<PAGE>
As filed with the Securities and Exchange Commission on January 11, 2000
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NUMBER 2
Quarterly report pursuant to Section 13 or 15(d)of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1999
Commission file number: 0-26355
eUniverse, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Nevada 06-1556248
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 North Plains Industrial Road 06492
Wallingford, Connecticut (Zip Code)
(Address of principal executive offices)
</TABLE>
203-265-6412
(Registrant's telephone number, including area code)
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 3 months and has
been subject to such filing requirements for the past 90 days.
As of November 15, 1999, there were 14,932,723 shares of
eUniverse, Inc. common stock, $.001 par value outstanding.
<PAGE>
eUNIVERSE, INC.
FORM 10-Q/A
AMENDMENT NUMBER 2
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
------
<S> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.................................................................... 1
Balance sheets, September 30, 1999, March 31, 1999 and December 31, 1998...................... 1
Statements of operations, for the three and six months ended September 30, 1999 and 1998...... 2
Statements of cash flows, for the six months ended September 30, 1999 and 1998................ 3
Statements of shareholders' equity (deficit) for March 31 and September 30, 1999.............. 4
Summary of significant accounting policies.................................................... 5
Notes to financial statements................................................................. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION............................................................................ 17
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................ 22
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EUNIVERSE, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
CD UNIVERSE CD UNIVERSE
SEPTEMBER 30, MARCH 31, MARCH 31,
1999 1999 1998
---- ---- ----
<S> <C> <C> <C>
ASSETS
Current assets |
Cash and cash equivalents......................... $ 2,294,045 | $ 11,335 $ 267,214
Accounts receivable, net of allowances for |
doubtfull accounts of $34,175 and $0, |
respectively.................................... 212,699 | 92,938 --
Inventory......................................... 54,199 | 22,647 23,877
Due from officers................................. -- | 157,569 1,000
Due from employees................................ 156,260 | -- --
Prepaid expenses and other current assets......... 199,532 | 9,629 43,031
----------- | --------- ---------
Total current assets......................... 2,916,735 | 294,118 335,122
Furniture and equipment, less accumulated depreciation |
of $170,492, $83,052, and $36,900 respectively....... 488,598 | 225,718 158,362
Goodwill, net of amortization of $850,750.............. 26,235,961 | -- --
Other intangibles, net of amortization of $65,119, |
$340, and $170, respectively......................... 697,356 | 510 680
Other assets........................................... 71,910 | -- --
----------- | --------- ---------
Total assets................................. $30,410,560 | $ 520,346 $ 494,164
----------- | --------- ---------
----------- | --------- ---------
|
LIABILITIES AND SHAREHOLDERS' |
EQUITY (DEFICIT) |
Current liabilities |
Accounts payable.................................. $ 797,927 | $ 828,718 $ 435,015
Accrued liabilities............................... 186,713 | 113,604 99,566
Due to affiliates................................. 2,500 | 30,000 110,395
Due to officer.................................... -- | 105,000 --
Short-term portion of lease obligations........... 8,585 | -- --
----------- | --------- ---------
Total current liabilities.................... 995,725 | 1,077,322 644,976
----------- | --------- ---------
Long-term liabilities |
Long-term portion of lease obligations............ 2,596 | -- --
Commitments and contingencies.......................... -- | -- --
Minority interest...................................... -- | -- --
Shareholders' equity (deficit) |
Preferred stock, $.10 par value; 40,000,000 shares |
authorized; 1,795,024 and -0- shares issued and |
outstanding, respectively....................... 179,502 | -- --
Common stock, $.001 par value; 250,000,000 shares |
authorized; 16,277,723 issued and outstanding... 16,278 | 1,000 1,000
Additional paid-in capital........................ 32,675,860 | -- --
Deferred stock compensation cost.................. (154,375) | -- --
Retained deficit.................................. (3,305,026) | (557,976) (151,812)
----------- | --------- ---------
----------- | --------- ---------
Total liabilities and shareholders' equity... $30,410,560 | $ 520,346 $ 494,164
----------- | --------- ---------
</TABLE>
See accompanying notes to the financial statements
1
<PAGE>
EUNIVERSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
CD UNIVERSE CD UNIVERSE
<S> <C> <C> <C> <C>
Revenue | |
Products.............................. $ 1,585,181 | $2,181,259 $ 3,549,735 | $4,299,444
Services.............................. 259,722 | -- 330,122 | --
----------- | ---------- ----------- | ----------
Total revenue.............................. 1,844,903 | 2,181,259 3,879,857 | 4,299,444
Cost of goods sold | |
Products.............................. 1,363,260 | 1,794,498 3,014,449 | 3,588,676
Services.............................. 13,468 | -- 22,120 | --
Total cost of goods sold................... 1,376,728 | 1,794,498 3,036,569 | 3,588,676
Gross profit | |
Products.............................. 221,921 | 386,761 535,286 | 710,768
Services.............................. 246,254 | -- 308,002 | --
----------- | ---------- ----------- | ----------
Total gross profit......................... 468,175 | 386,761 843,288 | 710,768
Operating expenses | |
Marketing and sales (excludes | |
stock-based compensation of $32,204, | |
$0, $37,606 and $0, respectively)... 585,456 | 279,956 1,022,182 | 524,561
Product development (excludes stock- | |
based compensation of $37,306, $0, | |
$43,524 and $0, respectively)....... 414,864 | 56,311 495,878 | 156,814
General and administrative (excludes | |
stock-based compensation of $1,740, | |
$0, $1,995 and $0, respectively).... 914,565 | 131,885 1,686,999 | 181,736
Amortization of goodwill and other | |
intangibles......................... 592,490 | 42 915,209 | 84
Stock-based compensation.............. 71,250 | -- 83,125 | --
----------- | ---------- ----------- | ----------
Total operating expenses................... 2,578,625 | 468,194 4,203,393 | 863,195
----------- | ---------- ----------- | ----------
Operating loss........................ (2,110,450)| (81,433) (3,360,105)| (152,427)
Nonoperating income (expense) | |
Interest and dividend income.......... 31,947 | 201 38,996 | 310
Interest expense...................... (355)| -- (355)| --
Loss allocated to minority interest... 16,438 | -- 16,438 | --
----------- | ---------- ----------- | ----------
Income (loss) before income taxes..... (2,062,420)| (81,232) (3,305,026)| (152,117)
Income taxes............................... -- | -- -- | --
----------- | ---------- ----------- | ----------
Net income (loss)..................... $ 2,062,420)| $ (81,232) $(3,305,026)| $ (152,117)
----------- | ---------- ----------- | ----------
----------- | ---------- ----------- | ----------
Basic income (loss) per common share....... $ (0.13)| N/A $ (0.23)| N/A
----------- | ---------- ----------- | ----------
----------- | ---------- ----------- | ----------
Basic weighted average common shares | |
outstanding.............................. 15,317,723 | N/A 14,592,274 | N/A
----------- | ---------- ----------- | ----------
----------- | ---------- ----------- | ----------
</TABLE>
See accompanying notes to the financial statements
2
<PAGE>
EUNIVERSE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
---- ----
CD UNIVERSE
<S> <C> <C>
Operating activities |
Net income (loss)...................................... $(3,305,026) | $(152,117)
Transactions not requiring cash: |
Depreciation...................................... 50,279 | 23,076
Amortization...................................... 915,569 | 84
Bad debt reserve.................................. 15,000 |
Common stock issued to employees.................. 83,125 |
Common stock issued to outside consultants........ 10,000 | --
Non-cash interest income.......................... (3,060) |
Loss allocated to minority interest............... (16,438) |
Changes in current assets.............................. (446,943) | 7,871
Changes in other assets................................ (60,685) |
Changes in current liabilities......................... (32,728) | (65,152)
----------- | ---------
Net cash (used in) operating activities...... (2,790,907) | (186,238)
----------- | ---------
Investing activities |
Acquisitions........................................... (1,915,000) | --
Proceeds through acquisitions.......................... 136,419 | --
Proceeds through reverse acquisition................... 858,477 |
Purchases of fixed assets.............................. (184,572) | (18,445)
Repayment of advances from officers.................... (105,000) | --
Advance to officers.................................... -- | (7,300)
Receipt of advances to officers........................ 157,769 | --
Advances made to Employees............................. (153,200) | --
----------- | ---------
Net cash provided by investing activities.... (1,205,107) | (25,745)
----------- | ---------
Financing activities |
Proceeds from issuance of preferred stock.............. 5,875,204 | --
Proceeds from issuance of common stock................. 505,000 | --
Payment to repurchase common stock..................... (20,000) | --
Financing costs........................................ (6,672) | --
Repayment of loan from affiliates...................... (74,808) | --
----------- | ---------
Net cash provided by financing activities.... 6,278,724 | --
----------- | ---------
Change in cash and cash equivalents......................... 2,282,710 | (211,983)
Cash and cash equivalents, beginning of period.............. 11,335 | 267,214
----------- | ---------
Cash and cash equivalents at end of period.................. $ 2,294,045 | $ 55,231
----------- | ---------
----------- | ---------
</TABLE>
See accompanying notes to the financial statements
3
<PAGE>
EUNIVERSE, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
--------------------- ---------------------- PAID-IN STOCK RETAINED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL COMPENSATION DEFICIT
------ --------- ------ --------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Share issued to acquire option
to purchase CD Universe..... -- $ -- 8,061,000 $ 8,061 $ 247,039 --
Shares issued for merger
related services............ -- -- 1,539,000 1,539 47,145 --
Shares issued pursuant to
Rule 506 of Regulation D.... -- -- 250,000 250 249,750
Shares issued pursuant to
employment agreement........ -- -- 200,000 200 6,036 --
--------- -------- ---------- ------- ----------- --------- -----------
Balance, March 31,
1999................ -- -- 10,050,000 10,050 549,970 --
Sale of Preferred Stock....... 1,795,024 179,502 6,282,584
Cost of offerings and
issuance.................... -- -- (1,950,110)
Shares issued in acquisition
of eUniverse.com website.... -- -- 15,000 15 59,985
Shares issued in acquisition
of CD Universe, Inc. ....... -- -- 2,425,000 2,425 7,272,575
Shares issued for services.... -- -- 339,000 339 169,161
Shares retained by former MCA
Shareholders................ -- -- 1,200,993 1,201 857,276
Shares issued in acquisition
of Mega DVD................. -- -- 4,605 5 52,495
Shares issued in acquisition
of Case's Ladder, Inc. ..... -- -- 700,000 700 6,999,300
Stock options issued in
connection with acquisition
of Case's Ladder, Inc. ..... -- -- -- -- 1,111,100
Stock options issued in
connection with services
performed................... -- -- -- -- 1,000
Fair Value of the warrants
issued...................... -- -- -- -- 1,214,567
Shares issued in acquisition
of Gamer's Alliance,
Inc. ....................... -- -- 78,125 78 999,922
Shares issued to employees of
CD Universe as compensation
expense..................... -- -- 25,000 25 237,475 (237,500)
Amortization of deferred stock
compensation................ -- -- -- -- -- 83,125
Shares issued in acquisition
of The Big Network, Inc. ... 1,440,000 1,440 8,818,560
Net income for the six months
ended September 30, 1999.... -- -- -- -- -- (3,305,026)
--------- -------- ---------- ------- ----------- --------- -----------
Balance, September 30,
1999................ 1,795,024 $179,502 16,277,723 $16,278 $32,675,860 $(154,375) $(3,305,026)
--------- -------- ---------- ------- ----------- --------- -----------
--------- -------- ---------- ------- ----------- --------- -----------
<CAPTION>
TOTAL
-----
<S> <C>
Share issued to acquire option
to purchase CD Universe..... $ 255,100
Shares issued for merger
related services............ 48,684
Shares issued pursuant to
Rule 506 of Regulation D.... 250,000
Shares issued pursuant to
employment agreement........ 6,236
-----------
Balance, March 31,
1999................ 560,020
Sale of Preferred Stock....... 6,462,086
Cost of offerings and
issuance.................... (1,950,110)
Shares issued in acquisition
of eUniverse.com website.... 60,000
Shares issued in acquisition
of CD Universe, Inc. ....... 7,275,000
Shares issued for services.... 169,500
Shares retained by former MCA
Shareholders................ 858,477
Shares issued in acquisition
of Mega DVD................. 52,500
Shares issued in acquisition
of Case's Ladder, Inc. ..... 7,000,000
Stock options issued in
connection with acquisition
of Case's Ladder, Inc. ..... 1,111,100
Stock options issued in
connection with services
performed................... 1,000
Fair Value of the warrants
issued...................... 1,214,567
Shares issued in acquisition
of Gamer's Alliance,
Inc. ....................... 1,000,000
Shares issued to employees of
CD Universe as compensation
expense..................... 0
Amortization of deferred stock
compensation................ 83,125
Shares issued in acquisition
of The Big Network, Inc. ... 8,820,000
Net income for the six months
ended September 30, 1999.... (3,305,026)
-----------
Balance, September 30,
1999................ $29,412,239
-----------
-----------
</TABLE>
4
<PAGE>
EUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(1) ORGANIZATION AND LINE OF BUSINESS
eUniverse, Inc. ('the Company') is a Nevada Corporation engaged in
developing and operating a network of web sites providing entertainment-oriented
products and services. At present the Company is engaged in sales of audio CDs,
videotapes, and digital videodisks ('DVDs') over the Internet, and providing
online computer gaming. The financial statements being presented include the
accounts of eUniverse, Inc. and its wholly owned subsidiaries. These
subsidiaries are Entertainment Universe, Inc. acquired on April 14, 1999,
CD Universe, Inc. acquired on April 14, 1999, Cases Ladder, Inc. acquired
May 31, 1999, Gamer's Alliance, Inc. acquired June 30, 1999. 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 September 30, 1999 have
been prepared by eUniverse pursuant to the rules and regulations of the
Securities and Exchange Commission. These statements are unaudited and reflect
all adjustments that are, in the opinion of management, necessary for a fair
presentation of the consolidated balance sheet, consolidated operating results,
and consolidated cash flows for the interim periods. These adjustments,
consisting of normal recurring adjustments and accruals, are made on a basis
consistent with the annual audited financial statements and generally accepted
accounting principles. The results of operation for the six months ended
September 30, 1999 are not necessarily indicative of the results for any other
period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of its products. Revenue
includes shipping and handling charges. The Company also maintains a partner
program whereby partners provide links on their web-sites that bring customers
to the CD Universe web-site. Revenue generated from these linked sites is
recognized upon shipment of the products. The partner receives a commission of
5% to 15% of sales of the Company's products that originate from the site,
recognized as a selling expense concurrent with the sale. Barter transactions
are recorded at the lower of the estimated fair value of advertisements
5
<PAGE>
EUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
received or the estimated fair value of the advertisements given. Barter revenue
and the related advertising is recorded based on impressions delivered and
received with the difference recorded as an advance or prepaid. During the
periods presented there were no barter transactions. Additionally, the Company
derives revenue from the sale of advertisements. Advertising, membership and
sponsorship revenues are recognized as earned. Returns are provided for based on
reasonable estimates of future returns.
ROYALTY PAYMENTS
The Company has agreements to share revenue with individuals independent of
the Company. The Company is required to pay royalties for the use of computer
games based on a percentage of advertising revenue generated from the Company's
usage of the games on its web-sites. As the Company generates advertising
revenue, a corresponding liability is accrued as a royalty expense, which is
recorded as a cost of revenue (see note 11).
COMPARATIVE PERIODS
Since EUI, the accounting acquirer, has no operating history, financial
statements are presented using CD Universe's historical data, as EUI's
predecessor.
CONCENTRATION OF CREDIT RISK
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances exceeded FDIC insured levels at
various times during the year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
INVENTORY
Inventory consists of compact discs, videos and packaging materials.
Inventory is valued at the lower of cost or market using the first-in, first-out
method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method based upon the estimated useful lives of the assets.
Maintenance and repairs are charged to expense as incurred.
Estimated useful lives are as follows:
<TABLE>
<S> <C>
Leasehold improvements...................................... 3 years
Computer equipment.......................................... 5 years
Telephone equipment......................................... 5 years
Furniture, fixtures and other............................... 10 years
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist of goodwill, customer lists, and domain names.
Excess cost over the fair value of net assets acquired (or goodwill) generally
is amortized on a straight-line basis over 10 years. Customer lists and domain
names are being amortized on a straight-line basis over a period of 3 and 10
years, respectively. The carrying values of intangible assets are reviewed if
the facts and circumstances
6
<PAGE>
EUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
suggest that they may be impaired. Negative operating results, 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
7
<PAGE>
EUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
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
During the six months ended September 30th 1999, the Company completed the
following acquisitions: CD Universe, Inc., Cases Ladder, Inc., Gamers Alliance,
Inc. and The Big Network, Inc. All four acquisitions were recorded using the
purchase method of accounting under the provisions of APB Opinion No. 16.
On April 14, 1999, the Company completed its acquisition of CD Universe,
Inc., a company engaged primarily in selling compact audio disks, video disks,
and video tapes to retail purchasers over the internet. According to the terms
of this acquisition, the Company acquired all of the capital stock of
CD Universe, Inc. for a total consideration of $1,915,000 in cash plus 2,425,000
shares of common stock of the company valued at $3.00 per share (fair value on
acquisition date). This was an arm's length transaction between independent and
unrelated parties. The Company also incurred direct costs related to the
acquisition totaling $60,215, which has been added to the acquisitioin price.
On May 31, 1999, the Company completed its Acquisition of Cases Ladder,
Inc., a company primarily engaged in providing online computer gaming with
competitive rankings, tournaments and leagues among its more than 1.1 million
registered members. The purchase price of this acquisition was 700,000 shares of
the Company's common stock, valued at $10.00 per share (market price on
acquisition date), issued in exchange for all the issued and outstanding shares
of Cases Ladder, Inc. This was an arm's length transaction between independent
and unrelated parties. The Company also incurred direct costs related to the
acquisition totaling $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. 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
8
<PAGE>
EUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
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).
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 7,888,855 923,292 8,817,374
---------- ---------- ---------- ----------
$9,250,215 $8,112,150 $1,026,887 $8,907,124
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Total goodwill recorded through the acquisitions is $27,086,711 and is
being amortized on a straight-line basis over ten years.
The operations of the acquired entities have been included in the statement
of operations from the date of acquisition, with the exception of CD Universe,
which is included from the beginning of the period.
PRO FORMA INFORMATION
Pro forma information as if the acquisitions had occurred at the beginning
of the periods presented is as follows:
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDING
SEPTEMBER 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Revenue............................................ $ 4,089,151 $ 4,451,491
Net loss........................................... 4,238,424 (1,891,106)
Loss per share..................................... (.26) (.12)
</TABLE>
(5) OTHER NON-CASH FINANCIAL ACTIVITIES
<TABLE>
<S> <C>
Stock issued in connection with acquisitions:
Acquisition of The Big Network......................... $8,820,000
Acquisition of CD Universe............................. 7,275,000
Acquisition Cases Ladder............................... 7,000,000
Stock options issued in connection with the acquisition
of Cases Ladder shares................................ 1,111,100
Acquisition Gamer's Alliance........................... 1,000,000
Acquisition of eUniverse.com website(1)................ 60,000
Acquisition of MegaDVD(1).............................. 52,500
Stock options issued in connection with services
performed................................................. 1,000
Stock issued in connection with the preferred stock
offering, 319,000 shares(2)............................... 159,500
Stock issued in connection with services performed, 20,000
shares(2)................................................. 10,000
Stock issued to employees of CD Universe 25,000 shares...... 237,500
</TABLE>
(footnotes on next page)
9
<PAGE>
EUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(footnotes from previous page)
(1) The purchase of eUniverse.com website was accomplished through issuance of
15,000 shares of common stock priced at $4.00 per share for a total of
$60,000 (fair value of the site at the date of purchase). Acquisition of
megaDVD website was accomplished through issuance of 4,605 shares of common
stock priced at $11.40 per share (market price of the stock on issue date).
(2) Issuance of 339,000 share of common stock valued at $.50 per share (fair
value of the services performed) for various consulting services such as
financial and legal services performed during March and April of 1999 in
relation to the Company's stock offering completed in April 1999, and public
relations services performed subsequent to the reorganization in April 1999.
Additionally, 25,000 shares of common stock were issued to key employees of
CD Universe, Inc. for their involvement in the Company's activities. These
shares were issued on June 15, 1999 and were valued at $9.50 per share (market
price on issue date) and will vest on April 14, 2000. The compensation expense
is being amortized over this period.
Moreover, warrants were issued to purchase a total of 671,865 shares of
common stock of the company as part compensation to its exclusive placement
agent, Gerard Klauer Mattison & Co., Inc. ('GKM'). 400,000 of these warrants
have the exercise price of $2.74 per share and became exercisable on April 14,
1999 and expire on April 14, 2004. The remaining 271,865 have an exercise price
of $2.75 per share will become exercisable on April 14, 2000 and expire on
April 14, 2004. These warrants have been recorded in the financial statement
valued at $1,214,567. The Black-Scholes option-pricing model with a risk free
interest rate of 4.5%, an annualized volatility of 81%, no expected dividend
yield, and an exercise term of five years was used to estimate the fair value of
the warrants issued.
(6) DUE FROM EMPLOYEES
Due from employees consists of three 6% interest-bearing notes in the
amounts of $85,000, $25,000, and $40,000 due from two former vice presidents of
Cases Ladder, Inc. and former principal of Green Willow (MegaDVD). All three
individuals are currently employees of eUniverse, Inc.
(7) FIXED ASSETS
Fixed assets, at cost, consist of the following
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ --------------
<S> <C> <C>
Furniture and fixture................................. $ 39,062 $ 29,069
Computers and equipment............................... 530,798 238,622
Purchased Software.................................... 49,230 1,079
Leasehold Improvements................................ 40,000 40,000
-------- --------
659,090 308,770
Less accumulated depreciation and amortization........ 170,492 83,052
-------- --------
Fixed assets, Net................................ $488,598 $225,718
-------- --------
-------- --------
</TABLE>
Depreciation expense for the reporting period were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Depreciation expense............................ $30,925 $11,538 $50,279 $23,076
</TABLE>
10
<PAGE>
EUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(8) OTHER INTANGIBLES
Other Intangibles primarily consists of purchase price of web sites
acquired:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ --------------
<S> <C> <C>
Domain Name -- eUniverse.Com.......................... $ 60,000 $--
Domain Names -- CD Universe, Inc...................... 100,000
Domain Names -- Cases Ladder, Inc. ................... 75,000
Domain Names -- Gamer's Alliance, Inc. ............... 90,000
Domain Names -- The Big Network, Inc. ................ 24,000
MegaDVD.com........................................... 52,500
Customer list -- CD Universe, Inc. ................... 250,000
Customer list -- Cases Ladder, Inc. .................. 100,000
Other................................................. 10,975 850
-------- ----
762,475 850
Less accumulated amortization......................... 65,119 340
-------- ----
Other Intangible, Net................................. $697,356 $510
-------- ----
-------- ----
</TABLE>
The above Web sites and customer lists are valued at their fair value based
on management judgment and are being amortized on a straight-line basis over the
period of ten years and three years, respectively. Amortization expense for
goodwill and intangible assets for the reporting period ending September 30,
1999 was $889,839.
(9) INCOME TAXES
The components of the provision for income taxes for the six months period
ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current tax expense
U.S. Federal....................................... $ -- $ --
State and local.................................... -- --
-------- --------
Total current........................................... -- --
-------- --------
Deferred tax expense
U.S. Federal....................................... -- --
State and local.................................... -- --
-------- --------
Total deferred.......................................... -- --
-------- --------
Total tax provision from continuing operations.......... $ -- $ --
-------- --------
-------- --------
</TABLE>
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Federal income tax rate..................................... 34.0% 34.0%
Deferred tax charge (credit)................................ -- --
---- ----
Effect on valuation allowance............................... 34.0% 34.0%
State income tax, net of Federal benefit.................... -- --
---- ----
Effective income tax rate................................... 0.0% 0.0%
---- ----
---- ----
</TABLE>
(10) MAJOR VENDOR
The Company purchased approximately 90% of its merchandise from one vendor.
At September 30, 1999, the balance due to that vendor was approximately
$338,000, which was paid in October 1999. The Company believes that the loss of
this vendor mayhave a material adverse effect on the Company.
11
<PAGE>
EUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(11) COMMITMENTS AND CONTINGENCIES
The Company has entered into several agreements to share revenues with
individuals independent of the company. These individuals have provided the
Company with computer games, which the Company has been operating on its web
sites. The individuals have granted the Company usage of the computer games for
up to 25% royalty of advertising revenue generated from the usage of the game on
the Company's web sites. For the six months ended September 30, 1999, the
Company has no liabilities or expenses due under these agreements.
The Company leases office space under non-cancelable operating lease
agreements that expire within the next three years. Future lease payments under
these non cancelable operating lease are as follows:
<TABLE>
<CAPTION>
MARCH 31,
- ---------
<S> <C>
2000...................................................... $ 91,500
2001...................................................... 183,900
2002...................................................... 175,050
2003...................................................... 16,950
</TABLE>
On September 23, 1999, a former employee of The Big Network, Inc. ('TBN'),
filed suit in the Superior Court of California against The Big Network, Inc.,
the Company and various unnamed individuals seeking an unspecified amount of
compensatory and punitive damages based on (i) alleged breach of employment
agreement with TBN, (ii) alleged breach of an oral agreement among various
principals of TBN prior to its merger with the Company relating to salary and
stock options and (iii) alleged breach of an implied covenant of good faith and
fair dealing and fraud in connection with salary, stock options and proposed
terms of employment with the Company following the merger with TBN. The Company
believes the allegations in the complaint are without merit and will defend the
suit vigorously. In the event that there is any liability in connection with
this lawsuit, the Company has a right of indemnification from the former
shareholders of TBN. On December 20, 1999, the parties reached agreement in
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.
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.
12
<PAGE>
EUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
The following table presents the amount of stock-based compensation that
would have been recorded under the following income statement categories if the
stock-based compensation had not been separately stated in the financial
statements.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Marketing and Sales............................. $32,204 $ -- $37,606 $ --
Product Development............................. 37,306 -- 43,524 --
General and Administrative...................... 1,740 -- 1,995 --
------- ------- ------- -------
Total stock based compensation............. $71,250 $ -- $83,125 $ --
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Under the Company's 1999 Stock Award Plan, stock options may be granted to
officers, directors, employees and consultants. An aggregate of 5,000,000 shares
of common stock have been reserved for issuance under the Plan. For the six
months ended September 30, 1999 the plan's activities were as follows:
STOCK OPTIONS:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF EXERCISE AVERAGE
SHARES PRICE PRICE
------ ----- -----
<S> <C> <C> <C>
Outstanding at 3-31-1999.............................. -- -- --
Granted............................................... 4,064,750 $3.00-11.00 $7.13
Cancelled............................................. (1,932,000) 9.50-11.40 9.67
Reissued.............................................. 1,642,200 6.00 6.00
Exercised............................................. --
Forfeited............................................. --
---------- --------------- -----
Outstanding at 9-30-1999.............................. 3,774,950 $3.00-9.50 $5.32
---------- --------------- -----
Options exercisable at 9-30-1999...................... 91,667 $3.00 $3.00
---------- --------------- -----
</TABLE>
Weighted average of remaining life of the options is 35 months.
On September 15, 1999, the Company cancelled 1,932,000 options, which had
been granted to employees on June 15, 1999 with a weighted average exercise
price of $9.67 and reissued 1,642,200 (85 percent) options with a weighted
average exercise price of $6.00 to the same employees. In addition to the stock
options granted to the employees, the Company has granted 340,000 options with
exercise price of $6.00 to an outside consultant for the services performed
related to the acquisition of Cases Ladder, Inc. These options were valued
$1,111,100 using the Black-Scholes option pricing model and have been included
as part of the acquisition cost. Moreover, 10,000 options with an exercise price
of $13.00 were granted to a firm for investor relation services. These options
were recorded based on the fair value of services performed.
The Company uses intrinsic value method (APB Opinion 25) to account for its
stock options granted to officers, directors, and employees and non-employees.
Under this method, compensation expense is recorded over the vesting period
based on the difference between the exercise price and quoted market price on
the date the options are granted. Since the company has granted all its stock
options at an exercise price equal to or above the quoted market value on the
measurement date, no compensation expense related to issuance of stock option
has been recorded.
Equity instruments issued to non-employees are recorded pursuant to
SFAS 123 based on the fair value of the services performed or the fair value of
the equity instruments issued, whichever is more reliably measurable.
13
<PAGE>
EUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
Had the Company chosen the fair value method of accounting for transactions
involving stock option issuance (SFAS No. 123), the Company would have recorded
an additional $340,084 in compensation cost for the six months ended
September 30, 1999 as presented by the pro forma statement below:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
SEPTEMBER 30,
1999
----
<S> <C>
Net loss as reported........................................ $(3,305,026)
-----------
Pro forma net loss.......................................... $(3,645,110)
-----------
Net loss per common share................................... $ (0.23)
-----------
Pro forma loss per share.................................... $ (0.25)
-----------
</TABLE>
The Black-Scholes option-pricing model with a risk free interest rate
ranging from 4.5% to 5.86%, a weighted average volatility of 79%, zero dividend
yield and an expected life of three years for the options was used.
WARRANTS:
<TABLE>
<CAPTION>
NUMBER
OF SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at 3-31-1999.................................... -- --
Granted..................................................... 671,865 $ 2.75-2.75
Exercised................................................... --
Forfeited................................................... --
------- --------------
Outstanding at 9-30-1999.................................... 671,865 $ 2.75-2.75
------- --------------
Options exercisable at 9-30-1999............................ 400,000 $2.75
------- --------------
</TABLE>
The Warrants were issued as part of compensation to Gerard Klauer Mattison
& Co., Inc., the Company's exclusive placement agents. 400,000 of these warrants
have the exercise price of $2.74 per share and became exercisable on April 14,
1999 and expire on April 14, 2004. The remaining 271,865 have an exercise price
of $2.75 per share will become exercisable on April 14, 2000 and expire on
April 14, 2004. These warrants have been recorded in the financial statement
valued at $1,214,567. The Black-Scholes option-pricing model with a risk free
interest rate of 4.5%, an annualized volatility of 81%, no expected dividend
yield, and an exercise term of five years was used to estimate the fair value of
the warrants issued.
(13) PREFERRED STOCK
On April 14, 1999 EUI sold 1,795,024 shares of its Series A 6% Convertible
Preferred Stock in a private offering pursuant to Regulation D of the Securities
Act of 1933 for the aggregate price of $6,462,086. Holders of the company's have
the right to convert such stocks into shares of the Company's common stock at
any time after October 15, 1999 at a one-to-one ratio unless market price of the
company's common stock is below $3.60, in which case, the conversion ratio would
be adjusted accordingly.
The shares of preferred stock have a liquidation preference of $3.60 per
share, which increases at a rate of 6% per annum. Each share of preferred stock
may be converted to common stock at an initial rate of one share of common stock
for each $3.60 of liquidation preference. If the common stock's market price at
the time of conversion is less than $3.60 per share, the conversion rate is
determined by reference to such lower price. Because of the variable conversion
rate and the 6% accretion factor, each
14
<PAGE>
EUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
share of preferred stock may be converted into greater than one share of common
stock. Prior to any conversion, the conversion price is adjusted to account for
any increase or decrease in the number of outstanding shares of common stock by
stock split, stock dividend, or other similar event.
The Company does not pay dividends on the preferred stock and the holders
of such stock are not entitled to receive any dividends thereon. In the event of
the liquidation or dissolution of the Company, the holders of the preferred
stock will be entitled to receive, prior in preference to any distribution to
the holders of the common stock and any other class of stock which has been
designated as junior in rank to the preferred stock, the liquidation preference
amount described above.
At any time after one year from the effective date of the registration
statement registering the common stock issued or to be issued upon conversion of
the preferred stock, if the closing bid price per share of the Company's common
stock is equal to or greater than $16.00, the company, at its option, may either
automatically convert the preferred stock to common stock or redeem the
preferred stock for cash in an amount per share equal to $3.60 plus accretion
thereon at a rate of 6% per year.
(14) INTERIM SEGMENTED DISCLOSURES
The following table represents segmented reporting for the reporting period
ending September 30, 1999. There were no identifiable reportable segments during
the similar period last year.
<TABLE>
<CAPTION>
PRODUCT SERVICES CORPORATE TOTAL
------- -------- --------- -----
(000'S)
<S> <C> <C> <C> <C>
Revenue................................................. $ 3,550 $ 330 $ -- $ 3,880
Operating loss.......................................... (1,491) (741) (1,128) (3,360)
Interest income......................................... 39 39
Minority interest....................................... 16 16
------- ------- ------- -------
Pre tax loss............................................ (1,491) (725) (1,089) (3,305)
Net loss................................................ (1,491) (725) (1,089) (3,305)
Assets.................................................. 9,878 17,920 2,612 30,410
Depreciation and amortization........................... 559 405 2 966
Fixed assets additions.................................. 162 11 12 185
</TABLE>
Significant reconciling items in the corporate columns are as follows:
<TABLE>
<S> <C>
Operating loss: Professional fees $323; Compensation $335; Consulting $129; Investor
relations $198.
Assets: Cash $2,105; Loans $156; Prepaid Expense $172.
</TABLE>
Management has chosen to organize the enterprise around differences in
products and services. Products include audio CDs, videotapes, and digital
videodisks. Services include advertising, membership and sponsorship revenue.
All revenues recorded are from external customers.
(15) SUBSEQUENT EVENT
On October 1, 1999, the Company finalized its purchase of the assets of
FunOne.com, an entertainment and community hub with over 250,000 unique visitors
per month. FunOne provides online greetings, cartoons, joke lists and gags and
its subscribers can receive weekly jokes and send fun electronic greetings to
their friends. The purchase price of FunOne is $50,000 payable in shares of the
company's common stock. Additional payments of up to $360,000 in stock may be
payable upon achievement of targeted numbers of unique visitors to FunOne.com
during the seven consecutive months following the Closing Date.
THEFT OF CUSTOMER DATA FROM CD UNIVERSE
The Company was contacted recently by a person claiming to possess CD
Universe customer information and demanding compensation in return for not
posting the information on the Internet.
15
<PAGE>
EUNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
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.
The Company is taking steps to secure its customers' information as it
investigates the facts behind the theft of data. To that end, a major technology
security firm has been retained to review the Company's security procedures. We
are also working with our credit card processing companies to limit any losses
or inconvenience to customers associated with the theft of data. At this time,
the Company has suspended online order processing and removed the customer
database from its web site.
This information has been widely disseminated in the national press. The
publicity generated by the press coverage may cause customer concerns regarding
the security of their credit card data, which could affect future sales of CD
Universe products and consequently its revenues and operating results. The
Company may also be required to defend against lawsuits arising in connection
with the theft of data. At this time, the Company is unable to determine the
extent of any such effect on sales or exposure to lawsuits or any associated
liability.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the accompanying notes that appear elsewhere in this report. The
results for both the current quarter and six months reflect the consolidated
operations of eUniverse, including CD Universe, the predecessor company, Case's
Ladder (from June 1), Gamer's Alliance (from July 1) and Big Network (from
September 1) along with results for the corporation established in connection
with the acquisitions of MCA and those identified above. Results for the
comparable periods in 1998 include only those of CD Universe. The following
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results could differ materially from those discussed in
the forward-looking statements.
RESULTS OF OPERATIONS -- QUARTER AND SIX MONTHS ENDED SEPTEMBER 30, 1999 VS.
1998
NET SALES
Net product sales include the selling price of music, video, games and
other products sold by the Company, net of returns, as well as outbound shipping
and handling charges. Net service sales include membership, sponsorship and
advertising revenues.
<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
---- ---- -------- ---- ---- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales
Products................... $1,585 $2,181 (37%) $3,550 $4,299 (17%)
Services................... $ 260 $ -- 100% $ 330 $ -- 100%
</TABLE>
For the quarter ended September 30, 1999, product revenues declined as a
result of increased competition in the online music retailing markets and the
continued effect of a shutdown in one of the company's larger partners whose
customers had previously contributed approximately 5% of net sales. The
shutdowns at the company's partner have been resolved and CD Universe
relationships with this partner are stabilized. No further negative impact is
foreseen for either sales or results of operations due to this issue.
Additionally, the Company experienced higher than average downtime in its CD
Universe website availability along with other technical difficulties that made
it more difficult for customers to place orders on that site. We have contracted
with outside consultants and substantially changed site stability as well as
enhancing customers' ability to order online. We are continuing to make further
improvements in both of these areas. The decrease was partially offset by an
increase in advertising revenues, which had a positive effect on gross margins.
For the six months ended September 30, 1999, the 17% decline in product revenue
was the result of the current quarter performance and the earlier impact of a
shutdown in one of the Company's larger partners that reduced first quarter
sales by 4%. Net sales attributable to acquisitions include all sales of
services. Advertising and membership revenues from our acquisitions amounted to
$260 thousand during the quarter and $330 thousand for the six months, compared
to no revenues for the prior year. We expect that advertising revenues will
continue to grow as a result of our emphasis in this area as well as realizing
the full period effect of the acquisitions to date.
GROSS PROFIT
Gross profit is calculated as net sales less the cost of sales, which
consists of the cost of merchandise sold to customers and inbound and outbound
shipping costs.
17
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
---- ---- -------- ---- ---- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gross Profit
Products................. $222 $387 (43%) $535 $711 (25%)
Percentage of sales...... 14.0% 17.7% 15.1% 16.5%
Services................. $246 $-- 100% $308 $-- 100%
Percentage of sales...... 94.6% -- % 93.3% -- %
</TABLE>
For the quarter ended September 30, 1999, combined gross profit increased
as a percentage of net sales to 25% from 18% and in absolute dollars to $468
thousand from $387 thousand over the same periods in 1998, reflecting a change
in the mix of revenues to include advertising and membership revenues as noted
above. Gross margins on product sales declined during the current quarter and
year-to-date as a result of increased promotional discounts provided to
customers. Gross margin percentages on advertising revenues of over 90% are
substantially higher than those of the product revenues of 14-17%. The Company
over time intends to expand its product sales operations by promoting new or
complementary products or sales formats and by expanding the breadth and depth
of its product or service offerings. Gross margins attributable to new business
areas may be lower than those associated with the Company's existing business
activities. Furthermore, the competitive and promotional factors sited above are
expected to have a continuing impact. However, the Company over time will
continue to focus on increasing advertising revenue particularly for Case's
Ladder, Gamer's Alliance and Big Network and thus improve margins.
MARKETING AND SALES
Marketing and sales expenses consist primarily of fulfillment costs,
advertising, public relations and promotional expenditures, and all related
payroll and related expenses for personnel engaged in marketing, selling and
fulfillment activities. Fulfillment costs include the cost of operating and
staffing the distribution and customer service center.
<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
---- ---- -------- ---- ---- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Marketing and Sales.......... $585 $280 109% $1,022 $525 95%
Percentage of sales.......... 31.7% 12.8% 26.3% 12.2%
</TABLE>
Marketing and sales expenses increased during the quarter ended September
30, 1999 due to factors principally related to the acquisitions during the
current year. For the three months, costs in the acquired companies accounted
for $240 thousand of the $305 thousand increase. Payroll increases were $125
thousand and advertising and promotion $107 thousand. Comparatively, costs in
the product segment increased by $25 thousand in payroll and $40 thousand in
processing and fulfillment related costs. For the six months, costs in the
acquired units accounted for $325 thousand of the $497 thousand increase.
Payroll was $150 thousand and advertising and promotion $145 thousand. In the
product segment there were increases of $65 thousand for payroll and $70
thousand in fees. Other increases of $67 thousand consisted of minor increases
in several marketing and sales categories. The Company intends to continue its
branding and marketing campaigns. Increases in sales will drive increases in
fulfillment costs. As a result, the Company continues to expect marketing and
sales expenses to increase significantly in absolute dollars. Marketing and
sales expenses exclude $32 thousand and $37 thousand in stock-based compensation
for the quarter and six-months ended September 30, 1999, respectively.
PRODUCT DEVELOPMENT
Product development expenses consist of payroll and related expenses for
developing and maintaining the Company's web sites and supporting technology.
18
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
---- ---- -------- ---- ---- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Product Development........... $415 $ 56 641% $496 $157 216%
Percentage of sales........... 22.5% 2.6% 12.8% 3.6%
</TABLE>
Product development costs increased as a result of increased payroll and
related expense due to inclusion of the results for Case's Ladder, Gamer's
Alliance and Big Network. The $359 thousand increase for the quarter came from
$72 thousand in payroll related costs related to the product segment and the
remainder from increases related to the acquisitions and corporate site
development and integration. Additional payroll in acquisitions added $150
thousand, internet fees $47 thousand and $90 thousand in outside services and
consultants. For the six months cost increase factors were the same as for the
quarter except outside consulting variance which was reduced to $130 thousand.
The company intends to create a tighter structure amongst its sites and design
new sites that will drive increased expenses. Product development expenses
exclude $37 thousand and $44 thousand in stock-based compensation for the
quarter and six-months ended September 30, 1999, respectively.
GENERAL AND ADMINISTRATIVE
General and administrative ('G&A') expenses consist of payroll and related
expenses for executive, finance and administrative personnel, recruiting,
professional fees and other general corporate expenses.
<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
---- ---- -------- ---- ---- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
General and administrative... $915 $132 593% $1,687 $182 827%
Percentage of sales.......... 49.6% 6.1% 43.5% 4.2%
</TABLE>
Increases in G&A costs are primarily attributable to increased
infrastructure costs associated with the Company's expansion efforts. These
include payroll $220 thousand, accounting and legal services $213 thousand and
professional consulting services $218 thousand and other increases of $132
thousand consisted of office supplies and support expense categories. Similarly
for the six months increases included $475 thousand in payroll, $392 thousand in
accounting and legal and $492 thousand in professional services and other
increases of $146 thousand consisted of office supplies and support expense
categories. The company expects G&A costs to continue to increase commensurate
with its expansion plans. G&A expenses exclude $2 thousand and $2 thousand in
stock-based compensation for the quarter and six-months ended September 30,
1999, respectively.
AMORTIZATION OF INTANGIBLES
<TABLE>
<CAPTION>
SIX-MONTHS
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Amortization of intangibles.................. $592 $ -- $915 $ --
</TABLE>
The current period charges reflect the acquisitions of CD Universe, Case's
Ladder, Gamer's Alliance and Big Network, while the results for 1998 reflect a
nominal amount related to CD Universe startup costs. The Company expects M&A
Costs to increase in the third quarter of 1999 and beyond, because the Company
will record a full quarter of amortization expense relating to the acquisitions
of Big Network amounting to $220 thousand. It is likely that the Company will
continue to expand its business through acquisitions and investments, which
would cause Amortization Costs to increase.
19
<PAGE>
STOCK-BASED COMPENSATION
Stock-based compensation is comprised of the portion of acquisition related
consideration conditioned on the continued tenure of key employees, which must
be classified as compensation expense under generally accepted accounting
principles. The following table represents the allocation of stock-based
compensation among income statement categories.
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Marketing and Sales............................. $32,204 $ -- $37,606 $ --
Product Development............................. 37,306 -- 43,524 --
General and Administrative...................... 1,740 -- 1,995 --
------- ------- ------- -------
Total stock based compensation............. $71,250 $ -- $83,125 $ --
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The expenses for the quarter and six months are attributable to the 1999
Stock Awards Plan under which 25,000 shares of restricted common stock were
issued to CD Universe employees that are being amortized over the vesting period
that ends April 14, 2000.
NON-OPERATING INCOME AND (EXPENSE)
<TABLE>
<CAPTION>
SIX-MONTHS
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income.............................. $32 $ -- $39 $ --
Minority interest............................ $16 $ -- $16 $ --
</TABLE>
Interest income increased due to higher cash balances resulting from the
Company's financing activities, principally the April 1999 issuance of $6.8
million in 6% Convertible Preferred Stock ('Preferred) and $0.9 million in
common stock. Minority interest represents the 20% minority shareholders of Big
Network's share of their losses for the period, limited by their investment.
INCOME TAXES
The Company has not generated any taxable income to date and therefore has
not paid any federal income taxes since inception. Utilization of the Company's
net operating loss carryforwards, which begin to expire in 2011, may be subject
to certain limitations under Section 382 of the Internal Revenue Code of 1986,
as amended. Due to uncertainties regarding realizability of the deferred tax
assets, the Company has provided a valuation allowance on the deferred tax asset
in an amount necessary to reduce the net deferred tax asset to zero.
NET INCOME
<TABLE>
<CAPTION>
QUARTER ENDED SIX-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Net (Loss).............. $(2,062) $ (81) $(3,305) $ (152)
Percentage of sales..... (111.8%) (2.9%) (85.2%) (3.5%)
</TABLE>
Net Income/(Loss) attributable to acquisitions include ($582) thousand for
the quarter ended 9/30/99 and nothing for the quarter ended 9/30/98. Net
Income/(Loss) attributable to acquisitions include ($688) thousand for the six
months ended 9/30/99 and nothing for the six months ended 9/30/98.
For the 6 months ended September 30, net loss for the products and services
segments were $(1,491,000) and $(725,000), respectively. For the products
segment the loss for the prior year was
20
<PAGE>
$(152,000). There were no results for the services segment. The increased loss
of $1,339,000 is attributable to several factors: $516,000 for amortization
of intangibles, $83,000 for stock based compensation (the entire amount
discussed above), $172,000 in marketing and sales expenses, $72,000 in
technical expenses, $320,000 in administrative expenses and the remaining
$176,000 in gross margin as discussed above. Marketing and sales increases
came from $65,000 in increased payroll, $70,000 in fees and $37,000 in increased
advertising and promotion related expenses. Technical expense increases were
due entirely to increased payroll related and contractor costs. Administrative
cost increases came from additional payroll related costs of $195,000, increased
office expenses of $53,000 and professional fees of $72,000. The services
segment relates entirely to the newly acquired businesses and there are no
comparable figures for the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Since April 14, 1999, the Company has satisfied its cash requirements
primarily through private placements of equity securities (including the $6.3
million raised in April of 1999 in exchange of shares of the Company's Series A
6% Convertible Preferred Stock) and cash flow from sales of music CDs and
videos.
Net cash used in operating activities was $2.79 million and $186 thousand
for the six-month periods ended September 30, 1999 and 1998, respectively. Net
operating cash flows were primarily attributable to quarterly net losses,
decreases in accounts payable and in increases in prepaid expenses, partially
offset by non-cash charges for depreciation and amortization and merger and
acquisition related costs.
Net cash used in investing activities was $1.2 million and $25.7 thousand
for the six-month periods ended September 30, 1999 and 1998, respectively. In
the six-months, $0.4 million was used for acquisitions, consisting of $1.9
million in cash paid for the CD Universe acquisition, less $1.0 million received
from acquisitions. The remainder was used for purchases of fixed assets.
Investments for 1998 consisted principally of fixed asset purchases.
Net cash provided by financing activities of $6.3 million for the six-month
period ended September 30, 1999 resulted from proceeds relating to the sale of
1.8 million shares of Preferred for $6.3 million, net of financing costs and
$858,447 from sale of 897,835 shares of common stock. See 'Item 10. Recent Sales
of Unregistered Securities.'
As of September 30, 1999, the Company's principal commitments include
obligations for leases amounting to about $180 thousand, annually. See 'Item 1.
Business -- Facilities' on page of the Second Amendment. Continued
acquisitions and investments may also require future capital expenditures.
The Company believes that cash balances of $2.3 million at September 30,
1999 will be sufficient to meet its anticipated cash needs for at least the next
6 months. After the next 6 months, we anticipate that we will need to raise
additional funds to meet our operating needs and the company is in current
discussions with an investment banker, Gerard Klauer Mattison, in connection
with such plans. However, any projections of future cash needs and cash flows
are subject to substantial uncertainty. If current cash that may be generated
from operations are insufficient to satisfy the Company's liquidity
requirements, the Company may seek to sell additional equity or to obtain a line
of credit. The sale of additional equity or convertible debt securities could
result in additional dilution to the Company's stockholders. In addition, the
company will, from time to time, consider the acquisition of or investment in
complementary businesses, products, services and technologies, which might
impact the Company's liquidity requirements or cause the Company to issue
additional equity. There can be no assurance that financing will be available in
amounts or on terms acceptable to the Company, if at all.
21
<PAGE>
THEFT OF CUSTOMER DATA FROM CD UNIVERSE
The Company was contacted recently 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.
The Company is taking steps to secure its customers' information as it
investigates the facts behind the theft of data. To that end, a major technology
security firm has been retained to review the Company's security procedures. We
are also working with our credit card processing companies to limit any losses
or inconvenience to customers associated with the theft of data. At this time,
the Company has suspended online order processing and removed the customer
database from its web site.
This information has been widely disseminated in the national press. The
publicity generated by the press coverage may cause customer concerns regarding
the security of their credit card data, which could affect future sales of CD
Universe products and consequently its revenues and operating results. The
Company may also be required to defend against lawsuits arising in connection
with the theft of data. At this time, the Company is unable to determine the
extent of any such effect on sales or exposure to lawsuits or any associated
liability.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
- -------
Number Exhibit Title/Description
- ------ -------------------------
<S> <C>
10.13 Web Advertising Agreement by and between eUniverse, Inc. and
Mpath Interactive, Inc., dated as of August 13, 1999, with exhibits
attached. Portions of Exhibit 10.13 have been omitted pursuant to
a request for confidential treatment.
27.01 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K during the quarterly
period ended September 30, 1999.
Items 3, 4 and 5 are not applicable and have been omitted.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized.
eUNIVERSE, INC.
Registrant
Dated: January 11, 2000 /s/ WILLIAM R. WAGNER
--------------------------------------
William R. Wagner
Chief Financial Officer
(Principal Financial Officer)
and Registrant's Authorized Officer
23
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as ........................... 'TM'
The registered trademark symbol shall be expressed as ................ 'r'
<PAGE>
EXHIBIT 10.13
[*] Material has been omitted pursuant to a request for confidential treatment
and the material has been filed separately with the Securities and Exchange
Commission.
WEB ADVERTISING AGREEMENT
This Web Advertising Agreement (the "Agreement") is made effective as of August
13, 1999 (the "Effective Date") by and between Mpath Interactive, Inc.
("Mpath"), a Delaware corporation, with its principal place of business at 665
Clyde Avenue, Mountain View, CA 94043 and eUniverse, a Nevada corporation having
its principal place of business at 101 North Plains Industrial Road,
Wallingford, CT 06492.
1. DEFINITIONS
The following terms, when used in this Agreement, have the respective meanings
ascribed to them:
1.1 "Advertising Campaign" means an advertising package that focuses on the
advertising/promotion of a single product or event.
1.2 "Advertising Revenue" means gross revenue actually received by Mpath from
advertising sales by Mpath's internal or external sales force, less any
commissions paid to external sales force.
1.3 "Confidential Information" means: (i) proprietary or confidential
business information of a party, including but not limited to any information
relating to a party's product plans, product designs, product costs, product
prices, product names, finances, marketing plans, business opportunities,
personnel, research, development or know-how; (ii) any information designated by
any party as "confidential" or "proprietary" or which, under the circumstances
taken as a whole, would reasonably be deemed to be confidential; and (iii) the
terms and conditions of this Agreement. "Confidential Information" excludes
information that: (a) is or becomes known or available by publication,
commercial use or otherwise through no fault of the receiving party; (b) is
known to the receiving party at the time of disclosure without violation of any
confidentiality restriction and without any restriction on the receiving party's
further use or disclosure; or (c) is independently developed by the receiving
party without access or reference to Confidential Information of the disclosing
party.
1.4 "eUniverse Web Sites" means Case's Ladder, Gamer's Alliance, eUniverse and
related web sites and/or networks owned and/or controlled by eUniverse as
described in Exhibit A of this Agreement.
1.5 "Gross Sponsorship Revenue" means gross revenue actually received by Mpath
from the sale and/or promotion of Mpath and eUniverse jointly sponsored events.
1.6 "Mpath's Web Sites" means Mplayer.com and Hearme.com.
1
<PAGE>
1.7 "Mplayer.com Internet Advertising Network" means network of web sites that
have elected to have Mpath provide advertising services.
1.8 "Mplayer.com Newsletter" means the opt-in only electronic newsletter sent
approximately every two weeks to Mplayer.com members, with a current
subscription of over 1,000,000 members.
1.9 "Reach" means monthly unique visitors to a web site as measured by a third
party auditing service approved by Mpath which approval may not be unreasonably
withheld.
2. WEB SITE OPERATIONS
2.1 Advertising Sales. eUniverse elects and authorizes Mpath to exclusively
sell advertising and sponsorships to appear on the pages of the eUniverse Web
Sites.
(i) Mpath's Responsibilities.
(a) Mpath will sell advertising on the eUniverse Web Sites on
generally no less favorable terms than advertising sold on Mpath's Web
Sites.
(b) Mpath will undertake to sell all advertising inventory using
Mpath's internal sales force. However, Mpath may use third party
services to sell excess inventory, not to exceed fifty percent (50%)
of the total inventory available. This restriction becomes effective
for each eUniverse Web Site six (6) months from the initial date of
eUniverse's integration of Mpath's advertising serving technologies.
(c) Mpath will administer one Advertising Campaign for eUniverse each
month at no charge and additional campaigns as eUniverse requests at
an administrative cost of $150 per campaign.
(d) eUniverse may elect to have Mpath serve promotional or barter
advertisements, not to exceed thirty percent (30%) of the inventory
on the eUniverse Web Sites. Mpath will have an equal number of
impressions not to exceed three and one-half percent (3.5%) of the
inventory of the eUniverse Web Sites to use in serving its own
promotional or barter advertisements on the eUniverse Web Sites
(ii) eUniverse's Responsibilities.
(a) eUniverse will integrate technologies supplied by Mpath into
eUniverse Web Sites for advertising support.
2
<PAGE>
(b) eUniverse is responsible for all maintenance, programming, web
pages and content appearing on the eUniverse Web Sites.
(c) eUniverse may agree in writing with Mpath for Mpath to provide
eUniverse with HTML or web programming services and any such services
are outside the scope of this Agreement, at Mpath's then-prevailing
rates for such services and subject to mutual, written agreement.
(d) eUniverse agrees to notify Mpath at least thirty (30) days in
advance of any changes in the eUniverse Web Sites that may result in
more than a ten percent (10%) change in usage of any one of the
eUniverse Web Sites and re-notify Mpath within forty-eight (48) hours
of the actual change or event.
(e) In a manner prescribed by Mpath, eUniverse will include Mpath's
advertising serving html code in every web page where Mpath will be
serving advertising. These unique tags in HTML/Java or other
appropriate languages are proprietary to Mpath and/or Mpath's
licensors.
(f) eUniverse will implement such new advertising technology as may be
reasonably requested by Mpath from time to time for use with eUniverse
Web Sites.
(g) eUniverse Web Sites will include a section listing contact
information for advertising on the site as discussed in Section 4.6.
2.2 Sponsorships. Mpath and eUniverse may promote and/or sell sponsorships of
events jointly held by Mpath and eUniverse based on a price schedule determined
by Mpath. Mpath may act as the sales administration for such sponsorships,
invoicing and collecting payments for such sales. Such sponsorships shall not
include more than [*] percent ([*]%) of their value of standard web advertising
products, else they will be deemed Advertising Revenue. The parties Gross
Sponsorship Revenue will be allocated according to the following schedule:
(i) eUniverse sells and eUniverse administers sponsorships - Mpath
receives [*] percent ([*]%) of Gross Sponsorship Revenue; eUniverse
receives [*] percent ([*]%) of Gross Sponsorship Revenue.
(ii) eUniverse sells and Mpath administers sponsorships - Mpath
receives [*] percent ([*]%) of Gross Sponsorship Revenue; eUniverse
receives [*] percent ([*]%) of Gross Sponsorship Revenue.
(iii) Mpath participates in selling and Mpath administers sponsorships
- Mpath and eUniverse receive [*] percent ([*]%) of Gross Sponsorship
Revenue each.
3
<PAGE>
2.3 Reach. eUniverse, within three (3) days of Agreement execution, will submit
to the appropriate monitoring and reporting services and to Mpath a signed
statement both electronic and written that authorizes any third party web site
auditing authority to include the eUniverse Web Sites as part of the Mplayer.com
Internet Advertising Network. This statement addressed to monitoring and
reporting services will specify that the Reach associated with eUniverse Web
Sites should be attributed to Mpath in calculating Mpath's total Internet Reach.
The initial statement will include the current eUniverse Web Sites.
3. REVENUE, PAYMENT, REPORTS AND AUDITS
3.1 Advertising Revenue. Advertising Revenue will be shared by the parties as
follows: [*] percent ([*]%) to eUniverse and [*] percent ([*]%) to Mpath. No
payment is due from Mpath to eUniverse for barter advertising deals. As advances
against its share of Advertising Revenue, Mpath will pay eUniverse within thirty
(30) days of the following milestones:
- --------------------------------------------------------------------------------
[*] Initial Contract Signing
Month 1 [*] First of the month following the full integration of the Mpath
ad serving technology within the eUniverse Sites.
Month 2 [*] One month after previous payment
Month 3 [*] One month after previous payment
Month 4 [*] One month after previous payment
Month 5 [*] One month after previous payment
Month 6 [*] One month after previous payment
- -------------------------------------------------------------------------------
Month 7 [*] One month after previous payment and Media Metrix shows the
eUniverse Web Sites to have a monthly reach of at least [*]
Month 8 [*] One month after previous payment
Month 9 [*] One month after previous payment
Month 10 [*] One month after previous payment
Month 11 [*] One month after previous payment
Month 12 [*] One month after previous payment
- --------------------------------------------------------------------------------
Month 13 [*] One month after previous payment and Media Metrix shows the
eUniverse Web Sites to have a monthly reach of at least [*]
Month 14 [*] One month after previous payment
Month 15 [*] One month after previous payment
Month 16 [*] One month after previous payment
Month 17 [*] One month after previous payment
Month 18 [*] One month after previous payment
Month 19 [*] One month after previous payment
4
<PAGE>
Month 20 [*] One month after previous payment
Month 21 [*] One month after previous payment
Month 22 [*] One month after previous payment
Month 23 [*] One month after previous payment
Month 24 [*] One month after previous payment
- --------------------------------------------------------------------------------
$2,080,000 [*] Total Advances
(i) If Media Metrix shows the Reach of the eUniverse Web Sites to
exceed [*] before the beginning of Month 7, the monthly advance
will become [*] at the time Reach exceeds [*].
(ii) If Media Metrix shows the Reach of the eUniverse Web Sites to
exceed [*] before the beginning of Month 13, the monthly advance
will become [*] at the time Reach exceeds [*].
(iii) If eUniverse signs additional web sites and/or networks beyond
the eUniverse Web Sites listed in Exhibit A, Mpath will increase
the monthly advance based on the Reach of the new web sites
and/or networks as reported by Media Metrix within the first
ninety (90) days of the addition of the new web sites and/or
networks by an increase of [*] per person. For example, if Site
X, reporting a Media Metrix Reach of [*] is added by eUniverse,
Mpath will increase the monthly advance by [*].
3.2 Payment Terms. Mpath will pay eUniverse its share of Advertising Revenue
netted against previously paid advances as described above, with surplus
amounts, if any, paid under this Agreement on a monthly basis.
3.3 Mpath's Records. For two (2) years after receipt by Mpath of Advertising
Revenue, Mpath will maintain records and books, in accordance with generally
accepted accounting principles, regarding all payments due under this Agreement.
3.4 Monthly Payment Reports. Within sixty (60) days after the end of each
calendar month, Mpath will deliver to eUniverse, or make available via the
Internet, a report which will provide all information reasonably necessary for
computation and confirmation of payments due to eUniverse from Mpath under this
Agreement, if any, due or credited to eUniverse for such monthly period.
3.5 Audit. A nationally-recognized independent certified public accountant (not
hired on a contingent-fee basis) selected and paid for by eUniverse and
reasonably approved by Mpath may, upon reasonable prior notice and during normal
business hours, inspect the records of Mpath on which such reports are based no
more than once per calendar year and once within six (6) months after
termination of this Agreement. eUniverse agrees to provide Mpath with a copy of
the audit report letter, no later than twenty (20) days after completion of the
audit. If, upon performing such audit, it is determined that Mpath has
5
<PAGE>
underpaid eUniverse, Mpath will pay to eUniverse the amount of the underpayment
within thirty (30) days of completion of the audit. If, upon performing such
audit, Mpath has overpaid eUniverse, Mpath may offset the amount of any such
overpayment against any balance owing from Mpath to eUniverse. If such offset is
not commercially reasonable, Mpath may invoice eUniverse for such amount and
eUniverse agrees to pay such invoice within thirty (30) days. Notwithstanding
the first sentence of this Section, if such underpayment exceeds the greater of
$2,500 or five percent (5%) of the amounts due eUniverse in the period being
audited, Mpath will bear all reasonable expenses and costs of such audit up to
the amount of the underpayment.
4. MARKETING AND TRADEMARK LICENSES
4.1 eUniverse Marks. Subject to the terms and conditions of this Agreement,
eUniverse hereby grants to Mpath a non-exclusive license to use eUniverse
trademarks, text, graphics and contents of their web site for advertising and
promoting the eUniverse Web Sites. Such use must reference the eUniverse
trademarks as being owned by eUniverse as specified in Exhibit B. Nothing in
this Agreement grants Mpath ownership or any rights in or to use the eUniverse
Marks, except in accordance with this license, and any such use is for and
inures to the benefit of eUniverse. Mpath will neither take nor authorize any
activity inconsistent with such exclusive right. The marketing contact at
eUniverse is [*] who will continue to be eUniverse's marketing contact unless
and until Mpath is notified otherwise in writing.
4.2 Mpath Marks. Subject to the terms and conditions of this Agreement, Mpath
hereby grants to eUniverse a non-exclusive license to use Mpath's trademarks,
text, graphics and contents of their web site for advertising and promoting the
Mpath Web Sites. Such use must reference the Mpath trademarks as being owned by
Mpath as specified in Exhibit C. Nothing in this Agreement grants eUniverse
ownership or any rights in or to use the Mpath Marks, except in accordance with
this license, and any such use is for and inures to the benefit of Mpath.
eUniverse will neither take nor authorize any activity inconsistent with such
exclusive right. The marketing contact at Mpath is [*] who will continue to be
Mpath's marketing contact unless and until eUniverse is notified otherwise in
writing.
4.3 eUniverse Marketing Responsibilities.
(i) Case's Ladder. eUniverse will create Case's Ladder support for all
Mplayer.com supported games. eUniverse will promote Mplayer.com as the
"official" game service of Case's Ladder, driving traffic to
Mplayer.com through web and gameplay links.
6
<PAGE>
(ii) Display of Mpath Marks.
(a) Mplayer.com. eUniverse will prominently display the
Mplayer.com graphic image provided by Mpath on the root eUniverse
Web Sites home pages that are game related. Such graphic image
shall be no smaller than 114 X 75 pixels and will hyperlink to
the download, registration, and launch site for the eUniverse
customized version of the Mplayer.com client software. eUniverse
may also display the Mplayer.com graphic image hyperlink on other
eUniverse Web Site pages at its discretion.
(b) Hearme.com. eUniverse will prominently place a Hearme.com
graphic image provided by Mpath on the root eUniverse Web Sties
home pages. Such graphic image shall be no smaller than 114 X 75
pixels and will hyperlink to the download, registration, and
launch site for the eUniverse customized version of the
Hearme.com client software. eUniverse may remove this link at its
discretion. eUniverse may also display the Hearme.com graphic
image hyperlink on other eUniverse Web Site pages at its
discretion.
4.4 Mpath Marketing Responsibilities.
(i) Mplayer.com Newsletter. Mpath will provide eUniverse a permanent
section in the Mplayer.com Newsletter for announcing and promoting
ladder competitions and events.
(ii) Access to Mplayer.com's Community and Calendar Tools. Mpath will
provide eUniverse with reasonable access to Mplayer.com's community
and calendar tools to assist eUniverse in scheduling and promoting
events.
(iii) Display of eUniverse Marks. Mpath will prominently display
eUniverse's Case's Ladder graphic image on the Mplayer.com home page.
Such graphic image shall be no smaller than 114 X 75 pixels.
(iv) Case's Ladder. Mpath will endorse the Case's Ladder support
provided through Section 4.3(i) as the exclusive "official"
Mplayer.com endorsed ladders. This ladder support will initially be
positioned in the default WebViewer position in each particular game
room.
4.5 Publicity. Subject to confidentiality restrictions as expressly stated in
this Agreement, eUniverse and Mpath may each make press releases about the
existence and contents of the Agreement (except with respect to specific
financial terms) with the prior approval of the other of the contents of the
press release, which approval shall not be
7
<PAGE>
unreasonably withheld or delayed. If the party from whom approval is sought does
not approve or reject such press release within five (5) business days of
submission for approval, such press release shall be deemed approved.
4.6 Advertising. Mpath may sell and place on-line ads on the eUniverse Web
Sites. The advertising contact at Mpath is [*] who will continue to be the
Mpath's advertising contact unless and until eUniverse is notified otherwise in
writing. The eUniverse' advertising contact is [*] who will continue to be
Mpath's advertising contact unless and until Mpath is notified otherwise in
writing. Mpath makes no representation regarding usage statistics or levels of
impressions for an Advertisement and estimated usage statistics are provided
only as a courtesy to the eUniverse. Mpath may not be held liable for any claims
related to usage statistics. If Mpath uses a third party to serve Web
advertising, then Mpath is not responsible for performance issues created by
such third party, incorrect or non-functioning hyperlinks, banner rotation, URL
addresses or other problems created by such third party. Mpath's NetGravity
AdInsight reports will determine the basis for payment and record keeping. All
advertisements are subject to Mpath's approval. Mpath may reject any listing
that does not meet Mpath's reasonable standards. Mpath may reject, discontinue,
or omit any listing or any part of advertisements. Mpath is not liable for
errors in listing's position and/or placement, or typographic errors of any
kind. Mpath may, at its sole option, remove the listing for any reason upon
written notice to the advertiser. eUniverse agrees to provide Mpath with all
reasonable subscribership, viewership, inventory, and usage reports, reviews and
audience studies, deliveries, census requirements, and any other information
regarding the eUniverse Web Sites as is reasonably available to eUniverse.
4.7 Hyperlinks. eUniverse agrees to create a section on their web sites listing
Mpath contact information for those people interested in advertising on
eUniverse's Web Sites, including links back to Mpath's advertising information
web site, http://www.mplayer.com/advertise/ or to such other Mpath URL as Mpath
may reasonably request from time-to-time. Mpath may include, on eUniverse Web
Sites, commercially reasonable hyperlinks to http://www.mplayer.com/,
http://www.hearme.com/ or to such other Mpath URLs as Mpath may reasonably
implement and from time-to-time request. Mpath may reference content appearing
on eUniverse Web Sites by headline in an effort to drive cross traffic to
eUniverse Web Sites {Insert URLS}. Mpath may provide hyperlinks to eUniverse
e-commerce web sites, and in such cases, the parties agree to determine
reasonable compensation schedules.
5. REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
5.1 By eUniverse. eUniverse represents and warrants that: (i) it is and will be
the sole and exclusive owner of all right and title, or has license to, the
eUniverse Web Sites, the eUniverse Marks and all intellectual property rights
therein; (ii) it has not granted any licenses or entered into any agreements of
any kind inconsistent with or contrary to this Agreement; (iii) to the best of
eUniverse's knowledge, information and belief, the
8
<PAGE>
eUniverse Web Sites and the eUniverse Marks do not violate or infringe, and will
not violate or infringe, any intellectual property or other proprietary rights
of any third party; (iv) it has sufficient right and authority to enter this
Agreement and to grant the licenses and rights granted under this Agreement; and
(v) the eUniverse Web Sites will be able to provide specific dates and calculate
spans of dates, and to record, store, process and provide true and accurate
dates and calculations for dates and spans of dates within the interval of
January 1, 1999 through December 31, 2100 (the "Interval Dates") prior to,
including and following January 1, 2000, including by: (a) prior and up to
December 31, 1999 correctly processing day and date calculations within the
Interval Dates; (b) on and after January 1, 2000 correctly processing day and
date calculations within the Interval Dates; (c) recognizing September 9, 1999
and January 1, 2001 as valid dates; (d) recognizing the year 2000 as a leap year
having 366 days, and correctly processing February 29, 2000 as a valid leap year
date; and (e) employing only four-digit year representations.
5.2 By Mpath. Mpath represents and warrants that: (i) it is and will be the
sole and exclusive owner of all right and title, or has license to, the Mpath
Marks; (ii) it has not entered into any agreements of any kind inconsistent with
or contrary to this Agreement; (iii) to the best of Mpath's knowledge,
information and belief, the Mpath Marks do not violate or infringe, and will not
violate or infringe, any intellectual property or other proprietary rights of
any third party, and (iv) it has sufficient right and authority to enter this
Agreement.
5.3 Warranty Disclaimer. THE FOREGOING WARRANTIES IN SECTIONS 5.1 AND 5.2 ARE
IN LIEU OF ANY OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT
LIMITATION ANY WARRANTY OF MERCHANTIBILITY, NON-INFRINGEMENT OR FITNESS FOR A
PARTICULAR PURPOSE. UNDER NO CIRCUMSTANCES IS MPATH RESPONSIBLE FOR ANY CONTENT
ON EUNIVERSES WEB SITES. eUNIVERSE SPECIFICALLY AGREES THAT MPATH IS NOT
RESPONSIBLE OR LIABLE TO eUNIVERSE, USERS OR ANYONE ELSE FOR ANY THREATENING,
DEFAMATORY, OBSCENE, OFFENSIVE OR ILLEGAL CONDUCT OR SPEECH OF ANY OTHER PARTY
OR ANY INFRINGEMENT OR VIOLATION OF ANOTHER'S RIGHTS, INCLUDING INTELLECTUAL
PROPERTY AND RIGHT OF PUBLICITY RIGHTS ORIGINATING FROM eUNIVERSE WEB SITES.
5.4 Indemnification by eUniverse. eUniverse agrees to indemnify Mpath against,
and hold Mpath free and harmless from, any and all loss, damage, settlement or
expense (including legal expenses), as incurred, resulting from or arising out
of any claims which allege that the eUniverse Web Sites or the use, display,
performance, transmission or distribution thereof infringe upon any patents,
copyrights, trademarks, trade secret rights or other proprietary rights of
persons, firms or entities who are not parties to this Agreement; provided that
Mpath promptly notifies eUniverse, in writing, of any notice or claim of such
alleged infringement involving the eUniverse Web Sites of which it becomes
aware, and permits eUniverse to control, in a manner not adverse to Mpath, the
9
<PAGE>
defense, settlement, adjustment or compromise of any such claim using counsel
reasonably acceptable to Mpath. Mpath may employ counsel, at its own expense
(provided that if such counsel is necessary because of a conflict of eUniverse
or its counsel or because eUniverse does not assume control, eUniverse will bear
such expense), to assist it with respect to any such claim.
6. CONFIDENTIALITY
Each party will refrain from using the other party's Confidential Information
except as contemplated in this Agreement and from disclosing such Confidential
Information to any third party except to employees (or subcontractors), legal
advisors, financial advisors and in the course of due diligence as is reasonably
required in connection with the exercise of its rights and obligations under
this Agreement (and only subject to binding use and disclosure restrictions at
least as protective as those set forth in this Agreement executed in writing by
such employees or subcontractors). The parties will each store and protect the
other party's Confidential Information from unauthorized access. However, each
party may disclose Confidential Information of another party: (i) pursuant to
the order or requirement of a court, administrative agency, the SEC or other
governmental body, provided that such party give reasonable notice to the other
party to contest such order or requirement; or (ii) on a confidential basis to
legal and financial advisors. Either party may disclose, subject to written
non-disclosure agreement, this Agreement to its lawyers, accountants and in the
course of investment or financing due diligence.
7. MUTUAL LIABILITY LIMITATION.
REGARDLESS WHETHER ANY REMEDY SET FORTH IN THIS AGREEMENT FAILS OF ITS ESSENTIAL
PURPOSE OR OTHERWISE, UNDER NO CIRCUMSTANCES, EXCEPT BREACH OF SECTION 6, WILL
EITHER PARTY BE LIABLE TO THE OTHER UNDER ANY CONTRACT, STRICT LIABILITY,
NEGLIGENCE OR OTHER LEGAL THEORY, FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES, LOST REVENUE OR LOST PROFITS IN CONNECTION WITH THE
SUBJECT MATTER OF THIS AGREEMENT EVEN IF THE PARTY HAS BEEN INFORMED IN ADVANCE
OF SUCH DAMAGES. THE TOTAL CUMULATIVE AMOUNT RECOVERABLE UNDER THIS AGREEMENT IS
HEREBY CAPPED AT AN AMOUNT EQUAL TO THE TOTAL CUMULATIVE AMOUNT PAID UNDER THIS
AGREEMENT BY MPATH TO EUNIVERSE. THE FOREGOING ALLOCATION OF RISK IS REFLECTED
IN THE AMOUNT OF THE COMPENSATION CONTEMPLATED IN THIS AGREEMENT.
8. TERM AND TERMINATION
8.1. Term. This Agreement commences on the Effective Date and continues in full
force and effect for two (2) years, and will automatically renew for successive
one (1) year terms thereafter, unless either party provides written notice to
the other at least
10
<PAGE>
ninety (90) days prior to the renewal date.
8.2. Termination by eUniverse.
(i) For Cause. eUniverse may terminate this Agreement if Mpath (a)
breaches a material provision of this Agreement and fails to cure
such breach within thirty (30) days following receipt of written
notice unless such breach is incurable in which case eUniverse may
terminate immediately; or (b) becomes insolvent or seeks protection
under any bankruptcy, receivership, trust deed, creditor's
arrangement or comparable proceeding, or if any such proceeding is
instituted against Mpath (and not dismissed within ninety (90) days).
(ii) Without Cause. eUniverse may terminate this Agreement six (6) months
following the month when the eUniverse Web Sites begin have added all
necessary codes to their pages to receive advertisements from Mpath, upon a
minimum of ninety (90) days written notice to Mpath and by paying to Mpath,
one of the following termination amounts:
(a) If eUniverse gives Mpath written notice to terminate the
Agreement six (6) months or later from when the eUniverse Web Sites
first begin receiving Mpath served advertising and the cumulative
amount of Advertising Revenue earned by eUniverse is less than twice
the cumulative amount of Advertising Revenue advances due from Mpath
(e.g. two hundred percent (200%)), [*].
(b) If eUniverse gives Mpath written notice to terminate the
Agreement six (6) months or later from when the eUniverse Web Sites
first begin receiving Mpath served advertising and the cumulative
amount of Advertising Revenue earned by eUniverse is greater than or
equal to twice the cumulative amount of Advertising Revenue advances
due from Mpath (e.g. two hundred percent (200%)), [*].
(c) If eUniverse gives Mpath one hundred and eighty (180) days
written notice to terminate the Agreement six (6) months or later
from when the eUniverse Web Sites begin receiving Mpath served
advertising, [*].
(iii) Acquisition of eUniverse. If eUniverse is acquired through a
purchase, merger, or other transaction, the acquirer, within thirty (30)
days of the acquisition, may terminate this Agreement upon thirty (30) days
written notice to Mpath, [*].
8.3 By Mpath. Mpath may terminate this Agreement if eUniverse: (a) breaches a
material provision of this Agreement and fails to cure such breach within thirty
(30) days following receipt of written notice unless such breach is incurable in
which case Mpath
11
<PAGE>
may terminate immediately; or (b) becomes insolvent or seeks protection under
any bankruptcy, receivership, trust deed, creditor's arrangement or comparable
proceeding, or if any such proceeding is instituted against eUniverse (and not
dismissed within ninety (90) days).
8.4 Termination of License. Upon termination of this Agreement for any reason,
the trademark licenses granted under this Agreement terminate and are of no
further force or effect.
8.5 Return of Confidential Information. No later than fifteen (15) business
days after termination or expiration of this Agreement, the recipient of
Confidential Information will return all Confidential Information and all copies
thereof to the owner. With respect to documents or data storage media containing
Confidential Information of the other party, the recipient may elect to delete
therefrom all such Confidential Information, in which event the recipient shall,
upon written request from the owner, deliver to the owner a certificate, signed
by an authorized representative of the recipient, to the effect that all
Confidential Information of the owner has been returned or deleted. Also upon
termination or expiration of this Agreement, the recipient of Confidential
Information agrees to not to use and to delete, in accordance with the
recipient's backup and archive procedures, all copies of the Confidential
Information stored in backup and archive.
9. MISCELLANEOUS
9.1 Controlling Law and Disputes. This Agreement is governed, controlled,
interpreted and defined by and under the laws of the State of California and the
United States, without regard to the conflicts of laws provisions thereof. Any
litigation arising under this Agreement will be brought in the federal or state
courts of the Northern District of California. If any litigation or proceeding
is brought by either party against the other in connection with this Agreement,
the prevailing party in such litigation or other proceeding shall be entitled to
recover from the other party all costs, attorneys' fees and other expenses
incurred by such prevailing party.
9.2 Equitable Relief. Due to the proprietary and sensitive nature of this
Agreement, both parties may be entitled to preliminary or other injunctive or
equitable relief to remedy any actual or threatened dispute arising from any
actions in breach of any of the obligations under this Agreement.
9.3 Waiver and Modification. Failure by any party to enforce any provision of
this Agreement will not be deemed a waiver of future enforcement of that or any
other provision. Any waiver, amendment or other modification of any provision of
this Agreement will be effective only if in writing and signed by eUniverse and
Mpath.
9.4 Severability. If for any reason a court of competent jurisdiction finds any
provision or portion of this Agreement to be unenforceable, that provision of
the Agreement will be enforced to the maximum extent permissible so as to effect
the intent
12
<PAGE>
of the parties, and the remainder of this Agreement will continue in full force
and effect.
9.5 Notices. All notices required or permitted under this Agreement will be in
writing, will reference this Agreement and will be deemed given: (i) when sent
by facsimile to the facsimile number set forth below each party's signature
below and confirmed by registered or certified mail; (ii) five (5) working days
after having been sent by registered or certified mail, return receipt
requested, postage prepaid; or (iii) one (1) working day after deposit with a
commercial overnight carrier, with written verification of receipt. All
communications will be sent to the addresses set forth in the opening paragraph
above or to such other address as may be designated by a party by giving written
notice to the other parties pursuant to this Section.
9.6 Delays Beyond Control. No party is liable to the other parties for any
failure or delay in performance caused by reasons beyond such party's reasonable
control, including delivery of advertising by third parties, and such failure or
delay will not constitute a material breach of this Agreement.
9.7 Assignment. Neither party may assign its rights or obligations under this
Agreement, by operation of law or otherwise, without the express written consent
of the others; except that a party may assign this Agreement to an affiliate
commonly owned and controlled by or with the party or to any other third party
in connection with the merger or acquisition of the party or sale of all or
substantially all of its assets used primarily in connection with this
Agreement. Each party agrees to provide no less than three (3) business days'
prior notification of any authorized assignment under this Agreement, including
assignment to an affiliate or as part of an asset sale. Any attempted assignment
except as expressly allowed by this Section is null and void. Subject to the
foregoing, this Agreement will benefit and bind the successors and assigns of
the parties.
9.8 Relationship of Parties. The parties to this Agreement are independent
contractors and nothing in this Agreement contained shall be deemed to create a
joint venture, partnership or agency relationship between the parties in this
Agreement. No party shall have any power to enter into any contracts or
commitments in the name of, or on behalf of, the other parties, or to bind the
other parties in any respect whatsoever.
9.9 Survival of Contents. Notwithstanding anything else in this Agreement to
the contrary, the parties agree that Sections 1, 3.3, 5.3, 6, 7, 8.4, 9,
ownership rights, and accrued rights to payments under this Agreement survive
the expiration or termination of this Agreement.
9.10 Interpretation. Any headings contained in this Agreement are for
convenience only and shall not be employed in interpreting this Agreement. The
parties and their respective counsel have negotiated this Agreement. This
Agreement will be interpreted fairly in accordance with its terms and conditions
and without any strict construction in favor of or against either party.
13
<PAGE>
9.11 Execution. This Agreement may be executed in several counterparts, each of
which will be deemed to be an original, and each of which alone and all of which
together, shall constitute one (1) and the same instrument, but in making proof
of this Agreement it shall not be necessary to produce or account for each copy
of any counterpart other than the counterpart signed by the party against whom
this Agreement is to be enforced. This Agreement may be transmitted by
facsimile. The parties may close the Agreement by exchanging fax signatures.
However, they agree to promptly exchange, by courier, duplicate originals signed
by both parties.
9.12 Entire Agreement. This Agreement, including the exhibit, constitutes the
entire agreement between the parties with respect to the subject matter to this
Agreement, and supersedes and replaces all prior or contemporaneous
understandings or agreements, written or oral, regarding such subject matter.
This Agreement includes the following exhibits, which are incorporated into, and
made a part of this Agreement:
(i) Exhibit A - eUniverse Web Sites;
(ii) Exhibit B - eUniverse Marks;
(iii) Exhibit C - Mpath Marks.
eUniverse Mpath Interactive, Inc.
By: ______________________________ By: ______________________________
Name: ______________________________ Name: ______________________________
Title: ______________________________ Title: ______________________________
Date: ______________________________ Date: ______________________________
Fax: ______________________________ Fax: (650) 429-3911
14
<PAGE>
EXHIBIT A
eUNIVERSE WEB SITES
e-Universe
http://www.euniverse.com
Big Network
http://www.bignetwork.com
CD Universe
http://cdu2.cduniverse.com/asp/cdu_main.asp
http://cdu3.cduniverse.com/
Video Universe
http://cdu2.cduniverse.com/asp/vdu_main.asp
http://www.videouniverse.com/
http://www.megadvd.com/
Case's Ladder
http://www.casesladder.com/
http://www.igl.net/
Gamer's Alliance
http://www.ga-source.com/
http://www.dreamcast.net/
http://forums.gagames.com/
http://www.gagames.net/
http://www.afflicted.net/
http://www.ctimes.net/
http://network.ctimes.net/
http://trarchive.ctimes.net/
http://experience.gagames.com/
http://www.dknation.com/
http://www.indy3d.net/
http://www.messiahpress.com/
http://www.metalgear.net/
http://descent.gagames.com/
http://www.pyroport.com/
http://www.prey.net/
http://tenfour.gagames.com/main.shtml
http://td.gagames.com/
http://www.tribesworld.com/
http://tlj.gagames.com/
http://www.cavenews.com/
15
<PAGE>
http://www.agsm.net/
http://axiom.gagames.com/
http://www.dreamstone.net/
http://www.exodite.com/
http://guam.gagames.com/
http://www.kickengine.co.uk/
http://msk.gagames.com/
http://www.nevolution.net/
http://www.bjorn3d.com/
http://www.matroxusers.com/
http://3dlabs.gagames.com/
http://www.voodoo3.net/
http://www.ag.ru/
http://www.gagames.de/
http://france.gagames.com/
http://beasties.gagames.com/
http://eqboard.com/
http://www.ga-rpg.com/
http://www.eqrelams.com
http://ga.eqrealms.com
http://www.ionrpg.com
http://www.ga-sports.com/
http://www.coursedepot.com/
http://www.fifagaming.com/
http://www.grandprix2.com/
http://www.highheatbaseball.com/
http://www.maddencentral.com/
http://www.rallychamp.com/
http://www.wrestling-games.com/
http://www.fifa99.net/
http://www.fifagaming.com/
http://www.soccergaming.com/
http://www.atlasf1.com/
http://www.fifala.com/
http://www.simracingnews.com/
http://www.highheatbaseball.com/
http://www.nba-live.com/
http://www.theuspits.com/
http://www.wrestling-games.com/
http://www.wwfattitude.com/
http://forums.wwfattitude.com/
http://www.rallychamp.com/
http://www.ga-strategy.com/
http://www.aoe2.net/
http://ts.ga-strategy.com/
16
<PAGE>
http://www.dropshipcommand.com/
http://homm3.ga-strategy.com/
http://www.myth2.com/
http://scm.ga-strategy.com/
http://s3.ga-strategy.com/
http://subtitans.ga-strategy.com/
http://www.war3.com/
http://forums.wwfattitude.com
http://www.3dracing.net/
http://www.frontofficefootball.com
http://www.the-fastlane.com
http://www.nflfever.com
http://www.goldenbearsden.net
http://www.nfscheats.com
http://www.nfs4.com
http://www.rasslin.net
http://tgo99.ga-sports.com/
http://www.nhl2k.com
http://www.wcw-meyham.com
http://www.gp500.net
http://www.motocrossmadness2.com
eUniverse may update this Exhibit from time-to-time during the term of the
Agreement and Mpath agrees to implement any such changes within a reasonable
period of time. Any updates require eUniverse to produce a signed written
authorization statement for third party web site auditing authorities as
desribed in Section 2.3.
17
<PAGE>
EXHIBIT B
eUNIVERSE MARKS
(eUniverse to provide)
eUniverse may update this Exhibit from time-to-time during the term of the
Agreement and Mpath agrees to implement any such changes within a reasonable
period of time.
18
<PAGE>
EXHIBIT C
MPATH MARKS
1. Registered Trademarks
Mpath Interactive'r'
Mplayer'r'
ScribbleTalk'r'
Wanna Play?'r'
Mpath Interactive, Mplayer, Scribbletalk, and Wanna Play? are registered
trademarks of Mpath Interactive, Inc.
2. Trademarks
Active Chat'TM'
Active Communications'TM'
Active Community'TM'
Gizmo Game Player'TM'
Hearme'TM'
Hearme.com'TM'
Hearme.com logo'TM'
It's About People'TM'
Earth's Free Multiplayer Game Service'TM'
Mpath'TM'
The Mpath logo'TM'
The Mplayer logo'TM'
Mplay'TM'
Mplayer.com'TM'
Active Chat, Active Communications, Active Communities, Gizmo Game Player,
Hearme, Hearme.com, the Hearme.com logo, It's About People, Earth's Free
Multiplayer Game Service, Mpath, the Mpath logo, the Mplayer logo, Mplay,
and Mplayer.com are trademarks of Mpath Interactive, Inc.
Mpath may update this Exhibit from time-to-time during the term of the Agreement
and Interplay agrees to implement any such changes within a reasonable period
of time.
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999
<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> SEP-30-1999 MAR-31-1999
<CASH> 2,294,045 11,335
<SECURITIES> 0 0
<RECEIVABLES> 246,874 92,938
<ALLOWANCES> 34,175 0
<INVENTORY> 54,199 22,647
<CURRENT-ASSETS> 2,916,735 294,118
<PP&E> 659,090 308,770
<DEPRECIATION> 170,492 83,052
<TOTAL-ASSETS> 30,410,560 520,346
<CURRENT-LIABILITIES> 495,725 1,077,322
<BONDS> 0 0
<COMMON> 16,278 1,000
0 0
179,502 0
<OTHER-SE> 29,412,239 (557,976)
<TOTAL-LIABILITY-AND-EQUITY> 30,410,560 520,346
<SALES> 3,549,735 8,851,713
<TOTAL-REVENUES> 3,879,857 8,851,713
<CGS> 3,014,449 7,750,289
<TOTAL-COSTS> 3,036,569 7,750,289
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 355 0
<INCOME-PRETAX> (3,305,026) (406,164)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,305,026) (406,164)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,305,026) (406,164)
<EPS-BASIC> (.23) (.03)
<EPS-DILUTED> (.23) (.03)
</TABLE>
