> <C> <C>
Balance, January 1, 1996..... $ (7,780) $ 88,887
Sale of treasury stock
(Note F)................... -- 3,375
Purchase of treasury stock
(Note F)................... -- (3,375)
Sale of treasury stock
(Note F)................... -- 6,250
Net loss..................... (24,965) (24,965)
------------ ------------
Balance, December 31, 1996... (32,745) 70,172
Treasury stock contributed by
officer (Notes B & F)...... -- (2,600)
Sale of treasury stock
(Note F)................... -- 1,363
Sale of common stock......... -- 9,500
Net loss..................... (5,562,713) (5,562,713)
------------ ------------
Balance, December 31, 1997... (5,595,458) (5,484,278)
Sale of common stock......... -- 3,750
Repurchase common stock,
subsequently cancelled..... -- (11,046)
Deferred offering costs...... -- (5,734)
Net loss..................... (6,001,630) (6,001,630)
------------ ------------
Balance December 31, 1998.... (11,597,088) (11,498,938)
Common stock issued for
services (Note F).......... -- 12,873,720
Net loss for the three months
ended March 31, 1999....... (1,345,806) (1,345,806)
------------ ------------
Balance, March 31, 1999...... $(12,942,894) $ 28,976
============ ============
</TABLE>
- ------------
* Restated for 1 for 20 reverse splits (Note F)
See accompanying summary of significant accounting policies and
notes to the financial statements.
F-27
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
ENDED YEARS ENDED DECEMBER 31, ENDED
MARCH 31, ------------------------------------- MARCH 31,
1999 1998 1997 1996 1998
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss)...................... $ (1,345,806) $(6,001,630) $(5,562,713) $ (24,965) $(1,050,424)
Transactions not requiring cash:
Depreciation........................ 125 723 833 833 181
Common stock issued for services.... 12,873,720 -- -- -- --
Unrealized (gains) losses on
marketable securities, net........ (84,074) 57,440 (5,775) 5,625 56,845
Changes in current assets and current
liabilities:
Purchases of marketable
securities........................ -- (8,000) (31,188) (32,438) --
Proceeds from sale of marketable
securities........................ 92,074 561 32,313 50,163 --
Accounts payable and accrued
expenses.......................... (11,455,221) 5,906,315 5,550,077 1,971 987,413
------------ ----------- ----------- --------- -----------
Net cash provided by (used in)
operating activities........... 80,818 (44,591) (16,453) 1,189 (5,985)
------------ ----------- ----------- --------- -----------
Investing Activities
Repayment of advances to former officer
(Note B)............................ (5,137) (68,563) (23,150) (14,300) (9,000)
Advances from former officer (Note
B).................................. 25,000 115,000 48,080 6,975 --
------------ ----------- ----------- --------- -----------
Net cash provided by (used in)
investing activities........... 19,863 46,437 24,930 (7,325) (9,000)
------------ ----------- ----------- --------- -----------
Financing activities
Purchases of treasury stock............ -- (11,046) (2,600) (3,375) --
Proceeds from sale of treasury stock... -- -- 1,363 9,625 --
Payments for deferred offering costs... -- (5,734) -- -- --
Proceeds from issuance of common
stock............................... -- 3,750 9,500 -- 3,750
Principal payments on notes payable.... -- -- (5,000) -- --
------------ ----------- ----------- --------- -----------
Net cash provided by (used in)
financing activities........... -- (13,030) 3,263 6,250 3,750
------------ ----------- ----------- --------- -----------
Change in cash and cash equivalents...... 100,681 (11,184) 11,740 114 (11,235)
Cash and cash equivalents, beginning of
period................................. 887 12,071 331 217 12,071
------------ ----------- ----------- --------- -----------
Cash and cash equivalents at end of
period................................. $ 101,568 $ 887 $ 12,071 $ 331 $ 836
============ =========== =========== ========= ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid for:
Interest............................... $ -- $ -- $ 874 $ 454 $ --
------------ ----------- ----------- --------- -----------
Income taxes........................... $ -- $ -- $ -- $ -- $ --
============ =========== =========== ========= ===========
Noncash investing and financing
transactions:
Receipt of investments as payment for
advances (Note B)................... $ -- $ -- $ 46,600 $ -- $ --
============ =========== =========== ========= ===========
Treasury stock subsequently
cancelled........................... $ -- $ 11,046 $ -- $ -- $ --
============ =========== =========== ========= ===========
</TABLE>
See accompanying summary of significant accounting policies and
notes to the financial statements.
F-28
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MARCH 31, 1999
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities consist of various equity securities and are stated
at current market value. All equity securities are considered 'trading'
securities under the provisions of Statement of Financial Accounting Standards
No. 115, 'Accounting for Certain Investments in Debt and Equity Securities'.
Accordingly, unrealized gains and losses on equity securities are reflected in
the accompanying statements of operations.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost and are depreciated using the
straight-line method over the useful lives of the assets, beginning at the time
the assets are placed into operation. Furniture and equipment are depreciated
over estimated useful lives of five years and three years, respectively.
Upon retirement or disposition of the furniture and equipment, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations. Repairs and maintenance are charged to expense
as incurred and expenditures for additions and improvements are capitalized.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the recorded book basis and tax basis
of assets and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future federal income taxes.
TREASURY STOCK
The Company accounts for purchases and reissuances of treasury stock using
the cost method. Under the cost method, each acquisition of treasury stock is
accounted for at cost. Upon the sale or disposition, the treasury stock account
is reduced for an amount equal to the number of shares sold, multiplied by the
cost per share. The difference is treated as paid-in capital.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, 'Disclosure About Fair Value of Financial Instruments,' requires
certain disclosures regarding the fair value of financial instruments. The
Company has determined, based on available
F-29
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
MARCH 31, 1999
market information and appropriate valuation methodologies, the fair value of
its financial instruments approximates carrying value. The carrying amounts of
cash, accounts payable, and other accrued liabilities approximate fair value due
to the short-term maturity of the instruments.
EARNINGS PER COMMON SHARE
Effective December 31, 1997, SFAS 128 'Earnings per Share' requires a dual
presentation of earnings per share-basic and diluted. Basic earnings per common
share has been computed based on the weighted average number of common shares
outstanding. Diluted earnings per share reflects the increase in weighted
average common shares outstanding that would result from the assumed exercise of
outstanding stock options. Basic and diluted earnings per share were the same
for all prior periods presented due to the Company's simple capital structure.
Earnings per share calculations are reported on a post-split basis for all
periods presented.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted the following new accounting pronouncements for the
year ended December 31, 1998. There was no effect on the financial statements
presented from the adoption of the new pronouncements. SFAS No. 130, 'Reporting
Comprehensive Income,' requires the reporting and display of total comprehensive
income and its components in a full set of general-purpose financial statements.
The Company did not have comprehensive income for the periods presented;
therefore, comprehensive income and net income are equal. SFAS No. 131,
'Disclosures about Segments of an Enterprise and Related Information,' is based
on the 'management' approach for reporting segments. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS No. 131 also requires disclosure about the Company's
products, the geographic areas in which it earns revenue and holds long-lived
assets, and its major customers. SFAS 131 is not applicable, as the Company had
no revenue-producing operations for the periods presented. SFAS No. 132,
'Employers' Disclosures about Pensions and Other Post-retirement Benefits,'
which requires additional disclosures about pension and other post-retirement
benefit plans, but does not change the measurement or recognition of those
plans.
F-30
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE A: NATURE OF OPERATIONS
Effective December 19, 1994, Motorcycle Centers of America, Inc. (MCAI)
(formerly NABCO, Inc.) merged with Humanus Corporation (Humanus), which was
incorporated under the laws of Colorado on February 23, 1988. Subsequent to the
merger, Humanus changed its name to NABCO, Inc.
NABCO was originally incorporated for the purpose of manufacturing bagels
and selling them to its subfranchisor and franchisees. In August 1995, NABCO
sold its bagel manufacturing operations, and on August 28, 1995, it officially
terminated operations and became an inactive shell company.
On January 26, 1998, the Company entered into an Agreement and Plan of
Reorganization with Sandale Holdings, Limited, to acquire a motorcycle
manufacturing company in China. The Plan of Reorganization was terminated on
August 14, 1998 (see Note I). In connection with the Plan of Reorganization, the
Company redomiciled in Nevada.
On April 15, 1998, NABCO entered into a merger with MCAI whereby all of the
outstanding shares of common stock in NABCO, amounting to 1,458,807 shares, were
issued to MCAI in exchange for 1,458,807 shares of the $.001 par value common
stock of MCAI. MCAI was the sole surviving corporation. The shares of NABCO were
cancelled following the merger. As a result of the merger, the Company
previously known as NABCO, Inc. became Motorcycle Centers of America, Inc.
On October 4, 1998, the Company entered into an Agreement and Plan of
Reorganization with DDA America, LLC to acquire all of the issued and
outstanding stock of DDA America, LLC. The Plan of Reorganization was terminated
on March 1, 1999 (see Note I).
On April 9, 1999, the Company entered into an Agreement and Plan of
Reorganization with Entertainment Universe, Inc. to acquire all of the issued
and outstanding stock of Entertainment Universe, Inc. (see Note J).
NOTE B: RELATED PARTY TRANSACTIONS
THREE MONTHS ENDED MARCH 31, 1999
During the three months ended March 31, 1999, an officer advanced the
Company $25,000 for working capital. The Company repaid the officer $5,137
during 1999. The remaining balance of $66,300 is included in the accompanying
financial statements as due to former officer.
During the three months ended March 31, 1999, the Company issued 2,000,000
shares of its $.001 par value common stock to an officer in exchange for
services. The transaction was valued at the fair value of the Company's common
stock on the date of issuance of $6.24 per share or $12,480,000. (See Note F.)
During the three months ended March 31, 1999, the Company issued 75,000
shares of its $.001 par value common stock to various shareholders in exchange
for services. The transaction was valued at the fair market value of the
Company's common stock on the date of issuance of $5.00 per share or $375,000.
(See Note F.)
During the three months ended March 31, 1999, the Company issued 3,000
shares of its $.001 par value common stock in exchange for services. The
transaction was valued at the fair market value of the Company's stock on the
date of issuance of $6.24 per share or $18,720. (See Note F.)
1998
During the year ended December 31, 1998, an officer advanced the Company
$115,000 for working capital. The Company repaid the officer $68,563 during
1998. The remaining balance of $46,437 is included in the accompanying financial
statements as due to former officer.
F-31
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
At December 31, 1998, the Company owed an officer $11,093,334 for services
rendered during 1998 and 1997 (see Note F).
1997
At January 1, 1997, an officer owed the Company $71,530 in advances. During
1997, the Company advanced the officer an additional $23,150, and the officer
repaid the total $94,680. The advances were repaid in cash totaling $48,080 and
marketable securities totaling $46,600. The Company recognized $12,938 in
realized gains and $15,000 in unrealized gains from marketable securities
received from the officer in 1997.
At December 31, 1997, the Company owed an officer $5,546,667 for services
rendered during the year (see Note F).
1996
At January 1, 1996, an officer owed the Company $60,205 for cash advances.
During 1996, the Company advanced the officer an additional $14,300, of which
the officer repaid $2,975. The balance at December 31, 1996 totaled $71,530.
NOTE C: MARKETABLE SECURITIES
Marketable securities consisted of the following at March 31, 1999 and
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
MARCH 31, 1999 1998 1997
------------------- ------------------- -------------------
ESTIMATED ESTIMATED ESTIMATED
MARKET MARKET MARKET
COST VALUE COST VALUE COST VALUE
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Equity securities........... $51,000 $-- $59,000 $8,000 $52,225 $7,000
======= ===== ======= ====== ======= ======
</TABLE>
Following is a summary of investment earnings recognized in income during
the three months ended March 31, 1999 and the years ended December 31, 1998,
1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------------
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Trading securities:
Realized gains............................ $84,073 $ -- $13,562 $ 5,200
Realized losses........................... -- (6,440) -- (7,563)
------- -------- ------- -------
Realized gains (losses), net......... 84,073 (6,440) 13,562 (2,363)
------- -------- ------- -------
Unrealized gains.......................... -- -- 15,000 --
Unrealized losses......................... -- (51,000) (9,225) (5,625)
------- -------- ------- -------
Unrealized gains (losses), net....... -- (51,000) 5,775 (5,625)
------- -------- ------- -------
Gain (loss) on trading securities,
net................................ $84,073 $(57,440) $19,337 $(7,988)
======= ========= ======= ========
</TABLE>
NOTE D: FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following at March 31, 1999 and
December 31, 1998 and 1997:
F-32
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Office furniture.......................................... $2,500 $2,500 $2,500
Computer equipment........................................ 1,000 1,000 1,000
------ ------ ------
3,500 3,500 3,500
Less: accumulated depreciation............................ (2,792) (2,667) (1,944)
------ ------ ------
$ 708 $ 833 $1,556
====== ====== ======
</TABLE>
NOTE E: INCOME TAXES
A reconciliation of the U.S. statutory federal income tax rate to the
effective tax rate follows for the three months ended March 31, 1999 and the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------------
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. statutory federal rate............... 15.00% 20.57% 15.00% 15.00%
State income tax rate, net of federal
benefit................................. 4.25 4.15 4.25 4.25
Unrealized gains and losses on marketable
securities, net......................... (0.00) (2.75) (8.21) 5.65
Net operating loss for which no tax
benefit is currently available.......... (19.25) (21.97) (11.04) (24.90)
------ ------- ------- -------
-- -- -- --
====== ======= ======= =======
</TABLE>
The current tax benefit (expense) for the three months ended March 31, 1999
and the years ended December 31, 1998, 1997 and 1996 totaled $499,765,
$2,209,766, $2,067,858 and $1,924, respectively, which have been offset by the
valuation allowance. The valuation allowance offsets the net deferred tax asset
for which there is no assurance of recovery. The change in the valuation
allowance for the three months ended March 31, 1999 and the years ended
December 31, 1998, 1997 and 1996 totaled $499,765, $2,209,766, $2,067,858 and
$1,924, respectively. The net operating loss carryforward expires through the
year 2019.
The valuation allowance will be evaluated at the end of each year,
considering positive and negative evidence about whether the deferred tax asset
will be realized. At that time, the allowance will either be increased or
reduced; reduction could result in the complete elimination of the allowance if
positive evidence indicates that the value of the deferred tax assets is no
longer impaired and the allowance is no longer required.
NOTE F: SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 40,000,000 preferred shares with a $.10
par value. The Board of Directors has authority to determine the relative rights
and preferences of the preferred shares.
COMMON STOCK
The Company is authorized to issue 250,000,000 common shares with a $.001
par value. Shareholders do not have preemptive rights to purchase additional
shares and cumulative voting of common shares is not permitted.
On March 29, 1999, Motorcycle Centers of America, Inc. issued 75,000 shares
(post-split) of its common stock in exchange for consulting and administrative
services provided to the Company during
F-33
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
the period from February 1, 1998 through January 31, 1999. The transaction was
recorded at the fair value of the Company's common stock on the date agreed to
issue the shares, March 29, 1999 of $5.00, resulting in $375,000 of total
expense. The services were ratably charged over the period the services were
performed. As a result, $343,750 was expensed in 1998 and $31,250 was expensed
during the three months ended March 31, 1999. These amounts are included in the
accompanying financial statements as stock based compensation.
On March 31, 1999, the Company issued 3,000 shares (post-split) of its
common stock in exchange for administrative services provided to the Company
during each of the years in the three-year period ended March 31, 1999. The
transaction was recorded at the fair value of the Company's common stock on the
date agreed to issue the shares, March 31, 1999 of $6.24, resulting in $18,720
of total expense. The services were ratably charged over the period the services
were performed. As a result, $8,320 was expensed in 1997, $8,320 was expensed in
1998, and $2,080 was expensed during the three months ended March 31, 1999.
These amounts are included in the accompanying financial statements as stock
based compensation.
On March 31, 1999, the Company also issued 2,000,000 shares (post-split) of
its common stock to an officer in exchange for consulting services provided to
the Company during the period from January 1, 1997 through March 31, 1999. The
transaction was recorded at the fair value of the Company's common stock on the
date agreed to issue the shares, March 31, 1999 of $6.24, resulting in
$12,480,000 of total expense. The services were ratably charged over the period
the services were performed. As a result, $5,546,667 was expensed in 1997,
$5,546,667 was expensed in 1998, and $1,386,666 was expensed during the three
months ended March 31, 1999. These amounts are included in the accompanying
financial statements as stock based compensation.
TREASURY STOCK
As of January 1, 1996, the Company held 6,000 shares of treasury stock at a
cost of $9,750. During 1996, the Company purchased an additional 3,000 shares at
a cost of $3,375 and sold 8,000 shares for proceeds of $9,625. As a result, the
Company recorded a $2,375 charge against additional paid-in capital for the
excess of cost over proceeds from the sale.
As of January 1, 1997, the Company held 1,000 shares of treasury stock at a
cost of $1,125. During the year ended December 31, 1997, an officer repaid an
advance to the Company with 1,300 shares of NABCO stock with a value of $2,600;
and the Company sold 2,300 shares of treasury stock for proceeds of $1,363. As a
result, the Company recorded a $2,362 charge against additional paid-in capital
for the excess of cost over proceeds from the sale. As of December 31, 1997, the
Company held no shares of treasury stock.
REVERSE COMMON STOCK SPLITS
Effective March 31, 1999, the Board of Directors approved a 20 for one
reverse split of the Company's common stock for all shares outstanding as of
March 31, 1999. Every 20 shares held by a shareholder prior to the split was
replaced by one share as of April 28, 1999.
On August 1, 1997, the Board of Directors approved a 20 for one reverse
split of the Company's common stock for all shares outstanding as of August 1,
1997. Every 20 shares held by a shareholder prior to the split was replaced by
one share as of August 11, 1997.
The accompanying financial statements have been restated to give effect to
these reverse splits for all periods presented.
DEFERRED OFFERING COSTS
The Company incurred legal fees and stock transfer fees of $4,500 and
$1,234, respectively, during the year ended December 31, 1998, which were
related to common shares sold under Rule 504 of
F-34
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
Regulation D in April 1999. The total $5,734 is included in the accompanying
financial statements as deferred offering costs.
NOTE G: COMMITMENT AND CONTINGENCY
COMMITMENT
The Company entered into an operating lease for office space during 1997,
which commenced December 1, 1997 and terminated on November 30, 1998. The
Company renewed the lease through December 31, 1999. Monthly rent payments
during 1998 were $438 and the future minimum lease payments total $5,593 due in
1999.
CONTINGENCY
As part of the sale of the Company's bagel manufacturing operations in
1995, the Company sold a building with a mortgage payable totaling $91,349.
Although the building was sold, the Company remains contingently liable until
the note is satisfied.
NOTE H: TERMINATED PLANS OF REORGANIZATION
SANDALE HOLDINGS, LIMITED (SANDALE)
On January 26, 1998, NABCO (subsequently Motorcycle Centers of America,
Inc.) entered into an Agreement and Plan of Reorganization with Sandale, a
Bahamian corporation. As part of the reorganization, Sandale agreed to exchange
all 10,000,000 of its Ordinary A shares and common shares; for 5,000,000
(pre-split) shares of NABCO's $.001 par value restricted common stock. As a
result of the reorganization, Sandale would have become a wholly owned
subsidiary of NABCO and the former shareholders of Sandale would have owned
approximately 77 percent of NABCO. The Agreement and Plan of Reorganization was
terminated on August 14, 1998.
DDA AMERICA, LLC (DDA)
On October 4, 1998, the Company entered into an Agreement and Plan of
Reorganization with DDA, a Delaware corporation. As part of the reorganization,
DDA agreed to exchange all of its common shares for 2,700,000 shares of the
Company's $.001 par value restricted common stock. As a result of the
reorganization, DDA would have become a wholly owned subsidiary of the Company
and the former shareholders of DDA would have owned approximately 67.5 percent
of the Company. The Agreement and Plan of Reorganization was terminated on
March 1, 1999. Earnest money lost in the failed agreement of $10,000 was charged
to expense in during the year ended December 31, 1998.
NOTE I: YEAR 2000 COMPLIANCE
The Year 2000 issue (Y2K) is the result of computer programs written using
two digits rather than four to define the applicable year. Any of the Company's
computer and telecommunications programs that have date sensitive software may
recognize a date using '00' as the year 1900 instead of 2000. This could result
in system failure or miscalculations causing disruptions in operations,
including the ability to process transactions, send invoices, or engage in
similar normal business activities. The Company has determined that its
equipment is Y2K compliant.
The Company cannot determine the extent to which the Company is vulnerable
to third parties' failure to remediate their own Y2K problems. As a result,
there can be no guarantee that the systems of other companies on which the
Company's business relies will be timely converted, or that failure to convert
by another company, or a conversion that is incompatible with the Company's
systems, would have a material adverse affect on the Company. In view of the
foregoing, there can be no assurance that the Y2K issue will not have a material
adverse effect on the Company's business.
F-35
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
NOTE J: SUBSEQUENT EVENTS
AGREEMENT AND PLAN OF REORGANIZATION
On April 9, 1999, the Company entered into an Agreement and Plan of
Reorganization with the shareholders of Entertainment Universe, Inc. (EUI), a
California corporation. EUI agreed to exchange all of its common shares for
12,904,000 shares of the Company's $.001 par value restricted common stock, and
all of its preferred shares for 1,832,810 shares of its Series A six percent
convertible preferred stock. As part of the reorganization, the Company agreed
to a 20 for 1 reverse split of its restricted common stock prior to the exchange
(see Note F). This acquisition will be accounted for as a recapitalization of
EUI, with the Company the legal surviving entity. Since the Company had, prior
to the recapitalization, no operations, the recapitalization has been accounted
for as the sale of 12,904,000 shares of the Company's restricted common stock
and 1,832,810 shares of its Series A six percent convertible preferred stock for
the net assets of EUI. As a result of the reorganization, EUI became a wholly
owned subsidiary of the Company and the former shareholders of EUI own
approximately 91.6 percent of the Company.
SUBSCRIPTION AGREEMENT SECURITIES OFFERING
The Company conducted an offering of its $.001 par value common stock from
April 1, 1999 through April 6, 1999 pursuant to Rule 504 of Regulation D under
the Securities Act of 1933, as amended. A maximum of 900,000 shares was offered
pursuant to a Regulation D Subscription Agreement at a price of $1.00 per share.
Following the offering termination on April 6, 1999, the Company had received
subscriptions for 897,835 shares for a gross amount of $897,835.
PURCHASE OF TREASURY STOCK
On April 20, 1999, the Company purchased 1,845,000 shares of its
outstanding common stock from its former officer for $20,000. The shares were
cancelled following the purchase.
F-36
<PAGE>
CD UNIVERSE, INC.
FINANCIAL STATEMENTS
MARCH 31, 1999
INDEX
<TABLE>
<S> <C>
Independent Auditor's Report................................ F-38
Balance Sheet............................................... F-39
Statement of Operations..................................... F-40
Statement of Stockholder's Deficit.......................... F-41
Statement of Cash Flows..................................... F-42
Notes to Financial Statements............................... F-43
</TABLE>
F-37
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
CD UNIVERSE, INC.
We have audited the accompanying balance sheets of CD UNIVERSE, INC. as of
March 31, 1999 and 1998 and the related statements of operations, stockholder's
deficit, and cash flows for each of the three years in the period ended March
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CD UNIVERSE, INC. as of
March 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1999 in conformity
with generally accepted accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
May 14, 1999
F-38
<PAGE>
CD UNIVERSE, INC.
BALANCE SHEET
MARCH 31, 1999
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................. $ 11,335 $ 267,214
Accounts receivable, net of allowance for doubtful
accounts of $0........................................ 92,938 --
Inventory.............................................. 22,647 23,877
Due from officer....................................... 157,569 1,000
Prepaid expenses and other current assets.............. 9,629 43,031
---------- ----------
Total current assets.............................. 294,118 335,122
Property and equipment, net of accumulated depreciation of
$83,052 and $36,900 respectively.......................... 225,718 158,362
Organization costs, net of accumulated amortization of $340
and $170 respectively..................................... 510 680
---------- ----------
Total assets...................................... $ 520,346 $ 494,164
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Accounts payable and accrued expenses.................. $ 942,322 $ 534,581
Notes payable -- officer............................... 105,000 --
Due to affiliates (Note 5)............................. 30,000 110,395
---------- ----------
Total current liabilities......................... 1,077,322 644,976
---------- ----------
Commitments and contingencies (Note 9)...................... --
Stockholder's deficit
Common stock -- no par value; authorized 1,000 shares;
1,000 issued and outstanding.......................... 1,000 1,000
Accumulated deficit.................................... (557,976) (151,812)
---------- ----------
Total stockholder's deficit....................... (556,976) (150,812)
---------- ----------
Total liabilities and stockholder's deficit....... $ 520,346 $ 494,164
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE>
CD UNIVERSE, INC.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
DIVISION OF
PRIME SOFTWARE, INC.
1999 1998 1997
---- ---- | --------------------
<S> <C> <C> | <C>
|
Revenue............................................. $8,851,713 $5,685,211 | $ 1,675,815
Cost of goods sold.................................. 7,550,289 4,709,528 | 1,433,766
---------- ---------- | --------------------
Gross profit........................................ 1,301,424 975,683 | 242,049
Selling, general and administrative expenses........ 1,708,601 1,111,698 | 434,203
---------- ---------- | --------------------
Loss from operations................................ (407,177) (136,015)| (192,154)
Other income........................................ 1,013 (15,797)| --
---------- ---------- | --------------------
Net loss............................................ (406,164) $ (151,812)| $ (192,154)
========== ========== | =====================
Net loss per common share |
Basic.......................................... (406.16) $ (151.81)| $ (192.15)
========== ========== | =====================
Diluted........................................ (406.16) $ (151.81)| $ (192.15)
========== ========== | =====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE>
CD UNIVERSE, INC.
STATEMENT OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT DEFICIT DEFICIT
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at April 7, 1997............................. -- $-- $ -- $ --
Issuance of shares for cash.......................... 1,000 1,000 -- 1,000
Net loss for the year ended March 31, 1998........... -- -- (151,812) (151,812)
----- ------ --------- ---------
Balance at March 31, 1998............................ 1,000 1,000 (151,812) (150,812)
Net loss for the year ended March 31, 1999........... -- -- (406,164) (406,164)
----- ------ --------- ---------
Balance at March 31, 1999............................ 1,000 $1,000 $(557,976) $(556,976)
===== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE>
CD UNIVERSE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31
<TABLE>
<CAPTION>
DIVISION OF
PRIME SOFTWARE, INC.
1999 1998 1997
---- ---- |--------------------
<S> <C> <C> |<C>
|
Cash Flows From Operating Activities: |
Net loss........................................ $(406,164) $(151,812) | $(192,154)
Adjustments to reconcile net loss to net cash |
provided by (used in) operating activities |
Depreciation and amortization................... 46,322 37,070 | --
Write off of excess of purchase price over cost |
assigned to assets acquired................... -- 40,000 | --
Changes in certain assets and liabilities: |
(Increase) in accounts receivable.......... (92,938) -- | --
Decrease (increase) in inventory........... 1,230 (23,877) | --
Decrease (increase) in prepaid expenses and |
other current assets..................... 33,402 (43,031) | (6,028)
Increase in accounts payable and accrued |
expenses................................. 407,741 534,581 | --
--------- --------- | ---------
Total cash provided by (used in) operating |
activities............................... (10,407) 392,931 | (198,182)
--------- --------- | ---------
Cash Flows From Investing Activities: |
Increase in other assets........................ -- (40,850) | --
Increase in property and equipment.............. (113,508) (195,262) | (6,500)
--------- --------- | ---------
Total cash used in investing activities.... (113,508) (236,112) | (6,500)
--------- --------- | ---------
Cash Flows From Financing Activities: |
Sale of common stock............................ -- 1,000 | --
Cash retained by affiliate...................... -- (19,558) | --
Increase in notes payable -- officer............ 150,000 -- | --
Repayment of notes payable -- officer........... (45,000) -- | --
Loans from affiliates........................... 30,000 110,395 | 224,240
Repayment of loans from affiliates.............. (110,395) -- | --
Loan to officer................................. (156,569) (1,000) | --
--------- --------- | ---------
Total cash provided by (used in) financing |
activities............................... (131,964) 90,837 | 224,240
--------- --------- | ---------
Net (decrease) increase in cash and cash |
equivalents........................................ (255,879) 247,656 | 19,558
Cash and cash equivalents -- beginning of year....... 267,214 19,558 | --
--------- --------- | ---------
Cash and cash equivalents -- end of year............. $ 11,335 $ 267,214 | $ 19,558
--------- --------- | ---------
--------- --------- | ---------
Cash Paid During the Year For: |
Interest expense................................ $ 286 $ -- | $ --
========= ========= | =========
Income taxes.................................... $ -- $ -- | $ --
========= ========= | =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-42
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) ORGANIZATION AND LINE OF BUSINESS
CD Universe, Inc. was incorporated under the laws of the State of
Connecticut on April 7, 1997. The Company began operations as CD Universe
commencing April 1, 1997. The Company was sold to new management in April 1999.
Prior to incorporating, the Company operated as a division of Prime
Software, Inc., a related party. The statements of operations and cash flows for
the year ended March 31, 1997 reflects the activity of that division. Prime
Software, Inc.'s fiscal year end is March 31. For the initial year ended
March 31, 1997, the division of Prime Software had an accumulated deficit of
$192,154 and advances from the parent of $224,240.
The Company sells and distributes compact discs (CD's) and video recordings
to retail purchasers over the internet.
b) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
c) CONCENTRATION OF CREDIT RISK
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances exceeded FDIC insured levels at
various times during the year.
d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents
e) ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of credit card charges by customers.
f) INVENTORY
Inventory consists of compact discs, videos and packaging materials.
Inventory is valued at the lower of cost or market using the first-in, first-out
method.
g) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method based upon the estimated useful lives of the assets.
Maintenance and repairs are charged to expense as incurred.
Estimated useful lives are as follows:
<TABLE>
<S> <C>
Leasehold Improvements...................................... 3 years
Computer Equipment.......................................... 5 years
Telephone Equipment......................................... 5 years
Furniture, Fixtures and Other............................... 10 years
</TABLE>
F-43
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
h) ORGANIZATION COSTS
Organization costs are being amortized over 5 years using the straight-line
method.
i) INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for
the current year and deferred taxes on temporary differences between the amount
of taxable income and pretax financial income and between the tax bases of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled as
prescribed by Statement of Financial Accounting Standards ('SFAS') No. 109,
'Accounting for Income Taxes'. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes.
j) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates fair value due to the
relatively short maturity of these instruments.
k) LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles to he held and used
are reviewed for impairment whenever events or changes in circumstances indicate
that the related carrying amount may not be recoverable. When required,
impairment losses on assets to be held and used are recognized based on the fair
value of the assets and long-lived assets to be disposed of are reported at the
lower of carrying amount or fair value less cost to sell.
l) STOCK-BASED COMPENSATION
The Company has adopted the intrinsic value method of accounting for
stock-based compensation in accordance with Accounting Principles Board Opinion
('APB') No. 25, 'Accounting for Stock Issued to Employees' and related
interpretations.
m) REVENUE RECOGNITION
The Company recognizes revenue upon shipment of its products. The Company
maintains a partner program whereby partners provide links on their web-sites
that bring customers to the CD Universe web-site. Revenue generated from these
linked sites is recognized upon shipment of the CD's. The partner receives a
commission of 5% to 15% of sales of the Company's products that originate from
the site, recognized as an expense concurrent with the sale.
n) ADVERTISING COSTS
Advertising costs, except for costs associated with direct-response
advertising, are charged to operations incurred. The costs of direct-response
advertising, if any, are capitalized and amortized over the period during which
future benefits are expected to be received.
o) EARNINGS PER SHARE
During 1997, the Company adopted SFAS No. 128, 'Earnings Per Share', which
requires presentation of basic earnings per share ('Basic EPS') and diluted
earnings per share ('Diluted EPS').
F-44
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
The computation of basic EPS is computed by dividing income available to
common stockholders by the weighted average number of outstanding common shares
during the period. Diluted EPS gives effect to all dilutive potential common
shares outstanding during the period. The computation of diluted EPS does not
assume conversion, exercise or contingent exercise of securities that would have
an anti-dilutive effect.
The shares used in the computation for the years ended March 31, 1999, 1998
and 1997 were as follows:
<TABLE>
<S> <C>
Basic....................................................... 1,000
=====
Diluted..................................................... 1,000
=====
</TABLE>
p) COMPREHENSIVE INCOME
In June 1997, SFAS No. 130, 'Reporting Comprehensive Income', was issued.
This statement establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. As of
March 31, 1999, 1998 and 1997, the Company had no items that represent other
comprehensive income and, therefore, has not included a schedule of
comprehensive income in the financial statements.
q) IMPACT OF YEAR 2000 ISSUE
During the year ended March 31, 1999, the Company conducted an assessment
of issues related to the Year 2000 and determined that it was necessary to
modify or replace portions of its software in order to ensure that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
expects to complete any Year 2000 systems modifications and conversions by the
middle of 1999. Currently, the Company does not expect that costs associated
with becoming Year 2000 compliant to be material. At this time, the Company
cannot determine the impact the Year 2000 will have on its key customers or
suppliers. If the Company's customers or suppliers do not convert their systems
to become Year 2000 compliant, the Company may be adversely impacted. The
Company is addressing these risks in order to reduce the impact on the Company.
r) RECENT ACCOUNTING PRONOUNCEMENTS
During 1998, the FASB issued SFAS No. 131, 'Disclosure About Segments of an
Enterprise and Related Information', which changes the way public companies
report information about segments. SFAS No. 131, which is based on the selected
segment information quarterly and entity-wide disclosures about products and
services, major customers and the material countries in which the entity holds
assets and reports revenue. This statement is effective for the Company's fiscal
year. The Company is in the process of evaluating the disclosure requirements
under this standard.
Additionally, during 1998, the America Institute of Certified Accountants'
Executive Committee issued Statement of Position Number 98-1 (SOP 98-1),
'Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use'. SOP 98-1 is effective for fiscal years beginning after December 15, 1998.
Management believes that the Company is substantially in compliance with this
pronouncement and that its implementation will not have a material effect on the
Company's financial position, results of operations or cash flows.
F-45
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at March 31,:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Leasehold Improvements.................................. $ 40,000 $ --
Computer Equipment...................................... 215,543 155,273
Telephone Equipment..................................... 24,158 18,467
Furniture, Fixtures and Other........................... 29,069 21,522
-------- --------
308,770 195,262
Less: Accumulated Depreciation.......................... 83,052 36,900
-------- --------
Property and Equipment, net........................ $225,718 $158,362
======== ========
</TABLE>
Depreciation expense for the years ended March 31, 1999 and 1998 was
$46,152 and $36,000, respectively.
NOTE 3 -- INCOME TAXES
The components of the provision for income taxes for the years ended
March 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<S> <C> <C> <C>
Current Tax Expense 1999 1998 1997
U.S. Federal........................... $ -- $ -- $ --
State and Local........................ $ -- -- --
-------- -------- --------
Total Current..................... -- -- --
-------- -------- --------
Deferred Tax Expense
U.S. Federal........................... -- -- --
State and Local........................ -- -- --
-------- -------- --------
Total Deferred......................... -- -- --
-------- -------- --------
Total Tax Provision from
Continuing Operations.......... $ -- $ -- $ --
======== ======== ========
</TABLE>
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal Income Tax Rate........................... (34.0)% (34.0)% (34.0)%
Deferred Tax Charge (Credit)...................... -- -- --
Effect on Valuation Allowance..................... 34.0% 34.0% 34.0%
State Income Tax, Net of Federal Benefit.......... -- -- --
------- ----- -----
Effective Income Tax Rate......................... 0.0% 0.0% 0.0%
======= ===== =====
</TABLE>
At March 31, 1999, the Company had net carryforward losses of approximately
$556,000 that can be utilized to offset future taxable income through 2014.
Utilization of these net carryforward losses is subject to the limitations of
Internal Revenue Code Section 382. The full realization of the tax benefit
associated with the carryforward depends predominantly upon the Company's
ability to generate taxable income during the carryforward period. A valuation
allowance equal to the tax benefit for deferred taxes has been established due
to the uncertainty of realizing the benefit of the tax carryforward.
F-46
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
Deferred tax assets and liabilities reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant
components of the Company's deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Loss Carryforwards.................................... $ 189,000 $ 51,700
Less: Valuation Allowance............................. (189,000) (51,700)
--------- ---------
Net Deferred Tax Assets (Liabilities)................. $ -- $ --
========= =========
</TABLE>
NOTE 4 -- NOTE PAYABLE -- OFFICER
The Company is indebted to an officer at March 31, 1999 for $105,000. The
terms indicate interest is payable at 8% with loan principal and interest
payable upon demand.
Subsequent to March 31, 1999, the Note was paid down to $85,000. This
amount will be settled through a purchase price adjustment upon the acquisition
of the Company by Entertainment Universe, Inc.
NOTE 5 -- RELATED PARTY TRANSACTIONS
In prior years, certain of the Company's fixed asset acquisitions and
certain expenses were paid for through advances by an entity controlled by the
Company's president. These advances, totaling $110,395, were repaid during the
year ended March 31, 1999.
During the current fiscal year, the Company received advances from an
entity controlled by the Company's chairman. These advances totaled $30,000 and
remain outstanding at March 31, 1999. Terms of repayment and interest are being
negotiated.
NOTE 6 -- MAJOR VENDOR
The Company purchased approximately 90% of its merchandise from one vendor.
At March 31, 1999, the balance due to that vendor was approximately $600,000
which was paid in April 1999. The Company believes that the loss of this vendor
may have a material adverse effect on the Company.
NOTE 7 -- ADVERTISING COSTS
Advertising costs incurred and recorded as expense in the statement of
operations were $67,052, $128,432 and $110,717 for the years ended March 31,
1999, 1998 and 1997, respectively.
NOTE 8 -- ACQUISITION OF ASSETS
During the year ended March 31, 1998, the Company purchased various assets
from a related party. Due to the fact that the entities were under common
control, the assets have been valued at historical cost in the financial
statements. The excess of purchase prior over cost has been charged to expense
during the year ended March 31, 1998. This amount was $40,000.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
The Company leases office space under non-cancelable operating lease
agreements that expire within the next three years. Future minimum lease
payments under these non-cancelable operating leases are as follows:
F-47
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
<TABLE>
<CAPTION>
MARCH 31,
- ---------
<S> <C>
2000.............................................. $117,000
2001.............................................. 117,000
2002.............................................. 107,250
--------
Total........................................ $341,250
========
</TABLE>
Rent expense under the office lease for the years ending March 31, 1999,
1998 and 1997 was $82,000, $45,938 and $5,387, respectively.
On October 1, 1998, the Company entered into an agreement with Charles
Beilman. The agreement stipulates that Charles Beilman will serve as Chief
Operating Officer and Chief Technical Officer for an annual compensation of
$135,000 and the reimbursement of certain expenditures, as defined in the
related agreement. This agreement becomes effective when the Company is acquired
and its shares are publicly traded. Mr. Beilman's employment will continue for
at least three years from the date the Company goes public.
NOTE 10 -- SUBSEQUENT EVENTS
The Company was acquired by Entertainment Universe, Inc. in April 1999 as a
wholly owned subsidiary.
F-48
<PAGE>
CASES LADDER, INC.
FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-50
Balance Sheets.............................................. F-51
Statements of Operations.................................... F-52
Statement of Stockholders' Equity........................... F-53
Statements of Cash Flows.................................... F-54
Notes to Financial Statements............................... F-55
</TABLE>
F-49
<PAGE>
[LETTERHEAD OF JONATHON P. REUBEN]
INDEPENDENT AUDITORS' REPORT
Board of Directors
CASES LADDER, INC.
Newbury Park, California
We have audited the accompanying balance sheet of Cases Ladder, Inc. (A
California corporation), as of December 31, 1998, and the related statements of
operations, stockholders' equity (deficit), and cash flows, for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cases Ladder, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
year ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Jonathon P. Reuben CPA
_________________________________
JONATHON P. REUBEN,
Certified Public Accountant
Torrance, California
April 9, 1999
F-50
<PAGE>
CASES LADDER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................. $ -- $ 15,045
Accounts receivable (net of allowance for bad debts of
$5,675 and $19,175)....................................... 65,262 94,724
Deferred tax asset.......................................... 2,172 --
Deposits.................................................... -- 685
-------- --------
Total current assets.............................. 67,434 110,454
Computer equipment and software (Note 2).................... 21,752 35,150
-------- --------
Total assets................................................ $ 89,186 $145,604
======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities
Accounts payable....................................... $ 19,365 $ 16,185
Accrued payroll and payroll taxes...................... -- 57,472
Income tax payable..................................... 800 1,600
Customer deposits...................................... 16,667 --
Notes payable -- affiliate............................. 9,028 8,433
Notes payable -- shareholders.......................... 55,000 61,916
-------- --------
Total current liabilities......................... 100,860 145,606
Stockholders' (deficit)
Common stock, no par value, authorized 40,000,000
shares,
issued and outstanding 9,437,500 shares at
December 31, 1998, and
March 31, 1999....................................... 2,750 2,750
Retained earnings (deficit)............................ (14,424) (2,752)
-------- --------
Total stockholders' (deficit)..................... (11,674) (2)
-------- --------
Total liabilities and stockholders' (deficit)..... $ 89,186 $145,604
======== ========
</TABLE>
See accompanying notes
F-51
<PAGE>
CASES LADDER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
1998 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... $ 378,345 $ 309,737
General and administrative expenses......................... (394,141) (295,093)
--------- ---------
Net income (loss) before provision for corporate income
tax................................................... (15,796) 14,644
Benefit (provision) for corporate income tax................ 1,372 (2,972)
--------- ---------
Net income (loss)...................................... (14,424) 11,672
========= =========
Basic Income (Loss) per share............................... (0.0015) 0.0012
========= =========
Weighted average shares outstanding......................... 9,404,630 9,437,500
========= =========
</TABLE>
See accompanying notes
F-52
<PAGE>
CASES LADDER, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------- EARNINGS
SHARES AMOUNTS (DEFICIT) TOTAL
------ ------- --------- -----
<S> <C> <C> <C> <C>
Balances at January 1, 1998............................. -- $ -- $ -- $ --
Original issuance of common stock....................... 9,375,000 2,000 -- 2,000
Sale of common stock.................................... 93,750 750 -- 750
Net loss................................................ -- -- (14,424) (14,424)
--------- ------ ------- -------
Balances at December 31, 1998........................... 9,468,750 2,750 (14,424) (11,674)
Net income for the three months ended March 31, 1999
(unaudited)........................................... -- -- 11,672 11,672
--------- ------ ------- -------
Balances at March 31, 1999 (unaudited).................. 9,468,750 $2,750 $(2,752) $ (2)
========= ====== ======= =======
</TABLE>
See accompanying notes
F-53
<PAGE>
CASES LADDER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)...................................... $(14,424) $11,672
Adjustments to reconcile net income (loss) to net cash
provided (used) by operations:
Depreciation......................................... 280 1,618
Allowance for bad debts.............................. 5,675 13,500
Changes in operating assets and liabilities:
Decrease (increase) in assets:
Accounts receivable............................. (70,936) (42,962)
Prepaid items and deposits...................... -- (685)
Deferred tax asset.............................. (2,172) 2,172
Increase (decrease) in liabilities:
Accounting payable and accrued expenses......... 19,826 55,648
Customer deposits............................... 16,667 (16,667)
Income tax payable.............................. 800 800
-------- -------
Net cash provided (used) by operating activities............ (44,284) 25,096
-------- -------
Cash Flows from Investing Activities:
Equipment acquisitions................................. (22,032) (15,016)
-------- -------
Net cash used by investing activities.................. (22,032) (15,016)
-------- -------
Cash Flows from Financing Activities:
Issuance of common stock............................... 2,750 --
Advances from shareholders............................. 55,000 5,560
Payments to affiliates................................. (71,766) (595)
Advances from affiliates............................... 80,332 --
-------- -------
Net cash provided by financing activities.............. 66,316 4,965
-------- -------
Net increase (decrease) in cash and cash
equivalents..................................... -- 15,045
Cash and cash equivalents -- beginning of year.... -- --
-------- -------
Cash and cash equivalents -- end of year.......... $ -- $15,045
======== =======
</TABLE>
See accompanying notes
F-54
<PAGE>
CASES LADDER, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS
Cases Ladder, Inc. (the 'Company') was incorporated under California State
law on August 19, 1998. The Company conducts business in the Internet software
and services industry. Prior to incorporating, the Company operated as a
partnership.
Case's Ladder began as a collaboration of six individuals in January 1998,
all of whom remain involved with the business. There was no formal legal
structure to the operations until the individuals agreed on a corporate form of
organization and ownership distribution in August 1998. Those six individuals
were the sole shareholders until other individuals invested in the business and
became shareholders later in 1998. Since the corporation continued an operation
begun earlier in 1998, the prior activity was accounted for in the corporation
as if that activity had occurred in the corporation.
Upon the inception of business, an agent of a related entity was asked to
open a bank account for the Company. The related entity, Strategic Alliance
Partners, Inc., shared common owners with the company. The agent mistakenly
thought that the account was to be a part of Strategic Alliance Partners'
activity and opened the account as 'Strategic Alliance Partners, Inc. dba Cases
Ladder'. Additionally, a fictitious business name statement was filed with this
name. These errors were not noted. However, only receipts and disbursements
related to the transactions and operations of Cases Ladder flowed through the
account. No other company, or individual, used the bank account.
Case's Ladder operated as a totally separate and distinct business from
Strategic Alliance Partners, Inc. Management does not believe that the mere fact
that the account was opened in the wrong name would deem the Company to be
considered a successor of Strategic Alliance Partners, Inc. and currently no
third party has made this claim.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Cash
The Company maintains all of its cash deposits at one bank. The Company's
balance with this bank is insured up to $100,000 as provided by the FDIC.
b) Computer Equipment and Software
The cost of Computer Equipment and Software is depreciated over the
estimated useful lives of the related assets. Depreciation is computed on the
straight-line method for both financial and tax reporting purposes. The useful
life of the computer equipment and related software is five years.
c) Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
d) Revenue Recognition
Revenue from product sales and services are recognized at the time the
product is shipped or the services are performed. Customer advance payments are
deferred and are recognized as revenue when the underlying income is earned.
Revenue from the licensing of the Company's software products is recognized when
the respective royalties are earned, based on the percentage of completion
method.
e) Earnings Per Share
Effective December 31, 1997, SFAS 128 'Earnings Per Share' requires a dual
presentation of earnings per share-basic and dilutive. Basic earnings per common
share has been computed based upon the weighted average number of common shares
outstanding. Diluted earnings per share reflects the increase in weighted
average common shares outstanding that would result from the assumed exercise of
outstanding stock options. The computation of diluted earnings per share shall
not assume
F-55
<PAGE>
CASES LADDER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
conversion, exercise, or contingent issuance of securities that would have an
anti-dilutive effect on earnings per share.
The Company reflects only basic loss per share for both periods presented
as the assumed exercise of the outstanding options would be anti-dilutive.
f) Statement of Comprehensive Income
The Company has adopted SFAS 130 'Comprehensive Income -- Financial
Statement Presentation'. However, as there is no difference between net loss as
reported on the statement of operations and comprehensive loss, the Statement of
Comprehensive Loss has not been provided.
NOTE 3 -- COMPUTER EQUIPMENT AND SOFTWARE
The following is a summary of computer equipment and software as of
December 31, 1998:
<TABLE>
<S> <C>
Computer Equipment.......................................... $21,237
Computer Software........................................... 795
-------
22,032
Less Accumulated Depreciation............................... (280)
-------
$21,752
=======
</TABLE>
Depreciation expense charged to operations for year ended December 31,
1998, was $280.
NOTE 4 -- INCOME TAXES
Income taxes are provided based on earnings reported for financial
statement purposes pursuant to the provisions of Statement of Financial
Accounting Standards No. 109 ('FASB 109').
FASB 109 uses the asset and liability method to account for income taxes
which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between tax basis and
financial reporting basis of assets and liabilities.
The Components of the (benefit) provision for income taxes for 1998 is as
follows:
<TABLE>
<S> <C>
Federal..................................................... $(2,172)
State....................................................... 800
-------
(Benefit) Provision for income taxes................... $(1,372)
=======
</TABLE>
Amounts of deferred tax assets and liabilities for the year ended December
31, 1998, are as follows:
<TABLE>
<S> <C>
Deferred Tax Liability...................................... $ --
Deferred Tax Asset.......................................... $2,172
</TABLE>
Deferred tax assets have not been reduced by any valuation allowances.
The deferred tax asset results primarily from the 1998 net operating loss
of $15,334 which is available to be carried forward to offset future federal and
state taxable income. The loss expires
in 2018.
The component of the deferred tax asset consists of the following:
<TABLE>
<S> <C>
Net operating loss.......................................... $2,172
</TABLE>
F-56
<PAGE>
CASES LADDER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- NOTES PAYABLE
Notes payable as of December 31, 1998 consist of the following:
<TABLE>
<S> <C>
Affiliate................................................... $ 9,028
Officers.................................................... 55,000
-------
$64,028
=======
</TABLE>
Notes payable to affiliates and officers bear interest at 12% and 10% per
annum, respectively. All notes payable are unsecured, and are due upon demand.
Interest charged to operations totaled $4,828.
NOTE 6 -- STOCK OPTION PLAN
The Company has a performance-based stock option plan. Under the plan, the
Company may grant options for up to 1.5 million shares of common stock for which
no vesting contingencies exist, other than being an employee. The exercise price
of each option is set at the discretion of the Board of Directors at the time of
each issuance. Management believes that the exercise price of each option is
equal to or greater then the market value of the respective shares granted.
The Company applies APB Opinion 25 in accounting for its performance-based
stock option plan. Accordingly, no compensation expense has been recognized for
the plan in 1998. Had compensation costs been determined on the basis of fair
value pursuant to FASB Statement No. 123, net loss and loss per share would have
increased as follows:
<TABLE>
<S> <C>
Net Loss
As reported............................................ $(14,424)
========
Proforma............................................... $(15,552)
========
Basic Loss Per Share
As reported............................................ $(0.0015)
========
Proforma............................................... $(0.0017)
========
</TABLE>
For proforma purposes, the Company valued the options using the
Black-Scholes option pricing model using the following assumptions: risk-free
interest rate of 5.5%, dividend yield of 0%, volatility factor of the expected
market price of the Company's common stock of 5% and the expected life of the
options of 12 months.
Following is a summary of the status of the plan during the year ended
December 31,1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at 1-1-98....................................... -- $--
Granted..................................................... 160,000 0.125
Exercised................................................... -- --
Forfeited................................................... -- --
------- ------
Outstanding at 12-31-98..................................... 160,000 $0.125
======= ======
Options exercisable at 12-31-98............................. 160,000 $0.125
======= ======
</TABLE>
The weighted average fair value at date of grant was $.0705 per share.
NOTE 7 -- SUPPLEMENTAL CASH FLOW INFORMATION
For the purpose of the statements of cash flows, all highly liquid
investments with a maturity of three months or less are considered to be cash
equivalents.
F-57
<PAGE>
CASES LADDER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended December 31, 1998, the Company paid interest totaling
$4,828.
The Company did not pay any income taxes during 1998.
NOTE 8 -- SALES TO MAJOR CUSTOMERS
Sales to three major customers amounted to 38.9%, 16.1% and 14.5% of total
sales for the year ended December 31, 1998.
NOTE 9 -- CONCENTRATIONS OF CREDIT RISK
The Company extends credit to its customers, all of which are companies in
the Internet software and services industry.
NOTE 10 -- SUBSEQUENT EVENTS
On April 1, 1999, the Board of Directors authorized a 5 for 4 stock split
of common stock to stockholders of record on March 14, 1999. The accompanying
financial statements have been restated to give effect to the indicated stock
split for the periods presented.
In April 1999, the Company received $55,000 in exchange for the issuance of
220,000 shares of its common stock.
In June 1999, the Company issued 645,996 shares of common stock to a
consultant who assisted in the sale of all of the outstanding stock of the
Company to eUniverse, Inc. These services were performed on behalf of the
individual shareholders of the Company and are not an expense of the Company.
Prior to the transaction with eUniverse, the Company issued 501,645 shares of
its Common Stock through the exercise of all of the outstanding options. In
determining the number of shares issued, the Company used a formula that took
into account the exercise price of the respective option and the price per share
offered by eUniverse. The Shareholders of the Company exchanged 10,616,311
shares of the Company's stock for 700,000 restricted shares of eUniverse's
common stock.
NOTE 11 -- UNAUDITED INFORMATION
In the opinion of the Company's management, the accompanying unaudited
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position of the Company as
of March 31, 1999 and the results of operations and cash flows for the three-
month period then ended. The operating results of the Company on a quarterly
basis may not be indicative of operating results for the full year.
F-58
<PAGE>
THE BIG NETWORK, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998
F-59
<PAGE>
THE BIG NETWORK, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998
INDEX
<TABLE>
<S> <C>
Independent Auditor's Report................................ F-61
Balance Sheet............................................... F-62
Statement of Operations..................................... F-63
Statement of Stockholders' Deficiency....................... F-64
Statement of Cash Flows..................................... F-65
Notes to Financial Statements............................... F-66
</TABLE>
F-60
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
THE BIG NETWORK, INC.
We have audited the accompanying balance sheet of The Big Network, Inc. as
of December 31, 1998 and the related statements of operations, stockholders'
deficiency and cash flows for the initial period January 30, 1998 to December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Big Network, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
initial period then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming The Big
Network, Inc. will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company had a net loss for the initial period January
30, 1998 to December 31, 1998, had no significant source of revenue and had a
stockholders' deficiency as of December 31, 1998. This raises substantial doubt
about its ability to continue as a going concern. Management's plans in regards
to these matters are also described in Note 1. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
July 23, 1999, except as for
Note 8(d) as to which the
date is September 15, 1999
F-61
<PAGE>
THE BIG NETWORK, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................. $ 3,554 $ 118,800
Accounts receivable.................................... 21,451 6,900
Other current assets................................... 144 514
-------- ------------
25,149 126,214
Equipment, net.............................................. 80,649 58,941
Other assets................................................ 2,266 2,105
-------- ------------
Total assets...................................... $108,064 $ 187,260
======== ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable and accrued expenses.................. $ 73,555 $ 76,684
Advances from stockholders............................. 16,500 13,500
Capital lease obligation -- current portion............ 14,785 8,585
-------- ------------
104,840 98,769
Capital lease obligation, less current portion.............. 3,771 2,596
Commitments and contingencies............................... -- --
-------- ------------
Total liabilities................................. 108,611 101,365
-------- ------------
Stockholders' deficiency
Preferred stock -- Series A, par value $.001, 5,000,000
shares authorized and 529,449 shares issued and
outstanding........................................... 530 983
Common stock, par value $.001, 15,000,000 shares
authorized and 2,675,385 shares issued and
outstanding........................................... 2,676 2,676
Additional paid-in capital.................................. 732,312 1,080,964
Accumulated deficit......................................... (736,065) (998,728)
-------- ------------
Total stockholders' deficiency.................... (547) 85,895
-------- ------------
Total liabilities and stockholders' deficiency.... $108,064 $ 187,260
======== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
THE BIG NETWORK, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN SIX SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1998
---- ---- ----
<S> <C> <C> <C>
Revenue.............................................. $ 83,883 $ 15,056 $ 30,106
Cost of revenue...................................... 56,375 27,620 28,637
--------- --------- ---------
27,508 (12,564) 1,469
--------- --------- ---------
Development cost..................................... 609,416 172,349 446,348
General and administrative expenses.................. 131,849 77,725 113,425
Write-off of purchase price over estimated fair value
of net assets acquired............................. 24,165 -- 24,165
--------- --------- ---------
Total expenses.................................. 765,430 250,074 583,938
--------- --------- ---------
Loss from operations................................. (737,922) (262,638) (582,469)
--------- --------- ---------
Other income (expense)
Investment income............................... 4,136 3,961 3,837
Interest expense................................ (2,279) (3,986) (1,407)
--------- --------- ---------
Total other income (expenses)................... (1,857) (25) 2,430
--------- --------- ---------
Net loss............................................. $(736,065) $(262,663) $(580,039)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
THE BIG NETWORK, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ --------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 30,
1998................ -- $-- -- $-- $ -- $ -- $ --
Issuance of preferred
stock --
Series A for:
Cash............. 401,184 401 -- -- 340,892 -- 341,293
Conversion of
note payable... 120,482 121 -- -- 99,879 -- 100,000
Compensation for
services
rendered....... 7,783 8 -- -- 6,452 -- 6,460
Issuance of Common
Stock for:
Cash............. -- -- 127,500 128 12,622 -- 12,750
Compensation for
services
rendered....... -- -- 55,385 55 5,484 -- 5,539
Acquisition of
assets......... -- -- 2,492,500 2,493 264,483 -- 266,976
Additional
Paid-in-
Capital........ -- -- -- -- 2,500 -- 2,500
Net loss......... -- -- -- -- -- (736,065) (736,065)
------- ---- --------- ------ ---------- --------- ---------
Balance at December
31, 1998............ 529,449 530 2,675,385 2,676 732,312 (736,065) (547)
Sale of Preferred
Stock-Series A
(Unaudited)......... 453,633 453 -- -- 348,652 -- 349,105
Net Loss
(Unaudited)......... -- -- -- -- -- (262,663) (262,663)
------- ---- --------- ------ ---------- --------- ---------
Balance at June 30,
1999 (Unaudited).... 983,082 $983 2,675,385 $2,676 $1,080,964 $(998,728) $ 85,895
======= ==== ========= ====== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
THE BIG NETWORK, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN SIX SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1998
---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities
Net loss........................................ $(736,065) $(262,663) $(580,039)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation.................................... 25,905 21,808 8,975
Write-off of purchase price over the estimated
fair value of net assets acquired............. 24,165 -- 24,165
Issuance of equity securities for services
rendered...................................... 11,999 -- 11,999
Write-off of organizational costs............... 103,431 -- 103,431
Loss on sale of securities...................... 4,752 -- 4,752
Change in assets and liabilities
(increase) decrease:
Accounts receivable........................ (8,673) 14,451 3,298
Other current assets....................... (144) (370) (1,622)
Other assets............................... (2,266) 161 (4,060)
Increase (Decrease):
Accounts payable and accrued expenses...... 53,732 3,129 90,878
--------- --------- ---------
Net cash used in operating activities................ (523,164) (223,484) (338,223)
--------- --------- ---------
Cash flows from investing activities
Purchase of equipment........................... (2,632) -- (2,632)
Sale of securities.............................. 78,262 -- 78,262
Acquisition of Dream Zero, net of cash
acquired...................................... 238 -- 238
--------- --------- ---------
Net cash provided by investing activities............ 75,868 -- 75,868
--------- --------- ---------
Cash flows from financing activities
Payments for capital lease obligations.......... (22,193) (7,375) (11,629)
Advances from (repayments to) stockholders...... 16,500 (3,000) 8,500
Proceeds from issuances of note................. 100,000 -- 100,000
Issuance of common stock........................ 12,750 -- 12,750
Purchase of treasury stock...................... -- (10,875) --
Additional paid-in capital...................... 2,500 -- --
Issuance of preferred stock -- Series A......... 341,293 359,980 181,239
--------- --------- ---------
Net cash provided by financing activities............ 450,850 338,730 290,860
--------- --------- ---------
Net increase in cash and cash equivalents............ 3,554 115,246 28,505
Cash and cash equivalents -- Beginning of period..... -- 3,554 --
--------- --------- ---------
Cash and cash equivalents -- End of period........... $ 3,554 $ 118,800 $ 28,505
========= ========= =========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION:
For the eleven months ended December 31, 1998, the Company paid no income
taxes and paid interest of $2,279.
For the six months ended June 30, 1999, the Company paid no income taxes
and paid interest of $3,986 (unaudited).
NON-CASH INVESTING AND FINANCING ACTIVITIES:
See Notes 3, 4 & 7
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Big Network, Inc. ('The Company') (http://www.bignetwork.com) offers a
network of technology and community-driven Web site focused on people
interaction through games and communications. The Company was incorporated on
December 4, 1997. However, the Company was capitalized and began operations on
January 30, 1998.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company had a net loss for the
eleven months ended December 31, 1998 and a stockholders' deficiency at
December 31, 1998. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
Management's plans in regard to this matter are as follows:
The Company is in negotiation to be acquired by a publicly held
company.
The Company is working to raise additional capital and debt financing
to fund operations, increase revenues, and reduce operating costs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments cash and cash
equivalents, receivables, accounts payable and accrued expense and advances from
stockholders the carrying amounts approximate fair value due to their short
maturities. The amounts shown for capital lease obligations also approximate
fair value because interest rates and terms offered to the Company for similar
debt are substantially the same.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances exceeded the FDIC insured levels
at various times during the year. Also, the Company performs ongoing credit
evaluations of its customers' financial conditions and generally does not
require collateral on accounts receivable. The Company maintains allowances for
credit losses when required.
EQUIPMENT
Equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of 3 to 7 years.
F-66
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
LONG-LIVED ASSETS
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the related carrying amount may
not be recoverable. When required, impairment losses on assets to be held and
used are recognized based on the fair value of the assets, and long-lived assets
to be disposed of are reported at the lower of carrying amount of fair value
less cost to sell.
REVENUE RECOGNITION
The Company derives its revenue from the sale of advertisements on
short-term contracts. Advertising revenues are recognized ratably over the
period in which the advertisements are displayed. Barter transactions are
recorded at the lower of the estimated fair value of advertisements received or
the estimated fair value of the advertisements given. Barter revenue and the
related advertising is recorded based on impressions delivered and received with
the difference recorded as an advance or prepaid. Barter revenue was immaterial
for the period ending December 31, 1998.
ORGANIZATIONAL EXPENSES
In accordance with American Institutes of Certified Public Accountants'
Statement of Position 98-5 'Reporting on the Costs of Start-Up Activities, the
Company expenses, as incurred, costs related to organizational and start-up
activities.
ROYALTY PAYMENTS
The Company has agreements to share revenue with individuals independent of
the Company. The Company is required to pay royalties for the use of computer
games based on a percentage of advertising revenue generated from the Company's
usage of the games on its web-site. As the Company generates advertising revenue
a corresponding liability is accrued as a royalty expense, which is recorded as
a cost of revenue. (See Note 3).
ADVERTISING AND MARKETING EXPENSE
The Company expenses costs associated with advertising and marketing as
they are incurred.
INCOME TAXES
Income taxes are provided for based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards ('SFAS') No. 109
'Accounting for Income Taxes.' The liability method requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences for
temporary differences between the reported amount of assets and liabilities and
their tax basis.
COMPREHENSIVE INCOME
SFAS No. 130, 'Reporting Comprehensive Income', establishes standards for
the reporting and displaying of comprehensive income and its components in the
financial statements. As of December 31, 1998, the Company has no items that
represent other comprehensive income and, therefore, has not included a schedule
of comprehensive income in the financial statements.
F-67
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
IMPACT OF THE YEAR 2000 ISSUE
During the year ended December 31, 1998, the Company conducted an
assessment of issues related to the year 2000 and determined that no issues
existed which would cause its computer systems not to properly utilize dates
beyond December 31, 1999.
UNAUDITED INFORMATION
The financial statements for the period ended June 30, 1999 are unaudited.
In the opinion of management, the unaudited information is fairly presented
and all adjustments (consisting only of normal recurring adjustments) necessary
to present fairly the financial position of the Company as of June 30, 1999 and
the results of operations and cash flows for the six month period then ended
have been included. The operating results of the Company for the six month
period may not be indicative of operating results for the full year.
NOTE 2 -- EQUIPMENT
As of December 31, 1998 and June 30, 1999, equipment consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Computer Equipment.................................. $ 54,900 $45,577
Computer Software................................... 50,836 44,066
Office Equipment.................................... 818 818
-------- -------
106,554 90,461
Less: Accumulated Depreciation...................... 25,905 31,520
-------- -------
Equipment, net...................................... $ 80,649 $58,941
======== =======
</TABLE>
Equipment purchased under capital lease obligations consisted of the
following as of December 31, 1998:
<TABLE>
<S> <C>
Computer Equipment.......................................... $40,749
Less: accumulated depreciation.............................. 6,180
-------
$34,569
=======
</TABLE>
Depreciation expense for the eleven months ended December 31, 1998 was
$25,905 and for the six months ended June 30, 1999 was $21,808.
NOTE 3 -- COMMITMENTS AND CONTINGENCIES
LEASES
In 1998, the Company was provided office space at no charge. In July 1999,
the Company entered into a non-cancelable lease for office space. Also, the
Company has capital lease obligations for computer equipment, which expire
starting in 1999. The future minimum payments under the non-cancelable lease and
capital lease obligations are as follows:
F-68
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
YEAR ENDED DECEMBER 31, ------ ------
<S> <C> <C>
1999................................................... $16,271 $ 29,425
2000................................................... 3,805 65,100
2001................................................... -- 66,900
2002................................................... -- 33,900
------- --------
Net Minimum Lease Payments.................................. 20,076 $195,325
Less: Amounts Representing Interest......................... 1,520 ========
-------
Present Value of Net Minimum Lease Payments................. 18,556
Less: Current Portion....................................... 14,785
-------
Long-Term................................................... $ 3,771
=======
</TABLE>
The Company had no rent expense for the eleven months ended December 31,
1998.
REVENUE SHARING AGREEMENTS
The Company has entered into several agreements to share revenues with
individuals independent of the Company. These individuals have provided the
Company with computer games, which the Company has operating on its web-site.
The individuals have granted the Company usage of the computer games for up to
25% royalty of advertising revenue generated from the usage of the game on the
Company's web-site. For the eleven months ended December 31, 1998, the Company
had no liabilities due under these agreements.
NOTE 4 -- STOCKHOLDERS' EQUITY
CLASSES OF SHARES
The Company's Articles of Incorporation enable the Company to issue up to
20,000,000 shares, consisting of 5,000,000 shares of Preferred Stock, which have
a par value of $0.001 per share and 15,000,000 shares of Common Stock, which
have a par value of $0.001 per share.
PREFERRED STOCK
Preferred stock, of any series, shall have the powers, preferences, rights,
qualifications, limitations, and restrictions as fixed by the Company's Board of
Directors in its sole discretion.
In 1998, the Company's Board of Directors established 1,300,000 shares of
Preferred Stock-Series A and issued 529,449 shares for $447,753.
The Series A shares have the following significant rights, preferences and
restrictions:
Entitled to receive dividends prior and in preference to any
declaration or payment of any dividend on the Common Stock, at a rate of
$.06 per share per annum, payable quarterly when, as, and if declared by
the Board of Directors. Such dividends shall not be cumulative.
Each share of Series A shall be convertible, at the option of the
holder, at any time after issuance, into such number of fully paid common
stock as is determined by dividing $0.83 by the conversion price of $0.83,
(which is adjustable under certain criteria).
Each share of Series A has an automatic conversion upon the Company's
sale of its common stock in a firm commitment for a public offering
pursuant to a registration statement under the Securities Act of 1933 and
the public offering price not less than $4.00 per share, which would result
in aggregate cash proceeds to the Company of $15,000,000, or the date
specified by written consent, or agreement, of the holders of a majority of
the then outstanding shares of the Series A.
F-69
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
COMMON STOCK
In 1998, the Company had the following significant issuances of Common
Stock:
In January 1998, the Company issued 673,900, 553,000 and 618,100
shares of its common stock to the three principal stockholders. The
consideration for the shares was 30,000, 6,000 and 2,500 shares,
respectively, of a publicly traded company with an aggregate market value
of $83,014 on the date of contribution, software with a cost basis of
$15,781 and a business plan with a cost basis of $103,431. The aggregate
fair market value of the contributed assets was $202,226.
The Company issued 127,500 shares of its common stock for proceeds of
$12,750.
On January 30, 1998, the Company acquired all the assets and assumed
certain liabilities of Dream Zero, LLC ('Dream Zero') and Play4Prizes (an
individual doing business as, 'DBA') for 435,000 and 212,500 shares,
respectively, of the Company's common stock with an aggregate fair market
value of $64,750. The acquisition agreements grants the Company the right
to repurchase all of the shares of its common stock issued in conjunction
with these acquisitions. (See Note 7).
NOTE 5 -- SALES
During the eleven months ended December 31, 1998, the Company had four
major customers which accounted for approximately 28%, 18%, 12% and 11% of total
sales, respectively. At December 31, 1998, the amounts due from two of these
customers was approximately $13,600 and $5,000.
NOTE 6 -- INCOME TAXES
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
<TABLE>
<S> <C>
Federal Income Tax Rate.............................. 34.0%
Effect of Valuation Allowance........................ (34.0)%
-----
Effective Income Tax Rate............................ 0.0%
=====
</TABLE>
At December 31, 1998, the Company had net carryforward losses of
approximately $730,000. Because of the current uncertainty of realizing the
benefits of the tax carryforward, valuation allowances equal to the tax benefits
for deferred taxes have been established. The full realization of the tax
benefit associated with the carryforward depends predominantly upon the
Company's ability to generate taxable income during the carryforward period.
Deferred tax assets and liabilities reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<S> <C>
Deferred Tax Assets
Loss Carryforwards.......................................... $ 297,000
Valuation Allowance......................................... (297,000)
---------
Net Deferred Tax Assets..................................... $ --
=========
</TABLE>
Net operating loss carryforwards expire in 2013.
NOTE 7 -- ACQUISITIONS
Asset Acquisition In January 1998, the Company issued 673,900, 553,000 and
618,100 shares of its common stock to the three principal stockholders. The
consideration for the shares was 30,000, 6,000 and 2,500 shares, respectively,
of a publicly traded company with an aggregate market value of $83,014
F-70
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
on the date of contribution, software with a cost basis of $15,781 and a
business plan with a cost basis of $103,431. The aggregate fair market value of
the contributed assets was $202,226.
DREAM ZERO
On January 30, 1998, the Company acquired all of the assets and assumed
certain liabilities of Dream Zero, LLC, which began its operations in 1997, in
exchange for 435,000 shares of the Company's Common Stock valued at $43,500, or
$0.10 per share which was determined to be the fair value of the shares issued
based on the Company's sales of stock in 1998 at $0.10. The acquisition was
accounted for by the purchase method of accounting; accordingly, the purchase
price has been allocated to the assets acquired and liabilities assumed based on
the estimated fair values at the date of acquisition. The excess of the purchase
price over estimated fair value of net assets acquired of $24,165 has been
expensed, because the Company determined that it had no future value at the date
of acquisition. The assets have been incorporated in the operations of the
Company since the date of acquisition.
PLAY4PRIZES
On January 30, 1998, the Company acquired all of the assets and assumed
certain liabilities of Play4Prizes, a DBA, which began operations in 1997, in
exchange for 212,500 shares of the Company's Common Stock valued at $21,250, or
$0.10 per share which was determined to be the fair value of the shares issued
based on the Company's sales of stock in 1998 at $0.10. The acquisition was
accounted for by the purchase method of accounting; accordingly, the purchase
price has been allocated to the assets acquired and liabilities assumed based on
the estimated fair values at the date of acquisition. The assets have been
incorporated in the operations of the Company since the date of acquisition.
The estimated fair value of assets acquired and liabilities assumed is
summarized as follows:
<TABLE>
<CAPTION>
ASSETS DREAM ZERO PLAY4PRIZES
------ ---------- -----------
<S> <C> <C> <C>
Cash................................................ $ -- $ 238 $ --
Accounts Receivable................................. -- -- 12,778
Equipment........................................... -- 7,786 6,000
Software............................................ 15,781 16,300 17,306
Other Assets........................................ 103,431 24,165 --
Securities.......................................... 83,014 -- --
Liabilities......................................... -- (4,989) (14,834)
-------- ------- --------
Purchase Price...................................... $202,226 $43,500 $ 21,250
======== ======= ========
</TABLE>
NOTE 8 -- SUBSEQUENT EVENTS
a) ISSUANCE OF SERIES A PREFERRED STOCK
During the first quarter of 1999, the Company issued 453,633 shares of its
Preferred Stock-Series A for $376,515, and issued warrants to purchase up to
216,867 shares of the Company's Preferred Stock-Series A at $0.83 per share.
b) STOCK OPTIONS
The Company has issued, for services rendered under contracts, stock
options to purchase 280,000 shares of the Company's common stock at $0.10 per
share.
F-71
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
c) REPURCHASE OF COMMON STOCK
In 1999, the Company repurchased 108,750 shares of its common stock at a
value of $10,875, which were issued for the acquisition of the assets from Dream
Zero. The consideration of $10,875 was satisfied by the Company's return of its
rights to certain computer programs acquired in the acquisition.
d) SALE OF COMPANY
Effective August 31, 1999, certain of the stockholders of the Company
consummated an agreement exchanging an aggregate of approximately 80% of the
issued and outstanding shares of the Company's common and preferred stock for
1,440,000 shares of a publicly held corporation's common stock. The Company
expects the remaining stockholders to consummate an exchange of their shares for
an aggregate of 360,000 additional shares of the same publicly held
corporation's common stock.
F-72
<PAGE>
GAMER'S ALLIANCE, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998
JUNE 30, 1999
F-73
<PAGE>
GAMER'S ALLIANCE, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998
INDEX
<TABLE>
<CAPTION>
<S> <C>
Independent Auditor's Report................................ F-75
Balance Sheet............................................... F-76
Income Statement............................................ F-77
Statement of Stockholders' Equity........................... F-78
Statement of Cash Flows..................................... F-79
Notes to Financial Statements............................... F-80
</TABLE>
F-74
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
GAMER'S ALLIANCE, INC.
We have audited the accompanying balance sheets of Gamer's Alliance, Inc.
as of December 31, 1998 and June 30, 1999 and the related statements of
operations, stockholders' equity and cash flows for the initial period June 1,
1998 to December 31, 1998 and for the six month period January 1, 1999 to
June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gamer's Alliance, Inc. as of
December 31, 1998 and June 30, 1999, and the results of its operations and its
cash flows for the initial period and six month period then ended, in conformity
with generally accepted accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
November 17, 1999
F-75
<PAGE>
GAMER'S ALLIANCE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................. $ 6,183 $ 5,503
Accounts receivable.................................... 30,543 52,464
------- -------
36,726 57,967
Equipment, net.............................................. 11,178 20,240
------- -------
Total assets...................................... $47,904 $78,207
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable....................................... $15,991 $35,284
Advances from stockholders............................. 29,328 29,328
------- -------
Total liabilities................................. 45,319 64,612
------- -------
Stockholders' equity
Common stock, par value $1.00, 30,000 shares authorized
and 200 shares issued and outstanding................. 200 200
Retained earnings...................................... 2,385 13,395
------- -------
Total stockholders' equity........................ 2,585 13,595
------- -------
Total liabilities and stockholders' equity........ $47,904 $78,207
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
GAMER'S ALLIANCE, INC.
INCOME STATEMENT
<TABLE>
<CAPTION>
SEVEN MONTHS SIX MONTHS INCEPTION
ENDED ENDED (JUNE 1, 1998)
DECEMBER 31, JUNE 30, TO JUNE 30,
1998 1999 1998
---- ---- ----
<S> <C> <C> <C>
Revenue................................................ $108,347 $163,047 $ 245
Cost of revenue........................................ 20,671 33,233 730
-------- -------- -------
87,676 129,814 (485)
General and administrative expenses.................... 85,291 118,804 968
-------- -------- -------
Income from operations................................. 2,385 11,010 (1,453)
Provision for income taxes............................. -- -- --
-------- -------- -------
Net income............................................. $ 2,385 $ 11,010 $(1,453)
======== ======== =======
Earnings per share, basic and diluted.................. $ 11.93 $ 55.05 $ (7.27)
======== ======== =======
Weighted average shares outstanding.................... 200 200 200
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE>
GAMER'S ALLIANCE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ -------- -----
<S> <C> <C> <C> <C>
Balance at June 1, 1998.................................... -- $-- $ -- $ --
Issuance of Common Stock for:
Cash.................................................. 200 200 -- 200
Net Income............................................ -- -- 2,385 2,385
--- ---- ------- -------
Balance at December 31, 1998............................... 200 200 2,385 2,585
Net Income................................................. -- -- 11,010 11,010
--- ---- ------- -------
Balance at June 30, 1999................................... 200 $200 $13,395 $13,595
=== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE>
GAMER'S ALLIANCE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS SIX MONTHS INCEPTION
ENDED ENDED (JUNE 1, 1998)
DECEMBER 31, JUNE 30, TO JUNE 30,
1998 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income........................................ $ 2,385 $11,010 $(1,453)
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation...................................... 2,795 1,752 157
Change in assets and liabilities
Increase in accounts receivable................... (30,543) (21,921) --
Increase in accounts payable...................... 15,991 19,293 --
------- ------- -------
Net Cash Provided by (Used in) Operating Activities.... (9,372) 10,134 (1,296)
------- ------- -------
Cash Flows from Investing Activities
Purchase of equipment............................. (13,973) (10,814) (5,650)
------- ------- -------
Cash Flows from Financing Activities
Advances from (repayments to) stockholders........ 29,328 -- 9,800
Issuance of common Stock.......................... 200 -- 200
------- ------- -------
Net Cash Provided by Financing Activities.............. 29,528 -- 10,000
------- ------- -------
Net Increase (Decrease) in Cash and Cash Equivalents... 6,183 (680) 3,054
Cash and Cash Equivalents -- Beginning................. -- 6,183 --
------- ------- -------
Cash and Cash Equivalents -- End of Period............. $ 6,183 $ 5,503 $ 3,054
======= ======= =======
</TABLE>
Supplemental Cash Flow Information:
For the seven months ended December 31, 1998 and the six months ended June 30,
1999, and the one month ended June 30, 1998, the Company paid no income taxes
and no interest.
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE>
GAMER'S ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND JUNE 30, 1999
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Gamer's Alliance, Inc. (the 'Company') is a collection of multiple
internet-based websites for information and evaluation of the current and most
popular software games sold on the World Wide Web and in software stores. The
Company was incorporated in the state of Missouri on June 1, 1998 and began
operations on that date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments such as cash and cash
equivalents, receivables, accounts payable and advances from stockholders the
carrying amounts approximate fair value due to their short maturities.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances may exceed the FDIC insured
levels at various times during the year. The Company maintains allowances for
credit losses when required.
EQUIPMENT
Equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of 3 to 5 years.
LONG-LIVED ASSETS
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the related carrying amount may
not be recoverable. When required, impairment losses on assets to be held and
used are recognized based on the fair value of the assets, and long-lived assets
to be disposed of are reported at the lower of carrying amount of fair value
less cost to sell.
REVENUE RECOGNITION
The Company derives its revenue from the sale of advertisements on
short-term contracts. Advertising revenues are recognized ratably over the
period in which the advertisements are displayed.
INCOME TAXES
The Company has been a subchapter S corporation. Income is passed through
to the stockholders who pay personally their share of the applicable taxes.
Therefore, no provision for income taxes was made at December 31, 1998.
Subsequent to the termination of the Company's S Corporation election (See
Note 3), provisions for income taxes are based on taxes payable or refundable
for the current year and deferred taxes on
F-80
<PAGE>
GAMER'S ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND JUNE 30, 1999
temporary differences between the amount of taxable income and pretax financial
income and between the tax bases of assets and liabilities and their reported
amounts in the financial statements. Deferred tax assets and liabilities are
included in the financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax assets and liabilities are
expected to be realized or settled as prescribed by Statement of Financial
Accounting Standards ('SFAS') No. 109, 'Accounting for Income Taxes.' As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
COMPREHENSIVE INCOME
SFAS No. 130, 'Reporting Comprehensive Income', establishes standards for
the reporting and displaying of comprehensive income and its components in the
financial statements. As of December 31, 1998 and June 30, 1999, the Company had
no items that represent other comprehensive income and, therefore, has not
included a schedule of comprehensive income in the financial statements.
EARNINGS PER SHARE
In accordance with SFAS No. 128, 'Earnings Per Share', the basic loss per
share is computed by dividing net loss available to common stockholders by the
weighted average number of common shares outstanding. Diluted loss per common
share is computed similar to basic loss per common share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potential common shares had been issued and
if the additional common shares were dilutive.
IMPACT OF THE YEAR 2000 ISSUE
During the period ended December 31, 1998, the Company conducted an
assessment of issues related to the year 2000 and determined that no issues
existed which would cause its computer systems not to properly utilize dates
beyond December 31, 1999.
NOTE 2 -- EQUIPMENT
As of December 31, 1998 and June 30, 1999, equipment consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
---- ----
<S> <C> <C>
Computer Equipment.......................................... $13,973 $24,787
Less: Accumulated Depreciation.............................. 2,795 4,547
------- -------
Equipment, net.............................................. $11,178 $20,240
======= =======
</TABLE>
Depreciation expense for the seven months ended December 31, 1998 was
$2,795 and for the six months ended June 30, 1999 was $1,752. For the one month
ended June 30, 1998 depreciation expense was $157.
NOTE 3 -- SUBSEQUENT EVENTS
On June 30, 1998, 100% of the Company's common stock was acquired by
eUniverse, Inc., a publicly held company.
As a result of the sale of the Company, the Subchapter Corporation status
has been terminated.
F-81
<PAGE>
FALCON VENTURES CORPORATION
FINANCIAL STATEMENTS
F-82
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report................................ F-84
Financial Statements:
Balance Sheets......................................... F-85
Statements of Operations............................... F-86
Statements of Stockholder's Equity (Deficiency)........ F-87
Statements of Cash Flows............................... F-88
Notes to Financial Statements.......................... F-89
</TABLE>
F-83
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
FALCON VENTURES CORPORATION
We have audited the accompanying balance sheets of Falcon Ventures
Corporation as of November 30, 1999 and February 24, 1999, and the related
statements of operations, stockholder's equity (deficiency) and cash flows for
the nine months ended November 30, 1999 and for the initial period May 12, 1998
to February 24, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Falcon Ventures Corporation
as of November 30, 1999 and February 24, 1999, and the results of its operations
and its cash flows for the nine months ended November 30, 1999 and the initial
period May 12, 1999 to February 24, 1999, in conformity with generally accepted
accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
January 5, 2000
F-84
<PAGE>
FALCON VENTURES CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, | FEBRUARY 24,
1999 | 1999
---- | ----
<S> <C> | <C>
ASSETS |
Current assets |
Cash and cash equivalents.............................. $ 9,892 | $ 8,924
Inventories............................................ 373,315 | --
Other current assets................................... 1,538 | 5,547
---------- | ---------
Total current assets.............................. 384,745 | 14,471
Equipment and furniture, net................................ 69,127 | 1,500
Excess of cost over fair value of net assets acquired, net |
of accumulated amortization of $37,544.................... 463,039 | --
Other assets................................................ 27,169 | --
---------- | ---------
Total assets...................................... $ 944,080 | $ 15,971
========== | =========
|
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY) |
Current liabilities |
Accounts payable and accrued expenses.................. $ 513,315 | $ 10,304
Due to parent.......................................... 590,944 | --
---------- | ---------
Total current liabilities......................... 1,104,259 | 10,304
---------- | ---------
Commitments and contingencies (Note 5)...................... -- | --
Stockholder's equity (deficiency) |
Common Stock, no par value, 1,000,000 shares |
authorized, 1,000,000 issued and outstanding.......... 506,250 | 313,750
Accumulated deficit.................................... (666,429) | (308,083)
---------- | ---------
Total stockholder's equity (deficiency)........... (160,179) | 5,667
---------- | ---------
Total liabilities and stockholder's equity |
(deficiency).................................... $ 944,080 | $ 15,971
========== | =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-85
<PAGE>
FALCON VENTURES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
| MAY 12, 1998 MAY 12, 1998
NINE SIX MONTHS | MAY 12, 1998 (INCEPTION) (INCEPTION)
MONTHS ENDED ENDED | TO TO TO
NOVEMBER 30, SEPTEMBER 30, | FEBRUARY 24, NOVEMBER 30, SEPTEMBER 30,
1999 1999 | 1999 1998 1998
---- ---- | ---- ---- ----
| (UNAUDITED) (UNAUDITED)
<S> <C> <C> | <C> <C> <C>
Sales.................... $ 427,766 $ 67,406 | $ 102,872 $38,192 $10,382
Cost of goods sold....... 495,877 94,868 | 91,788 16,779 5,714
--------- --------- | --------- ------- -------
Gross (loss) profit...... (68,111) (27,462) | 11,084 21,413 4,668
Selling, general and |
administrative |
expenses............... 598,318 320,443 | 319,167 10,391 7,782
--------- --------- | --------- ------- -------
Income (loss) before |
taxes.................. (666,429) (347,905) | (308,083) 11,022 (3,114)
Provision for income |
taxes.................. -- -- | -- -- --
--------- --------- | --------- ------- -------
Net income (loss)........ $(666,429) $(347,905) | $(308,083) $11,022 $(3,114)
========= ========= | ========= ======= =======
Basic and diluted income |
(loss) per share....... $ (0.67) $ (0.35) | $ (0.76) $ 0.03 $ (0.01)
========= ========= | ========= ======= =======
Weighted average shares |
outstanding -- basic |
and diluted............ 1,000,000 1,000,000 | 404,167 400,000 400,000
========= ========= | ========= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-86
<PAGE>
FALCON VENTURES CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ------- -----
<S> <C> <C> <C> <C>
Balance at May 12, 1998.......................... -- $ -- $ -- $ --
Issuance of shares for cash...................... 400,000 10,000 10,000
Issuance of shares for services.................. 600,000 303,750 -- 303,750
Net loss......................................... -- -- (308,083) (308,083)
--------- -------- --------- ---------
Balance at February 24, 1999..................... 1,000,000 313,750 (308,083) 5,667
Excess of cost over fair value of net assets
sold........................................... -- 192,500 308,083 500,583
Net loss......................................... -- -- (666,429) (666,429)
--------- -------- --------- ---------
Balance at November 30, 1999..................... 1,000,000 $506,250 $(666,429) $(160,179)
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-87
<PAGE>
FALCON VENTURES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE SIX MONTHS | MAY 12, 1998 MAY 12, 1998 MAY 12, 1998
MONTHS ENDED ENDED | TO (INCEPTION) TO (INCEPTION) TO
NOVEMBER 30, SEPTEMBER 30, | FEBRUARY 24, NOVEMBER 30, SEPTEMBER 30,
1999 1999 | 1999 1998 1998
---- ---- | ---- ---- ----
(UNAUDITED) | (UNAUDITED) (UNAUDITED)
<S> <C> <C> | <C> <C> <C>
Cash Flows from Operating |
Activities |
Net Income (Loss)............. $(666,429) $(347,905) | $(308,083) $ 11,022 $ (3,114)
Adjustments to reconcile net |
loss to cash provided by |
operating activities: |
Depreciation and |
amortization expense... 41,224 26,427 | -- -- --
Issuance of common stock |
for services........... -- -- | 303,750 -- --
(Increase) Decrease in: |
Inventories......... (373,315) (2,914) | -- -- --
Other current |
assets............ 4,009 (10,067) | (5,547) (12,373) --
Other assets........ (27,169) (26,204) | -- -- (210)
Increase (Decrease) in |
Accounts payable and |
accrued |
expenses.......... 503,011 26,754 | 10,304 -- 1,344
Due to parent....... 590,944 395,662 | -- -- --
--------- --------- | --------- -------- ---------
Net Cash Provided by (Used in) |
Operating Activities............. 72,275 61,753 | 424 (1,351) (1,980)
--------- --------- | --------- -------- ---------
Cash Flows from Investing |
Activities |
Purchase of equipment and |
furniture................... (71,307) (25,931) | (1,500) (1,500) (1,500)
--------- --------- | --------- -------- ---------
Cash Flows from Financing |
Activities |
Issuance of common stock...... -- -- | 10,000 10,000 10,000
--------- --------- | --------- -------- ---------
Net Increase in Cash............... 968 35,822 | 8,924 7,149 6,520
Cash and Cash Equivalents -- |
Beginning of Period.............. 8,924 11,867 | -- -- --
--------- --------- | --------- -------- ---------
Cash and Cash Equivalents -- End of |
Period........................... $ 9,892 $ 47,689 | $ 8,924 $ 7,149 $ 6,520
========= ========= | ========= ======== =========
</TABLE>
Supplemental Disclosures of Cash Flow Information:
During the nine months ended November 30, 1999 and for the initial period May
12, 1998 to February 24, 1999, the Company paid no income taxes and no interest.
Supplemental Schedule of Non-Cash Investing and Financing Transactions:
During the initial period May 12, 1998 to February 24, 1999, the Company issued
600,000 shares of its common stock at an estimated fair market value of $303,750
for compensation.
The accompanying notes are an integral part of the financial statements.
F-88
<PAGE>
FALCON VENTURES CORPORATION
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 24, 1999
NOVEMBER 30, 1999
NOTE 1 -- THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND LINE OF BUSINESS
Falcon Ventures Corporation (dba 'DVD Wave') (the 'Company'), began
operations on May 12 1998, under a partnership agreement, and was incorporated
in California on November 4, 1998. The partners maintained their ownership
interests in the corporation. The corporation continued the operations begun as
the partnership. As of February 25, 1999 the Company is a wholly owned
subsidiary of Take-Two Interactive Software, Inc. ('Taketwo'). The Company is in
the business of selling and distributing Digital Video Disks ('DVD') on its
Internet web site. The Company's customers are located throughout the U.S. and
the Company has a corporate office in San Francisco, California. The Company
uses a fulfillment center with facilities located throughout the U.S. for the
storage and distribution of its products.
As discussed in Note 3, the original stockholders sold their shares on
February 24, 1999. There was no significant activity for the period February 25
to February 28, 1999. Therefore, the financial statements cover substantially
all of the operations of the company since inception. The Company's fiscal year
end is February 28.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments including cash and
accounts payable and accrued expenses, the carrying amounts approximate fair
value due to their short maturities.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and accounts receivables. The
Company places its cash with high quality financial institutions and at times
may exceed the FDIC $100,000 insurance limit.
IMPAIRMENT OF LONG-LIVED ASSETS AND EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED
In accordance with Financial Accounting Standards Board ('FASB') Statement
of Financial Accounting Standard ('SFAS') No. 121, 'Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of',
long-lived assets are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amounts of such assets may not be
recoverable. Impairment losses would be recognized if the carrying amounts of
the assets exceed the fair value of the assets.
INVENTORIES
Inventories consist of certain DVD's, which are held specifically for
resale. Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out basis.
F-89
<PAGE>
FALCON VENTURES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 24, 1999
NOVEMBER 30, 1999
EQUIPMENT AND FURNITURE
Equipment and furniture are stated at cost. Depreciation is computed using
the straight-line method based on useful lives of 5 years.
REVENUE RECOGNITION
Product sales are recognized upon delivery of product to the customer.
Sales are adjusted for any future returns or allowances.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
'Accounting for Income Taxes'. Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary differences,
and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
NET LOSS PER SHARE
In accordance with SFAS No. 128, 'Earnings Per Share', the basic loss per
common share is computed by dividing net loss available to common stockholders
by the weighted average number of common shares outstanding. Diluted loss per
common share is computed similar to basic loss per common share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potential common shares had been issued and
if the additional common shares were dilutive.
COMPREHENSIVE INCOME
SFAS No. 130, 'Reporting Comprehensive Income', establishes standards for
the reporting and display of comprehensive income and its components in the
financial statements. As of November 30, 1999 and February 24, 1999, the Company
had no items that represent other comprehensive income and, therefore, has not
included a schedule of comprehensive income in the financial statements.
IMPACT OF YEAR 2000 ISSUE
During the 1999, the Company conducted an assessment of issues related to
the Company and its customers regarding the Year 2000 and determined that no
issues existed, which would cause its computer systems not to properly utilize
dates beyond December 31, 1999.
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.
F-90
<PAGE>
FALCON VENTURES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 24, 1999
NOVEMBER 30, 1999
NOTE 2 -- EQUIPMENT AND FURNITURE
The cost of equipment and furniture consisted of the following as of:
<TABLE>
<CAPTION>
MAY 12, 1998
TO
NOVEMBER 30, FEBRUARY 24,
1999 1999
---- ----
<S> <C> <C>
Computers.................................................. $54,128 $ --
Furniture and Fixtures..................................... 18,679 1,500
------- ------
72,807 1,500
Less: Accumulated Depreciation............................. 3,681 --
------- ------
$69,126 $1,500
======= ======
</TABLE>
Depreciation expense was $3,681 and $0 for the nine months ended
November 30, 1999 and for the initial period May 12, 1998 to February 24, 1999,
respectively, and $1,398 and $0 for the six months ended September 30, 1999 and
the initial period May 12, 1998 to September 30, 1998, respectively.
NOTE 3 -- EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
On February 24, 1999, the Stockholders of the Company sold 100% of their
issued and outstanding shares of the Company's common stock in exchange for
50,000 shares of Taketwo. The fair market value of the Company was determined by
the market value of Taketwo's common stock issued at the date of the
acquisition. Pursuant to the Securities and Exchange Commission's Staff
Accounting Bulletin Topic 5J ('Push Down Basis of Accounting Required in Certain
Limited Circumstances'), the Company's assets and liabilities have been adjusted
to their fair market values as of the date of acquisition. The transaction was
accounted for by the purchase method of accounting; accordingly, the purchase
price has been allocated to the assets acquired and liabilities assumed based on
the estimated fair values at the date of acquisition. The excess of the purchase
price over the estimated fair value of net assets acquired of $500,583 has been
recorded as the excess cost over the fair value of net assets acquired, which is
being amortized over ten years. The estimated fair value of the assets acquired
and liabilities assumed is summarized as follows:
<TABLE>
<S> <C>
Cash........................................................ $ 8,924
Other current assets........................................ 5,547
Equipment, net.............................................. 1,500
Excess cost over fair value of net assets acquired.......... 500,583
Accounts payable and accrued expenses....................... (10,304)
--------
Purchase price.............................................. $506,250
========
</TABLE>
NOTE 4 - DUE FROM PARENT
As of November 30, 1999, the Company has borrowed $588,030 from the
stockholder of the Company for operating funds and personnel costs. The advances
are non-interest bearing and due on demand.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
For the initial period May 12, 1998 to February 24, 1999, the Company
operated from a room located in the residency of the principal management. The
associated costs were determined to be immaterial to the operations of the
Company. For the nine months ended November 30, 1999, the Company's office was
located in the personal residence of the principal management until August 1999,
F-91
<PAGE>
FALCON VENTURES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 24, 1999
NOVEMBER 30, 1999
at which time the Company executed a non-cancelable operating lease for its
current office space. Total rent expense for the nine months ended November 30,
1999 was $32,980, and for the six months ended September 30, 1999 was $15,145.
Future minimum lease payments under the non-cancelable operating lease is
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
NOVEMBER 30,
------------
<S> <C>
2000........................................................ $104,000
2001........................................................ 104,000
2002........................................................ 70,000
--------
Total....................................................... $278,000
========
</TABLE>
NOTE 6 -- STOCKHOLDER'S EQUITY
CLASS OF SHARES
The Company's Articles of Incorporation authorize the issuance of up to
1,000,000 shares common stock with no par value.
COMMON STOCK
Upon incorporation of the Company, 400,000 shares of the Company's common
stock was issued for the $10,000 of capital contributed to the partnership
originally formed on May 12, 1998.
During the ten months ended February 24, 1999, the Company issued 600,000
shares of the Company's common stock for compensation at a fair market value of
$0.5062 per share for a total value of $303,750. The market value of the shares
issued was determined based on the fair market value paid by the parent on
February 24, 1999.
NOTE 7 -- INCOME TAXES
The reconciliation of the effective income tax rate to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
MAY 12, 1998
TO
NOVEMBER 30, FEBRUARY 24,
1999 1999
---- ----
<S> <C> <C>
Federal Income Tax Rate.................................. 34.0 % 34.0 %
Effect of Valuation Allowance............................ (34.0)% (34.0)%
----- -----
Effective Income Tax Rate................................ 0.0 % 0.0 %
===== =====
</TABLE>
At November 30, 1999 and February 24, 1999, the Company had net carry
forward losses of approximately $666,000 and $308,000, respectively. Because of
the current uncertainty of realizing the benefits of the tax carry forward, a
valuation allowance equal to the tax benefits for deferred taxes has been
established. The full realization of the tax benefit associated with the carry
forward depends predominantly upon the Company's ability to generate taxable
income during the carry forward period.
F-92
<PAGE>
FALCON VENTURES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 24, 1999
NOVEMBER 30, 1999
Deferred tax assets and liabilities reflect the net effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
MAY 12, 1998
TO
NOVEMBER 30, FEBRUARY 24,
1999 1999
---- ----
<S> <C> <C>
Deferred Tax Assets Loss Carry forwards.................... $ 331,000 $ 105,000
Less: Valuation Allowance.................................. (331,000) (105,000)
--------- ---------
Net Deferred Tax Assets.................................... $ -- $ --
========= =========
</TABLE>
At November 30, 1999 and February 24, 1999, the Company has provided a
valuation allowance for the deferred tax asset since management has not been
able to determine that the realization of that asset is more likely than not.
The net change in the valuation allowance for the nine months ended
November 30, 1999 and for the initial period May 12, 1998 to February 24, 1999
increased by $226,000 and $105,000, respectively.
NOTE 8 -- ADVERTISING COSTS
Advertising costs incurred and recorded as expense in the statement of
operations were $37,580 and $2,400 for the periods ended November 30, 1999 and
February 24, 1999, respectively, and $16,011 and $550 for the six months ended
September 30, 1999 and the initial period May 12, 1998 to September 30, 1998,
respectively.
F-93
<PAGE>
POKEMON VILLAGE
FINANCIAL STATEMENTS
DECEMBER 31, 1999
F-94
<PAGE>
INDEPENDENT AUDITOR'S REPORT
TO POKEMON VILLAGE
We have audited the accompanying balance sheet of Pokemon Village (a
proprietorship) as of December 31, 1999, and the related statements of income,
proprietor's capital, and cash flows for the initial period August 1 to December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the over all financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pokemon Village as of December
31, 1999, and the results of its operations and its cash flows for the initial
period then ended in conformity with generally accepted accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
March 15, 2000
F-95
<PAGE>
POKEMON VILLAGE
BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets
Accounts receivable $18,512
Fixed assets, net of accumulated depreciation of $1,700 10,540
-------
TOTAL ASSETS $29,052
=======
LIABILITIES AND PROPRIETOR'S CAPITAL
Current liabilities $ --
Proprietor's capital 29,052
-------
TOTAL LIABILITIES AND PROPRIETOR'S CAPITAL $29,052
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-96
<PAGE>
POKEMON VILLAGE
INCOME STATEMENT
AUGUST 1 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
Revenue $40,939
Selling, general and administrative expenses 16,557
-------
Income before income taxes 24,382
Provision for income taxes --
-------
Net income $24,382
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-97
<PAGE>
POKEMON VILLAGE
STATEMENT OF PROPRIETOR'S CAPITAL
AUGUST 1 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
PROPRIETOR'S CAPITAL, AUGUST 1, $ --
Capital contributions 12,765
Net income 24,382
Distributions 8,095
-------
PROPRIETOR'S CAPITAL, DECEMBER 31, 1999 $29,052
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-98
<PAGE>
POKEMON VILLAGE
STATEMENT OF CASH FLOWS
AUGUST 1 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $24,382
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,700
Accounts receivable (18,512)
--------
Net cash provided by operating activities 7,570
--------
CASH FLOWS FROM INVESTING ACTIVITIES --
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions 525
Distributions (8,095)
--------
NET CASH USED BY FINANCING ACTIVITIES (7,570)
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS --
CASH AND CASH EQUIVALENTS - BEGINNING --
--------
CASH AND CASH EQUIVALENTS - DECEMBER 31, 1999 $ --
========
No cash was paid for interest or income taxes.
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES:
The proprietor contributed fixed assets with a cost basis of $12,240.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-99
<PAGE>
POKEMON VILLAGE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Pokemon Village, a proprietorship, operates multiple websites targeted
to the youth markets. PokemonVillage.com is for enthusiasts of Pokemon
computer and video games and other collectibles. ForumNation.com
provides discussion forums on subjects including games, music, comics
and collectibles. ReserveAuction.com allows users to auction their
Pokemon cards and collectibles to other users.
The financial statements have been prepared solely from the accounts
of Pokemon Village and do not include the personal accounts of the
owner or any other operation in which he is engaged.
The Company began operations on August 1, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
For certain of the Company's financial instruments such as cash and
cash equivalents and receivables, carrying amounts approximate fair
value due to their short maturities.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances may exceed the FDIC
insured levels at various times during the year. The Company maintains
allowances for credit losses when required.
Equipment
Equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of 3 years.
Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the related
carrying amount may not be recoverable. When required, impairment
losses on assets to be held and used are recognized based on the fair
value of the assets, and long-lived assets to be disposed of are
reported at the lower of carrying amount of fair value less cost to
sell.
F-100
<PAGE>
POKEMON VILLAGE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue Recognition
The Company derives its revenue from the sale of advertisements on
short-term contracts. Advertising revenues are recognized ratably over
the period in which the advertisements are displayed.
Income Taxes
The proprietorship itself is not a taxpaying entity for purposes of
federal and state income taxes. Federal and state income taxes of the
proprietor are computed on his total income from all sources;
accordingly, no provision for income taxes is made in these financial
statements.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for the reporting and displaying of comprehensive income and its
components in the financial statements. As of December 31, 1999, the
Company had no items that represent other comprehensive income and,
therefore, has not included a schedule of comprehensive income in the
financial statements.
Impact of the Year 2000 Issue
During the period ended December 31, 1999, the Company conducted an
assessment of issues related to the year 2000 and determined that no
issues existed which would cause its computer systems not to properly
utilize beyond December 31, 1999.
NOTE 2 - EQUIPMENT
As of December 31, 1999, equipment consisted of the following:
<TABLE>
<S> <C>
Computer equipment $12,240
Less: accumulated depreciation 1,700
-------
Equipment, net $10,540
=======
</TABLE>
Depreciation expense for the five months ended December 31, 1999 was
$1,700.
NOTE 3 - SUBSEQUENT EVENTS
On February 1, 2000, 100% of the Company's assets (with the exception
of fixed assets) were acquired by eUniverse, Inc., a publicly held
company.
F-101
<PAGE>
JUST SAY WOW
FINANCIAL STATEMENTS
DECEMBER 31, 1999
F-102
<PAGE>
INDEPENDENT AUDITOR'S REPORT
TO JUST SAY WOW
We have audited the accompanying balance sheet of JUST SAY WOW (a
proprietorship) as of December 31, 1999, and the related statements of income,
proprietor's capital, and cash flows for the initial period November 1
to December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the over all financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JUST SAY WOW as of December 31,
1999, and the results of its operations and its cash flows for the initial
period then ended in conformity with generally accepted accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
March 15, 2000
F-103
<PAGE>
JUST SAY WOW
BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Current Assets
Accounts receivable $33,164
Fixed assets, net of accumulated depreciation of $144 2,456
-------
TOTAL ASSETS $35,620
=======
LIABILITIES AND PROPRIETOR'S CAPITAL
Current Liabilities $ --
Proprietor's capital 35,620
-------
TOTAL LIABILITIES AND PROPRIETOR'S CAPITAL $35,620
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-104
<PAGE>
JUST SAY WOW
INCOME STATEMENT
NOVEMBER 1 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
Revenue $33,164
Selling, General and Administrative Expenses 7,799
-------
Income Before Income Taxes 25,365
Provision for Income Taxes --
-------
Net Income $25,365
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-105
<PAGE>
JUST SAY WOW
STATEMENT OF PROPRIETOR'S CAPITAL
NOVEMBER 1 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
PROPRIETOR'S CAPITAL, NOVEMBER 1, $ --
Capital contributions 10,255
Net income 25,365
Distributions --
-------
PROPRIETOR'S CAPITAL, DECEMBER 31, 1999 $35,620
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-106
<PAGE>
JUST SAY WOW
STATEMENT OF CASH FLOWS
NOVEMBER 1 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $25,365
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 144
Accounts receivable (33,164)
-------
Net cash used by operating activities ( 7,655)
-------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment --
--------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions 7,655
--------
NET INCOME IN CASH AND CASH EQUIVALENTS --
CASH AND CASH EQUIVALENTS - BEGINNING --
--------
CASH AND CASH EQUIVALENTS - DECEMBER 31, 1999 $ --
========
No cash was paid for interest or income taxes.
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES:
The proprietor contributed fixed assets with a cost basis of $2,600.
The accompanying notes are an integral part of the financial statements.
F-107
<PAGE>
JUST SAY WOW
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
JUST SAY WOW (the "Company"), a proprietorship, operates an
entertainment related website that allows users to view "fun" graphics
and webpages and send them to friends, similar to a greeting card.
The financial statements have been prepared solely from the accounts
of JUST SAY WOW and do not include the personal accounts of the owner
or any other operation in which he is engaged.
The Company began operations on November 1, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
For certain of the Company's financial instruments such as cash and
cash equivalents and receivables, carrying amounts approximate fair
value due to their short maturities.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances may exceed the FDIC
insured levels at various times during the year. The Company
maintains allowances for credit losses when required.
Equipment
Equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of 3 years.
F-108
<PAGE>
JUST SAY WOW
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the related
carrying amount may not be recoverable. When required, impairment
losses on assets to be held and used are recognized based on the fair
value of the assets, and long-lived assets to be disposed of are
reported at the lower of carrying amount of fair value less cost to
sell.
Revenue Recognition
The Company derives its revenue from the sale of advertisements on
short-term contracts. Advertising revenues are recognized ratably over
the period in which the advertisements are displayed.
Income Taxes
The proprietorship itself is not a taxpaying entity for purposes of
federal and state income taxes. Federal and state income taxes of the
proprietor are computed on his total income from all sources;
accordingly, no provision for income taxes is made in these
statements.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for the reporting and displaying of comprehensive income and its
components in the financial statements. As of December 31, 1999, the
Company had no items that represent other comprehensive income and,
therefore, has not included a schedule of comprehensive income in the
financial statements.
Impact of the Year 2000 Issue
During the period ended December 31, 1999, the Company conducted an
assessment of issues related to the year 2000 and determined that no
issues existed which would cause its computer systems not to properly
utilize beyond December 31, 1999.
NOTE 2 - EQUIPMENT
As of December 31, 1999, equipment consisted of the following:
</TABLE>
<TABLE>
<S> <C>
Computer equipment $2,600
Less: accumulated depreciation 144
------
Equipment, net $2,456
======
</TABLE>
Depreciation expense for the two months ended December 31, 1999 was
$144.
F-109
<PAGE>
JUST SAY WOW
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 3 - SUBSEQUENT EVENTS
On March 1, 100% of the Company's assets were acquired by eUniverse,
Inc., a publicly held company.
F-110
<PAGE>
PROSPECTUS
April 14, 2000
910,000
_____________ SHARES
eUNIVERSE, INC.
COMMON STOCK
($.001 par value)
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of the expenses to be incurred by eUniverse in
connection with the registration of the securities being registered under this
Registration Statement.
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
Securities and Exchange Commission registration fee $ 1,440
Printing fees ------
Legal fees and expenses
Accounting fees and expenses
Miscellaneous
Total
</TABLE>
Except for the SEC registration fee, all expenses are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF
LIABILITY.
Sections 78.751 et seq. of the Nevada Revised Statutes allow a company to
indemnify its officers, directors, employees, and agents from any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, except under certain circumstances.
Indemnification may only occur if a determination has been made that the
officer, director, employee, or agent acted in good faith and in a manner which
such person believed to be in the best interests of eUniverse. A determination
may be made by the shareholders, by a majority of the directors who were not
parties to the action, suit, or proceeding confirmed by opinion of independent
legal counsel; or by opinion of independent legal counsel in the event a quorum
of directors who were not a party to such action, suit, or proceeding does not
exist.
ARTICLES OF INCORPORATION
Article Twelfth of the Articles of Incorporation of eUniverse provide as follows
with respect to indemnification of Directors and Officers:
"TWELFTH. INDEMNIFICATION: The corporation shall indemnify and hold harmless the
Officers and Directors of the Corporation from any and all liabilities or claims
to the fullest extent now, or hereafter from time to time, permitted under the
general corporation Law of the state of Nevada."
BYLAWS
Article XII of the Bylaws of eUniverse provide as follows with respect to
indemnification of Officers and Directors:
II-1
<PAGE>
"Section 1. Exculpation. No Director or Officer of the Corporation shall be
liable for the acts, defaults, or omissions of any other Director or Officer, or
for any loss sustained by the Corporation, unless the same has resulted from his
own willful misconduct, willful neglect, or gross negligence.
"Section 2. Indemnification. Each Director and Officer of the Corporation
and each person who shall serve at the Corporation's request as a director or
officer of another corporation in which the Corporation owns shares of capital
stock or of which it is a creditor shall be indemnified by the Corporation to
the fullest extent permitted from time to time by the Nevada Revised Statutes
against all reasonable costs, expenses and liabilities (including reasonable
attorneys' fees) actually and necessarily incurred by or imposed upon him in
connection with, or resulting from any claim, action, suit, proceeding,
investigation, or inquiry of whatever nature in which he may be involved as a
party or otherwise by reason of his being or having been a Director or Officer
of the Corporation or such director or officer of such other corporation,
whether or not he continues to be a Director or Officer of the Corporation or a
director or officer of such other corporation, at the time of the incurring or
imposition of such costs, expenses or liabilities, except in relation to matters
as to which he shall be finally adjudged in such action, suit, proceeding,
investigation, or inquiry to be liable for willful misconduct, willful neglect,
or gross negligence toward or on behalf of the Corporation in the performance of
his duties as such Director or Officer of the Corporation or as such director or
officer of such other corporation. As to whether or not a Director or Officer
was liable by reason of willful misconduct, willful neglect, or gross negligence
toward or on behalf of the Corporation in the performance of his duties as such
Director or Officer of the Corporation or as such director or officer of such
other corporation, in the absence of such final adjudication of the existence of
such liability, the Board of Directors and each Director and Officer may
conclusively rely upon an opinion of independent legal counsel selected by or in
the manner designated by the Board of Directors. The foregoing right to
indemnification shall be in addition to and not in limitation of all other
rights which such person may be entitled as a matter of law, and shall inure to
his legal representatives' benefit.
"Section 3. Liability Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation or who is or was serving at the request of the
Corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, association, or other enterprise against any
liability asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not he is indemnified against such
liability by this article XII."
Provided the terms and conditions of the applicable provisions under Nevada
law, eUniverse's Articles of Incorporation and Bylaws are met, officers,
directors, employees, and agents of eUniverse may be indemnified against any
cost, loss, or expense arising out of any liability under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of eUniverse,
eUniverse has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is, therefore,
unenforceable.
We intend to enter into indemnity agreements with each of our directors and
executive officers to give them additional contractual assurances regarding the
scope of the indemnification described above and to provide additional
procedural protections. In addition, we have obtained directors' and officers'
insurance providing indemnification for our directors, officers and certain
employees for certain liabilities. We believe that these indemnification
provisions and agreements are necessary to attract and retain qualified
directors and officers.
The limitation of liability and indemnification provisions in our Amended
and Restated Certificate of Incorporation and Bylaws may discourage shareholders
from bringing a lawsuit against directors for breach of their fiduciary duty.
They may also reduce the likelihood of derivative litigation against
II-2
<PAGE>
directors and officers, even though such an action, if successful, might
otherwise benefit our shareholders and us. Furthermore, a stockholder's
investment may be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers under these
indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees regarding which indemnification is sought,
nor are we aware of any threatened litigation that may result in claims for
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED STOCK
Since its incorporation in February 1999, Entertainment Universe has issued
and sold unregistered securities in the amounts, at the times, and for the
aggregate amounts of consideration listed below. All such securities were
exchanged on a one-to-one basis with eUniverse.
1. On March 3, 1999, eUniverse issued 250,000 shares of common stock for
consideration of $250,000 to GKM and certain of its affiliates in a private
offering pursuant to Rule 506 of Regulation D.
2. On March 3, 1999, Entertainment Universe issued 1,539,000 shares of its
common stock to Joseph Abrams for services provided to eUniverse with a fair
market value of $48,684.
3. On March 3, 1999, Entertainment Universe issued 8,061,000 shares of its
common stock to Brad D. Greenspan in connection with the Merger Agreement with a
fair market value of $255,000.
4. On March 3, 1999, Entertainment Universe issued to Leland N. Silvas
200,000 shares of common stock in consideration of his acceptance of employment
by the company as President and Chief Executive Officer and in connection with
the provision of certain consulting services with a fair market value of $6,036.
See "PRINCIPAL SHAREHOLDERS."
5. On April 1, 1999, Entertainment Universe issued 354,000 shares to
approximately 10 persons in consideration of public relations, legal and related
services with a fair market value of $229,500 provided to eUniverse in
connection with various activities, including the Preferred Stock Offering and
Merger with Motorcycle Centers.
6. On April 14, 1999, Entertainment Universe acquired from Charles Beilman,
the sole shareholder of CD Universe, Inc., one hundred percent of the capital
stock of CD Universe, Inc. for a total consideration of $1,915,000 in cash plus
2,425,000 shares of common stock with a fair market value of $7,275,000. Charles
Beilman is the Chief Operating Officer, Chief Technical Officer and a Director
of eUniverse. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
7. On April 14, 1999, Entertainment Universe sold 1,795,024 shares of its
Series A 6% Convertible Preferred Stock in a private offering pursuant to
Section 4(2) of the Securities Act and Rule 506 of Regulation D adopted under
the Securities Act. The Entertainment Universe preferred stock was sold to a
group of approximately 40 purchasers, including Lehman Brothers, Eisenberg
Partners and principals of Gerard Klauer Mattison & Co., Inc., all of whom were
accredited investors as defined in Rule 501 of Regulation D. The aggregate
offering price for the preferred stock was $6,462,086. In connection with the
reorganization, the holders of the Entertainment Universe preferred stock
exchanged their shares, on a one-to-one basis, for shares of eUniverse's
preferred stock having equivalent rights and preferences, as set forth in the
Designation of Preferred Stock. Proceeds from this sale were used to acquired CD
Universe, Inc. and for general corporate purposes.
II-3
<PAGE>
8. On April 14, 1999, Entertainment Universe merged with and into
Motorcycle Centers pursuant to an Agreement and Plan of Reorganization dated
April 9, 1999 (the "Merger Agreement"). As contemplated in the Merger Agreement,
all of the outstanding common shares of Entertainment Universe (12,829,000) were
acquired by Motorcycle Centers, and the shareholders of Entertainment Universe
were issued shares of Motorcycle Centers equal to approximately 92% of the
shares of Motorcycle Centers outstanding after the transaction. In connection
with the merger into Motorcycle Centers, each share of Entertainment Universe
preferred stock was exchanged for a share of preferred stock of Motorcycle
Centers having identical rights and preferences, and Motorcycle Centers changed
its name to eUniverse, Inc.
9. On April 14, 1999, as part of its compensation for acting as exclusive
placement agent for the sale of the Entertainment Universe preferred stock,
Gerard Klauer Mattison & Co., Inc. ("GKM") received warrants to purchase 400,000
shares of common stock at an exercise price of $2.74 per share, which became
exercisable on April 14, 1999 and expire April 14, 2004. GKM also received
warrants to purchase an additional 271,835 shares of common stock of eUniverse
at an exercise price of $2.75 per share, which become exercisable on April 14,
2000 and expire April 14, 2004. GKM's services to eUniverse had a fair market
value of $1,214,567.
Prior to April 14, 1999, Motorcycle Centers issued and sold unregistered
securities in the amounts, at the times, and for the aggregate amounts of
consideration listed as follows:
1. In October and November, 1997, Motorcycle Centers sold 47,500 shares of
its common stock for $9,500 under Rule 504 of Regulation D under the Securities
Act to ten unaffiliated individuals.
2. On April 2, 1998 Motorcycle Centers sold 18,750 shares of its common
stock for $3,750 under Rule 504 to five individuals.
3. On March 29 and March 31, 1999, Motorcycle Centers issued 78,000 shares
of its common stock to various shareholders in exchange for services rendered in
anticipation of the reorganization. The transaction was valued at the cost of
the services rendered of $393,720.
4. On March 31, 1999, Motorcycle Centers issued 2,000,000 shares of its
common stock to A. Jay Boisdrenghein in exchange for services. The transaction
was valued at the cost of the consulting services rendered of $12,480,000.
5. On April 6, 1999, Motorcycle Centers sold 897,835 shares of Motorcycle
Centers common stock pursuant to Rule 504 for $897,835.
Subsequent to the reorganization, eUniverse issued and sold unregistered
securities in the amounts, at the times, and for the aggregate amounts of
consideration listed as follows:
1. As of May 17, 1999, eUniverse purchased all the assets of Green Willow
International Corp. for a total of 4,605 shares of common stock having a value
of $52,500.
2. As of June 1, 1999, eUniverse purchased all of the outstanding shares of
the common stock of Case's Ladder for a total of 700,000 shares of common stock
of eUniverse with a fair market value of $7,000,000.
3. On June 15, 1999, eUniverse issued 25,000 shares of common stock to
employees of CD Universe under the 1999 Stock Awards Plan valued at the fair
market value of $237,500. The awards vest on April 14, 2000, subject to the
continued employment of such employees.
II-4
<PAGE>
4. As of July 1, 1999, eUniverse purchased all the outstanding capital
stock of Gamer's Alliance, Inc. in exchange for 78,125 shares of common stock
valued at $1,000,000.
5. As of August 31, 1999, eUniverse purchased 80% of the outstanding
capital stock of The Big Network, Inc. in exchange for 1,440,000 shares of
common stock valued at $8,820,000. After August 31, 1999 and as of the date of
this prospectus, eUniverse has acquired 813,315 of the remaining outstanding Big
Network shares in exchange for 354,600 shares of eUniverse, with a fair market
value of $2,171,925. As of the date of this prospectus, eUniverse owns 99.7% of
the outstanding capital stock of Big Network. eUniverse intends to purchase the
remaining .3% over the next six months.
6. As of October 1, 1999, eUniverse purchased all of the assets of
Funone.com in exchange for 8,733 shares of common stock valued at $50,000.
7. Effective as of December 10, 1999, as compensation for consulting
services for the following twelve months, eUniverse issued to Michael Zaroff
warrants to purchase 60,000 shares of common stock at an exercise price of $6.00
per share, which were exercisable immediately and expire on December 31, 2000.
These warrants have a value of $118,000 based on the Black-Scholes valuation
model.
8. Effective as of December 10, 1999, as compensation for consulting
services for the following twelve months, eUniverse issued to Bob Agriogianis
warrants to purchase 60,000 shares of common stock at an exercise price of $6.00
per share, which were exercisable immediately and expire on December 31, 2000.
These warrants have a value of $118,000 based on the Black-Scholes valuation
model.
9. Effective as of January 15, 2000, as compensation for consulting
services for one month, eUniverse issued to Mark Bergman warrants to purchase
20,000 shares of common stock at an exercise price of $4.75 per share, and
warrants to purchase 20,000 shares of common stock at an exercise price of $5.75
per share, which were exercisable immediately and expire on January 31, 2001.
These warrants have a value of $39,000 based on the Black-Scholes valuation
model.
10. As of February 1, 2000, eUniverse purchased all of the assets of
Pokemonvillage.com and Quake City Gaming Network in exchange for 43,630 shares
of common stock valued at $417,610.
11. As of February 2, 2000, eUniverse purchased all of the outstanding
stock of Falcon Ventures Corporation in exchange for 310,000 shares of common
stock valued at $1,782,500.
12. As of February 2, 2000, eUniverse sold 400,000 shares of common stock
to Take-Two Interactive Software, Inc. in exchange for $2,000,000 in cash.
Proceeds from this sale are being used for general corporate purposes.
13. eUniverse amended the terms of its Series A 6% Convertible Preferred
Stock, $.10 par value, with the consent of the requisite number of holders of
the preferred stock and eUniverse issued, in the aggregate, 359,004 warrants to
purchase shares of common stock at an exercise price of $6.00 to $8.00 per
share, as consideration for such consents. These warrants become exercisable on
February 2, 2000, and expire one year after the date of issuance.
14. As of March 1, 2000, eUniverse acquired all the assets of
Justsaywow.com in exchange for $200,000 cash and 11,696 shares of eUniverse
common stock with a value of $100,000.
15. As of April 14, 2000, eUniverse acquired all of the assets of
Dustcloud Media in exchange for 23,668 shares of eUniverse common stock valued
at $150,000, and up to an additional $150,000 in contingent payments of
eUniverse common stock over the period of 12 months after the closing.
II-5
<PAGE>
Proceeds from the above sales were used for general corporate purposes.
Shares were also issued as consideration in the acquisition of other businesses
and assets. Such business and assets are being used in eUniverse's current
business operations.
eUniverse believes that the Rule 504 offers and sales described above were
exempt from registration pursuant to Rule 504 of Regulation D under the
Securities Act because those offers and sales met all the conditions of Rule 504
as then in effect, including the dollar limitation, and eUniverse was not at the
time of such transactions within any of the categories of issuers prohibited
from using Rule 504.
Except for the Rule 504 offerings described above, the foregoing sales of
common stock and preferred stock were made in reliance upon the exemptions from
registration set forth in Section 4(2) of the Securities Act of 1933 and/or Rule
506 of Regulation D promulgated thereunder for transactions not involving a
public offering. No underwriters were engaged in connection with the foregoing
sales of securities. These sales were made without general solicitation or
advertising. Each purchaser was an "accredited investor" or a sophisticated
investor with access to all relevant information necessary to evaluate the
investment who represented to the Registrant that the shares were being acquired
for investment.
ITEM 16. EXHIBITS.
<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)
5.01 Opinion of Martin, Gasparrini & Chioffi, LLP*
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)
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
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.(2)
10.15.1 -- Second Amendment to Agreement and Plan of Reorganization by and among eUniverse, Inc., Gamer's
Alliance, Inc., and Larry N. Pevnick and Robin T. Pevnick, Ten Ent., 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).(2)
10.17 -- Letter Agreement by and among Brad D. Greenspan, Charles Beilman, Stephen D. Sellers and John V. Hanke
regarding appointment of a director of eUniverse, Inc., dated as of August 31, 1999.(2)
10.18 -- Employment Agreement by and between eUniverse, Inc. and John Haiduck, dated as of June 17, 1999.(2)
10.19 -- Employment Agreement by and between eUniverse, Inc. and Stephen D. Sellers, dated as of August 31,
1999.(2)
10.21 -- eUniverse, Inc. Registration Rights Agreement dated July 30, 1999.(2)
10.22 -- Office Sublease by and between Golden Gate University and The Big Network, Inc., dated July 9, 1999.(2)
10.23 -- Engagement Letter by and among Gerard Klauer Mattison & Co., Inc. by Entertainment Universe, Inc. and
Brad Greenspan, dated February 24, 1999.(2)
10.24 -- Indemnification Agreement by Entertainment Universe, Inc. and Brad Greenspan in favor of Gerard Klauer
Mattison & Co., Inc., dated February 24, 1999.(2)
10.25 -- eUniverse, Inc. 1999 Stock Awards Plan.(2)
10.26 -- Online Partner Agreement between CD Universe, Inc. and Accessio.com Inc., regarding US-Style, dated
November 5, 1998.(1)
10.27 -- Employment Agreement by and between eUniverse, Inc. and Martin Hamilton, dated as of October 25, 1999.
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.(3)
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.(4)
10.31 -- Letter agreement by and among eUniverse, Inc. Take-Two Interactive Software, Inc. and Falcon Ventures
Corporation, dated as of February 2, 2000.(4)
10.32 -- Employment Agreement by and between eUniverse, Inc. and William R. Wagner dated as of April 5, 1999.(4)
10.33 -- Letter Agreement by and between eUniverse, Inc. and Christian Walter d/b/a Justsaywow.com dated February
20, 2000.(5)
10.34 -- Lease by and between Hamms Building Associates and Falcon Ventures Corp., dated as of July 27, 1999.*
</TABLE>
II-7
<PAGE>
<TABLE>
<S> <C>
10.35 -- eUniverse, Inc. Common Stock Purchase Warrant to Michael Zaroff, dated December 10, 1999.*
10.36 -- eUniverse, Inc. Common Stock Purchase Warrant to Bob Agriogianis, dated December 10, 1999.*
10.37 -- eUniverse, Inc. Common Stock Purchase Warrant to Mark Bergman, dated January 15, 2000.*
10.38 -- eUniverse, Inc. Common Stock Purchase Warrant to Mark Bergman, dated February 15, 2000.*
10.39 -- Stock Option Agreement by and between eUniverse, Inc. and Charles Beilman, dated as of January 26, 2000.*
10.39.01 First Amendment to Stock Option Agreement by and between eUniverse, Inc. and Charles Beilman,
dated as of March 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 closing of which shall occur
on or before April 24, 2000.*
10.41 -- eUniverse, Inc. Common Stock Purchase Warrant to Salomon Grey Financial Corporation, dated March 14,
2000.*
10.42 -- eUniverse, Inc. Common Stock Purchase Warrant to Salomon Grey Financial Corporation, dated March 14,
2000.*
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.*
10.44 -- Agreement by and between eUniverse, Inc. and Take-Two Interactive Software, Inc., dated as of March 16,
2000, providing for programming services.*
21.01 -- Subsidiaries of eUniverse, Inc.*
23.01 -- Consent of Martin, Gasparrini & Chioffi, LLP (included in Exhibit 5.01)*
23.02 -- Consent of Jonathan P. Reuben, CPA**
23.03 -- Consent of Cordovano & Harvey, PC**
23.04 -- Consent of Merdinger, Fruchter, Rosen & Corso, PC**
23.05 -- Consent of Merdinger, Fruchter, Rosen & Corso, PC**
23.06 -- Consent of Merdinger, Fruchter, Rosen & Corso, PC**
23.07 -- Consent of Merdinger, Fruchter, Rosen & Corso, PC**
23.08 -- Consent of Merdinger, Fruchter, Rosen & Corso, PC**
23.09 -- Consent of Merdinger, Fruchter, Rosen & Corso, PC**
27.01 -- Financial Data Schedule(5)
</TABLE>
- ---------
* Previously filed.
** 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 SB-2 filed on September 13,
1999 (Registration File No. 333-86959).
(3) Incorporated by reference to eUniverse's Form 10-Q filed on November 15,
1999.
(4) Incorporated by reference to eUniverse's Form 10-Q filed on February 14,
2000.
(5) Incorporated by reference to eUniverse's Form 8-K filed on March 13, 2000.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment of the Registration Statement) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the commission under Rule 424 (b) if, in the aggregate,
the changes in volume and price represent no more than a 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement; provided,
however, that paragraphs (a)(1) (i) and (a)(1) (ii) do not apply if the
Registration Statement is on From S-3, Form S-8 or Form F-3, and the information
required to be, included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by
eUniverse under Section 13 or Section 15 (d) of the Securities Exchange Act of
1934 that are incorporated by reference in the Registration Statement.
(2) For purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
II-8
<PAGE>
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) Insofar as indemnification for liabilities raising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant under the, foregoing provisions, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Wallingford, State of
Connecticut, on April 14, 2000.
eUniverse, Inc.
By: /s/ Leland N. Silvas
__________________________________
Leland N. Silvas
President and Chief Executive Officer
Under the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
/s/ Leland N. Silvas
________________________________________________
Leland N. Silvas
President, Chief Executive Officer and Director
(principal executive officer)
Date: April 14, 2000
II-9
<PAGE>
/s/ William R. Wagner
__________________________________________
William R. Wagner
Chief Financial Officer
(principal financial officer and principal accounting officer)
Date: April 14, 2000
* Brad D. Greenspan
__________________________________________
Brad D. Greenspan
Chairman of the Board of Directors
Date: April 14, 2000
* Charles Beilman
__________________________________________
Charles Beilman
Vice President, Special Projects and Director
Date: April 14, 2000
* Stephen D. Sellers
__________________________________________
Stephen Sellers
Director
Date: April 14, 2000
* By: /s/ Leland N. Silvas
_____________________________________
Leland N. Silvas
Attorney-in-Fact
Date: April 14, 2000
II-10
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as.......................'r'
The section symbol shall be expressed as...................................'SS'
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
eUNIVERSE, INC.
101 North Plains Industrial Road
Wallingford, Connecticut 06492
We consent to the use in this Registration Statement of eUniverse, Inc. on
Form S-1/a Amendment 2 of our report dated April 9, 1999, and to the reference
to us under the headings "Experts."
Jonathon P. Reuben, C.P.A.
An Accountancy Corporation
Torrance, CA 90505
April 14, 2000
<PAGE>
EXHIBIT 23.03
INDEPENDENT AUDITORS' CONSENT
To: Securities and Exchange Commission
Washington, D.C.
We consent to the use in this Registration Statement relating to 910,000 shares
of common stock of eUniverse, Inc. on Form S-1/A Amendment 2 of our report on
Motorcycle Centers of America, Inc. dated June 3, 1999, appearing in the
prospectus, which is part of this Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ CORDOVANO AND HARVEY, P.C.
Cordovano and Harvey, P.C.
Denver, Colorado
April 14, 2000
<PAGE>
[LETTERHEAD OF MERDINGER, FRUCHTER, ROSEN & CORSO]
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in this Registration Statement of eUniverse, Inc.
on Form S-1/A of our report dated January 5, 2000 relating to the financial
statements of Falcon Ventures Corporation and to the reference to our Firm under
the caption "Experts" in the Prospectus.
/s/ MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
April 14, 2000
<PAGE>
[LETTERHEAD OF MERDINGER, FRUCHTER, ROSEN & CORSO]
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in this Registration Statement of eUniverse, Inc.
on Form S-1/A of our report dated July 23, 1999, except as for Note 8(d) as to
which the date is September 15, 1999, relating to the financial statements of
The Big Network, Inc., and to the reference to our Firm under the caption
"Experts" in the Prospectus.
/s/ MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
April 14, 2000
<PAGE>
[LETTERHEAD OF MERDINGER, FRUCHTER, ROSEN & CORSO]
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in this Registration Statement of eUniverse, Inc.
on Form S-1/A of our report dated May 14, 1999 relating to the financial
statements of CD Universe, Inc., and to the reference to our Firm under the
caption "Experts" in the Prospectus.
/s/ MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
April 14, 2000
<PAGE>
[LETTERHEAD OF MERDINGER, FRUCHTER, ROSEN & CORSO]
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in this Registration Statement of eUniverse, Inc.
on Form S-1/A of our report dated November 17, 1999 relating to the financial
statements of Gamer's Alliance, Inc., and to the reference to our Firm under the
caption "Experts" in the Prospectus.
/s/ MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
April 14, 2000
<PAGE>
[LETTERHEAD OF MERDINGER, FRUCHTER, ROSEN & CORSO]
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in this Registration Statement of eUniverse, Inc.
on Form S-1/A of our report dated May 14, 1999, relating to the financial
statements of Pokemon Village, and to the reference to our Firm under the
caption "Experts" in the Prospectus.
/s/ MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
April 14, 2000
<PAGE>
[LETTERHEAD OF MERDINGER, FRUCHTER, ROSEN & CORSO]
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in this Registration Statement of eUniverse, Inc.
on Form S-1/A of our report dated March 15, 2000, relating to the financial
statements of Just Say Wow, and to the reference to our Firm under the caption
"Experts" in the Prospectus.
/s/ MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
April 14, 2000
