-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RRAfuwuNxyhhU/DSwofEO3iRV64qJzkR8egaTBv9t2d4dntlqJh+c689oDvyX6R6 rz3b+pziK9hYlPNg8+Ayjw== 0000950117-02-001599.txt : 20020702 0000950117-02-001599.hdr.sgml : 20020702 20020701172551 ACCESSION NUMBER: 0000950117-02-001599 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020701 DATE AS OF CHANGE: 20020701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EUNIVERSE INC CENTRAL INDEX KEY: 0001088244 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL- COMPUTER & PRERECORDED TAPE STORES [5735] IRS NUMBER: 061556248 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26355 FILM NUMBER: 02694340 BUSINESS ADDRESS: STREET 1: 6300 WILSHIRE BLVD SUITE 1700 CITY: LOS ANGELES STATE: CA ZIP: 90048 BUSINESS PHONE: 2032941648 MAIL ADDRESS: STREET 1: 6300 WILSHIRE BLVD SUITE 1700 CITY: LOS ANGELES STATE: CA ZIP: 90048 10-K 1 a32903.txt EUNIVERSE, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 000-26355 eUniverse, Inc. (Exact Name of Registrant as Specified in Its Charter) NEVADA 06-1556248 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6060 Center Drive, Los Angeles, CA 90045 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 215-1001 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to section 12(g) of the Act: Common Stock, par value $.001 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of May 31, 2002, there were 23,566,696 shares of the Registrant's common stock outstanding. As of May 31, 2002, the aggregate market value of such shares held by non-affiliates of the Registrant (based upon the closing sale price of such shares on the Nasdaq Small Cap Market on May 31, 2002) was approximately $144,463,846. Shares of the Registrant's common stock held by each executive officer and director and by each entity that owns 5% or more of the Registrant's outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. eUniverse, Inc. Annual Report on Form 10-K for the Year Ended March 31, 2002 TABLE OF CONTENTS
Page --------- PART I. Item 1. Business........................................... 1 Factors Affecting eUniverse's Business, Operating Results, and Financial Condition................ 7 Item 2. Facilities......................................... 10 Item 3. Legal Proceedings.................................. 10 Item 4. Submission of Matters to a Vote of Security Holders 11 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ......................... 12 Item 6. Selected Financial Data............................ 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 23 Item 8. Financial Statements and Supplementary Data........ 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 23 PART III. Item 10. Directors and Executive Officers of the Registrants 24 Item 11. Executive Compensation............................. 26 Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 30 Item 13. Certain Relationships and Related Transactions..... 31 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 32 Signatures
PART I Information contained in this Annual Report on Form 10-K (Form 10-K) for eUniverse, Inc. (referred to herein as eUniverse or the Company) contains projections or other forward-looking statements regarding future events or the future financial performance of eUniverse. Sentences or phrases that use such words as believes, anticipates, should, plans, may, hopes, can, will, expects, is designed to, with the intent, potential and others indicate forward-looking statements, but their absence does not mean that a statement is not forward-looking. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, potential fluctuations in quarterly results, rapid technological and market change, acquisition strategy, risks associated with Internet infrastructure, volatility of stock price, financial risk management, and future growth subject to risks. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled Factors Affecting eUniverse's Business, Operating Results, and Financial Condition beginning on page 7 of this Form 10-K. Unless required by law, the Company undertakes no obligation to revise any of these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Item 1. Business Overview eUniverse operates a network of Web sites and email newsletters that provides millions of users with compelling entertainment content as well as products and services. The network garners on average more than 20million unique monthly visitors and more than 50 million subscribers to its network of email newsletters. During fiscal 2002, eUniverse was consistently ranked as one of the Top 15 most visited properties on the Internet by the leading ratings services. The eUniverse network includes Flowgo (www.Flowgo.com), the largest entertainment Web site according to Nielsen//Netratings; comedy site Madblast (www.madblast.com); dating site Cupid Junction (www.cupidjunction.com); health and fitness site Fitness Heaven (www.fitnessheaven.com) and one of the largest email newsletter networks, delivering entertainment and informative content to millions of opt-in subscribers with such titles as Infobeat, IntelligentX and GossipFlash. Similar to a television network, eUniverse continually adds new programming that provides its users with the products and entertainment that keeps them coming back for more. In fiscal year 2002, the company's revenue was generated from combination of paid third-party advertising on our network of sites and from our suite of proprietary products and services. The company's proprietary products and services include offerings in the lifestyle, fitness, health, entertainment and impulse merchandising categories. We offer advertising opportunities on Web pages, through email newsletters, direct email placement and other proprietary content. Revenues from our proprietary products and services are generated primarily from subscriptions, activity based items and purchases of merchandise. The company generally acquires the merchandise it sells from suppliers on a just-in-time basis. General Development of the Business Entertainment Universe, Inc. was founded in February 1999 by Brad D. Greenspan for the purpose of developing and acquiring entertainment-related Internet businesses. Motorcycle Centers of America , Inc., was a Nevada corporation with no significant operations or revenue since 1995, whose shares were publicly traded on the OTC Bulletin Board. In March 1999, Entertainment Universe and Motorcycle Centers entered into a letter of intent to undertake a reorganization under which the holders of Entertainment Universe common stock would exchange their Entertainment Universe shares for shares of Motorcycle Centers common stock on a one-to-one basis. On April 14, 1999, the reorganization was completed. As a result of the reorganization, Entertainment Universe shareholders owned 92% of Motorcycle Center's shares common stock and Entertainment Universe became a wholly owned subsidiary of Motorcycle Centers. The reorganization was an arms-length transaction between unrelated parties. Also on April 14, 1999 but immediately prior to the closing of the reorganization, Entertainment Universe sold 1,795,024 of Series A Convertible Preferred Stock in a private offering under Regulation D of the Securities Act of 1933, raising approximately $6.5 million, before costs were deducted. In connection with the reorganization, the holders of the Entertainment Universe A Convertible Preferred Stock exchanged their shares, on a one-to-one basis, for shares of Motorcycle Centers convertible preferred stock which have equivalent rights and preferences. Entertainment Universe used $1.9 million of the preferred stock offering proceeds (plus 2,425,000 shares of common stock with a fair market value of $7,275,000) to acquire CD Universe. The consideration paid was based upon negotiations between two parties. This was an arms length transaction between unrelated parties. CD Universe is a Connecticut corporation engaged in the business of selling audio CD's and videotapes over the Internet. Concurrently with the closing of the reorganization, Entertainment 1 Universe distributed its asset, the capital stock of CD Universe, to its sole shareholder, Motorcycle Centers, the parent entity following the reorganization, changed its name to eUniverse, Inc. Throughout fiscal 2000, the Company acquired a series of gaming (Cases Ladder, Inc., Gamers Alliance, Inc., Falcon Ventures Corporation) and content (Funone.com and Justsaywow) properties with the intent to develop an operating enterprise that could leverage the user traffic of gaming and content with the product offerings CD Universe. During fiscal 2002, the Company continued to acquire content sites (Send4fun.com, Debsfunpages and Spreadingjoy.com) and develop its core user audience. Additionally, in early fiscal 2001 the company launched Flowgo.com, which has gone onto become the most frequented entertainment site on the Internet, according to Nielsen/Netratings. With the acquisition and introduction of these sites, the Company began to quickly ascend in the user traffic rankings becoming one of the top 15 most frequented sites by the end of the fiscal year, according Nielsen/Netratings. During October 2000, the Company decided to dispose of the retail products segment (CDUniverse) of its business. The company received $1 million in exchange for the sale of the intangible and tangible assets of the business to CLBL, Inc., a company owned by Charles Beilman, formerly a director and officer of eUniverse. Additionally, over the next six months, the company received $.5 million from CLBL for advertsing on the eUniverse sites. As the Company entered fiscal year 2002, its revenue was being generated solely from paid third party advertising. At this juncture the Company decided to launch a new strategy to diversify its revenue streams and develop longer higher yielding relationships with its user base. As part of this strategy shift, the Company launched its Products and Services Segment during the first quarter of fiscal 2002, with the introduction of its dating site Cupid Junction. Over the course of the year, the Company would launch an additional seven proprietary products and services. These products and services were either developed in-house or in some cases acquired (see recent transactions below). Also during fiscal 2002, the Company began to develop its email newsletter properties by acquiring the newsletter portfolios of IntelligentX and Info Beat (See recent transactions section below). In conjunction with the acquisition of Info Beat, the Company raised $5 million by issuing Series B Convertible Preferred Stock to an affiliate of Sony Music Entertainment, Inc. Expansion The Company is currently managing a shift in its revenue base from paid third party advertising to its proprietary products and services offerings. During fiscal 2002, over one-third of the Company's revenues were driven from this area versus a zero contribution in fiscal 2001. Management is excited to grow its Products and Services segment as it provides the Company with enhanced growth potential over paid third party advertising through higher and longer term revenue yields. Additionally, it is expected to provide the Company with greater visibility of future revenues. eUniverse currently offers proprietary products and services across five categories: (1) Wellness (2) Lifestyle (3) Family (4) Online Gaming and (5) Impulse merchandising. The Company intends to continue to expand its Products and Services segment to approximately seven or eight distinct categories, with potentially several offerings within each category. This expansion will be driven from organic development within the Company, acquisitions of other products and services and through the creation of key partnerships. Additionally, the Company intends to invest in the infrastructure and human resources necessary to scale each of the product offerings and drive revenue growth. The Company is actively adding to and improving upon the existing content and functionality of its current Web sites and related offerings. The core content and newsletter offerings are considered key components of the revenue generating capabilities of the firm and therefore are consistently refreshed in effort to retain users and enhance yield. New content offerings will be driven primarily from internally developed resources and partnerships. However, the Company may acquire additional content through selective acquisitions that attract desired demographics and that cater to the specific communities of interest on the user network. eUniverse is also exploring the potential expansion of its operational and revenue generating reach outside of the United States. The Company is currently focusing on the European and Asian markets, but has made no definitive moves into either market at this time. Description of the Business eUniverse is one of the largest entertainment and media networks on the Internet, delivering fun and compelling diversionary entertainment that people use to communicate and connect and a suite of value added products and services. People visit us for animated content, newsletters, online greeting cards, streaming media, gaming, lifestyle matters, services and merchandise and health and fitness information. 2 Throughout fiscal 2002, the Company maintained its position as one of the highest trafficked Internet networks, as reported by Nielsen/Netratings, consistently ranking in the top 15 properties on a monthly basis. Through its Web based properties and email newsletter offerings the Company attracts a large user audience, with a majority of our demographic being adult females. The Company generates revenues by leveraging its available inventory space through fees from third party advertisers and by promoting its own products and services. Additionally, the Company markets its Product and Services offerings to its partner network. For our advertising partners, we offer sponsorship, branding and direct marketing opportunities. Through our prior experience of successfully interacting with our audience, eUniverse provides a rich environment to deliver information, foster long-term relationships and enable transactions online. We work with our partner-advertisers to understand their goals for their media campaign. Then, based on performance history, we choose the most relevant, persuasive and efficient contact opportunities in our network to convey their message. We constantly test and reevaluate the media placement and creative content within our network, working with our partners to achieve the desired result. During fiscal 2001, 100% of the Company's revenues from continuing operations were generated from third party advertising. During fiscal 2002, the Company implemented a strategy to develop a closer relationship with its user base and thereby increase the life time value of the customers who transact on the network. Additionally, management wanted to develop a more diversified revenue platform that had great growth potential. The introduction of the Products and Services segment was a key component of this strategy. At the close of fiscal 2002, the Company had increased its top-line revenue by more than 100% from the prior fiscal year. Approximately, 34% of overall revenue was generated from the Products and Services segment. However, the recent trend in revenue diversification was even more pronounced as nearly 50% of fourth quarter revenue was derived from the Products and Services segment. The Company believes that this trend should continue into the future with a majority of future growth coming from this segment. Revenues are generated from our network in a variety of manners. Below our a few examples of our revenue generating methods and tools: o Banner and button advertisements on the various sites. o Pop-ups which are interstitial ads that appear as a separate window on top of content. o Superstitials which are interstitial commercials that seamlessly load while a visitor is surfing the site. o Sponsorships of email newsletters or parts of our sites. o Subscriptions to service or content offerings. o Activity based fees (e.g. dating). o Premium fees for certain upgraded service offerings. o Sales of merchandise. o Newsletter advertisements which we can target by interest profile and responsiveness. The Company believes it is well positioned to take advantage of the online commerce opportunity due primarily to the significant size of its user audience and its strong reach into the most lucrative segments of the Internet population. eUniverse enjoys a broad reach among some very lucrative demographic segments. According to Nielsen//Net Ratings, eUniverse reaches 7.1 million adult women at home and 3.9 million at work per month which amounts to approximately 1 in 5 adult women on the Web (women over 18 years of age are considered adult women). This demographic is believed to control over 80% of household spending. The network also reaches 9.3 million adults over age 50 at home and 3.7 million at work, this amounts to approximately 1 in 5 of the online over 50 segment. This demographic has more leisure time and greater buying power in the aggregate than most other standard demographic groups. eUniverse also reaches 4.8 million teens, 4.5 million adult men at home, 2.4 million adult men at work and 7.2 million parents every month. Source: Nielsen//NetRatings March 2002. The Company has no customer that represents more than 10% of its overall revenue. Traditionally, spending in the advertising sector increases during the later part of each calendar year in line with the holiday shopping season. Accordingly, the Company's revenue from advertising may be potentially higher during its fiscal third quarter than in other quarters throughout the year. However, it is not possible to predict what impact this seasonality will have on the Company's financial results due to the relative newness of the on-line advertising market. 3 The eUniverse Network The eUniverse Network consists of entertainment and content delivered from both Web sites and email. Web Based Properties The Company's Web based properties offer users a choice of entertainment, content, services, merchandise and interactive experiences. The overall network attracts on average more than 15 million unique monthly visitors, according to the leading online ratings agencies. Flowgo (launched in April 2000) is the Company's most popular property and is considered the largest entertainment Web site according to Nielsen//NetRatings (source: Nielsen//NetRatings March 2002). Comedy site Madblast, launched in December 2000, is also a very popular entertainment offering. The following five sites are a few of the most frequented entertainment and content properties on the Company's network: 1. www.Flowgo.com 2. www.expage.com 3. www.justsaywow.com 4. www.FunForwards.com 5. www.madblast.com In connection with the introduction of the Products and Services segment in June 2001, the Company launched dating site Cupid Junction (www.cupidjunction.com). In the first two months after its launch, the site attracted more the 450,000 members, making it one of the fastest growing sites in the online dating category. By the end of March 2002, the site had grown to more than 1.2 million members and had experienced approximately 100,000 credit card transactions. The Company's other popular Products and Services segment includes Fitness Heaven (www.fitnessheaven.com), complete health and fitness offering and AllYouCanInk (www.allyoucanink.com), a remanufactured and compatible ink-jet cartridge online store. The Company has certain other products and services offerings that are in various stages of operation and development. Email Based Content eUniverse's email newsletters are received by over 50 million unique subscribers each month. A majority of the newsletters are emailed daily to the subscriber base. The Company has over 35 newsletters in its portfolio covering specific topics such as sports, general news, technology, entertainment, business and finance. Many of the newsletters are also vehicles for delivering content from the numerous sites that make up the eUniverse network. Two of the more popular newsletter groups are IntelligentX, with two daily publications, and InfoBeat, with five daily publications, focusing on factual news delivery similar to a traditional newspaper or magazine format. The IntelligentX and InfoBeat newsletter groups have approximately 5 million and 6.5 million subscribers, respectively. Over the past year the Company has added over 15 newsletters to its portfolio with more than half coming from acquisitions and the remainder from internal development. Additionally, the Company's subscriber base has nearly doubled from the prior year. A substantial portion of the newsletter portfolio content is developed from internal resources of the Company. Domain Names, Patents and Trademarks The domain names of eUniverse's Web sites constitute important intellectual property for eUniverse that are essential to its business. There are currently 297 domain names registered to eUniverse. Also important to eUniverse's business are its trademarks and service marks. eUniverse currently has 25 registered service marks and 15 applications for trademarks and/or service marks filed with the US Patent and Trademark Office ("USPTO") that are pending registration. eUniverse currently has two patent applications filed with the USPTO. eUniverse believes that it presently has, or is capable of acquiring, ownership and/or control of the intellectual property rights which are necessary to conduct its operations and to carry out its strategic plans. Recent Transactions Acquisition of VIZX Corporation In December 2001, the Company purchased the assets of VIZX Corporation, which held assets known on the Internet as eMusicGames.com and SportsTriviaClub.com. The Company agreed to pay common stock valued at $100,000 , $150,000 cash, and a portion of net income generated from the assets starting either 4 months after the closing date, or 30 days after the gross revenues for any month exceed $100,000, and ending 60 months thereafter. The total aggregate acquisition price is capped at $10.15 million. 4 Acquisition of Hobbyrat.com In October 2001, the Company purchased the assets of Hobbyrat.com. The Company agreed to pay the seller monthly a portion of net revenues generated from the assets starting 30 days after the closing date, and ending 21 months thereafter. Should the seller's portion of the net revenue be less than $50,000 at the end of 12 months, the seller has the right to repurchase the assets at a bargain price unless the Company pays to the seller the difference between $50,000 and the amount previously paid to the seller. Acquisition of Fitnessheaven.com In October 2001, the Company purchased the assets and Web site of FitnessHeaven.com. The Company agreed to pay a portion of the net revenue generated from the assets starting 30 days after the closing date, and ending 21 months thereafter. The total payments are capped at $1.3 million, and if the seller's portion on the net revenue is less than $110,000 at the end of 21 months, the seller has the right to repurchase the assets at a bargain price unless the Company pays to the seller the difference between $110,000 and the amount previously paid to the seller. Acquisition of expage.com In July 2001, the Company purchased substantially all of the assets, including the Web site of expage.com for $240,000 to be paid in installments of $10,000 per month over a 24 month period. In addition to the purchase, the Company agreed to pay a portion of net revenue generated from the Web site over the succeeding 24 months. If the sellers portion of the net revenue is less than $110,000 at the end of 24 months, the Company will pay the seller monthly payments equal to the greater of 10% of net monthly revenues from the purchased assets or $10,000 until the seller has received $110,000. Sale of $5 Million of eUniverse Series B Convertible Preferred Stock and Acquisition of Permission-based Email Publishing Assets On July 13, 2001, the Company entered into a Stock Purchase Agreement with 550 Digital Media Ventures, Inc. (the Investor), a subsidiary of Sony Music Entertainment, Inc., for the purchase of Web sites and other assets owned by Indimi, L.L.C. ("Indimi"), known as the InfoBeat Business ("InfoBeat") in a business combination accounted for as a purchase. The purchase price of $9.94 million exceeded the fair value of the tangible and identifiable intangible net assets of InfoBeat by an estimated $8.1 million representing acquired goodwill. In connection with the share purchase agreement, the Company also agreed to redeem a warrant issued to the Investor through the issuance of the Company's common stock valued at $1 million. The results of operations of Indimi have been included with the results of the Company from July 13, 2001. Simultaneously with the execution of the Share Purchase Agreement with the Investor, the Company entered into a Stock Purchase Agreement by which the Investor agreed to invest $5 million in the Company in exchange for issuance by the Company of shares of Series B Senior Convertible Preferred Stock, at a purchase price of $2.60 per share. Further information on this transaction and certain related transactions are included in the Recent Transactions section of the Company's for 10-K/A for fiscal year 2001 filed on July 30, 2001. As part of this transaction, the secured promissory note due to the investor with a balance of $2,289,764 was extended to March 31, 2003. The Company may convert this note to preferred shares or common stock, subject to certain conditions. The Company completed its acquisition of Indimi, L.L.C. and InfoBeat and the associated preferred stock issuance for $5 million on October 23, 2001. Please see form 8-K filed on November 7, 2001 for specific details of the transaction. Acquisition of Funbug.com In June 2001, the Company acquired the Web site and the technology assets of Funbug.com. The Company agreed to pay Funbug.com a percentage of revenues generated from the purchased assets for a period of 30 months after closing. If sellers portion of revenue is not at least $200,000 at the end of 30 months the Company may, at its option, pay the remainder of the $200,000 to the seller or sell the assets back to the seller for $1. Operations and Technology The Company's primary operations facilities are located in Los Angeles, California. The Company's senior management team and core operations, marketing, product development and administrative support are combined in the same facility. Certain of the Company's customer care and content development operations are undertaken at various locations throughout the United States. eUniverse maintains a technology center at the company's primary facility, with in-house technical staff. This staff monitors the Company's network 24 hours a day, 7 days a week. Additionally, the Company maintains a software development center, with in-house software engineers. This staff develops and maintains the Company's proprietary systems. 5 eUniverse has developed proprietary technologies and systems that provide for reliable online entertainment in a secure and easy-to-use format. Using a combination of proprietary solutions and licensed technologies, the Company has deployed systems for online content dissemination, online transaction processing, customer service, market analysis and electronic data interchange. Chief among our proprietary systems is our email transmission and reporting technology. All of our email is transmitted and tracked via this proprietary system. The Company's email system can dynamically send the appropriate type of email to specific domains based on information generated from previous email campaigns. Additionally we have built a content delivery system that enables our users to freely transmit greeting cards and other content to their friends and family. The content delivery system has a full featured ad tracking subsystem that allows eUniverse to monitor usage of the system. Finally, we have built a full featured ad distribution system capable of meeting our dynamic ad creative, ad reporting and ad tracking needs. This system allows us to use many different types of ad creatives from pop-ups to dynamic flash creatives. eUniverse's sites are based on a Microsoft platform. The Company's on-site network operations center is connected via a secure digital transmission link to its primary Internet service provider, AT&T Corporation. This service is provided under a three year contract. Sales and Marketing Through its Web and email based properties, eUniverse is able to reach a very large user audience with a rich demographic mix. The Company maintains this large consumer reach by constantly developing and introducing new content as well as value added service and product offerings. Additionally, the Company is able to reach a substantial audience outside of its network through its partnership program. The Company markets its own proprietary products and services and those of its third party advertisers using various direct marketing tools and techniques across its available advertising inventory. The Company maintains internal sales forces to obtain and maintain third party advertising relationships as well as market and sell its own proprietary products and services. The Company intends to continue investing in the sales and marketing teams of its Products and Services segment, with potential expansion beyond the online market. Additionally, the Company considers customer care to be a vital component of customer acquisition and retention. Accordingly, eUniverse intends to invest in the enhancement of its customer care group. The Company believes that through its investment strategy it will have sufficient human resources to grow the business. Competition The market for online multi-channel offerings, which include information, entertainment, community, commerce and activity based experiences is rapidly evolving and intensely competitive. The past two years has seen an extremely soft advertising market, with ad budgets severely restricted from years past, coupled with a decline in demand due to the wave of Internet-based or Internet-related companies shutting down or dramatically reducing operations. Accordingly, a few of the leading Internet sites have started to develop business models with a broader base of revenue streams, similar to eUniverse. The most notable of these competitive companies are AOL Time Warner and Yahoo. The Company believes it differentiates itself from these competitors through its origins as a multi-channel entertainment and destination network as opposed to being more of a pass-through portal. Accordingly, eUniverse users are more accustomed to interacting with the content and offerings on the network of sites. Additionally, the Company believes its various offerings are superior or market competitive with other similar competitive products and services. Other direct competition of the Company is from advertising networks such as DoubleClick Inc., Sportsline.com, and CNET Networks, as well as more focused information providers such as Overture and Primedia, which owns About.com. In addition, the Company also faces competition from traditional offline media such as print, radio and television for a share of advertisers' budgets. We expect the advertising market to remain intensely competitive for the foreseeable future and barriers to entry are not prohibitive, thus new and/or existing competitors may expand their offerings at a relatively low cost. Some of our current competitors have larger user bases, longer operating histories, higher brand recognition, and greater financial resources than eUniverse. As we expand the scope of our offerings, we may have to compete with a larger number of Internet sites as well as media companies. In addition, as the Internet becomes increasingly ubiquitous, larger, more well-financed or well-established entities may expand into, acquire, invest or continue to consolidate, thus increasing the competitive pressures that eUniverse faces. Employees eUniverse currently employs 146 full-time associates and one part-time employee. Of the Company's 146 full-time associates, 57 are in sales and marketing, 29 are in product development, 39 are technology and 21 are in finance, human resources, legal and administration. The one part-time employee is in administration. 6 FACTORS AFFECTING EUNIVERSE'S BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION Risks Related to our Business If we are unable to continue to develop compelling diversionary entertainment content traffic for our network of Web sites, the Company's traffic may be reduced and our revenues could decrease. Additionally, if our network infrastructure is not sufficient to service our customers, we could lose customers and our revenues could be reduced. Although the Company's ability to generate additional revenue from Internet commerce may depend on maintaining, or increasing the network traffic, eUniverse does expect to generate significant commerce and advertising revenues from strategic partnerships. However, there can be no assurance that its existing relationships will be maintained through their initial terms or that additional third-party partnerships will be available to the Company on acceptable commercial terms or at all. The inability to enter into new, and to maintain any one or more of the Company's existing, strategic partnerships, could result in decreased third party paid advertising and/or product and service sales revenue. Even if we can maintain our strategic partnerships, there can be no assurance that our infrastructure of hardware and software will be sufficient to handle the potential increased traffic and sales volume from these partnerships or our other organic product and service offerings. Because we may not successfully develop, identify or acquire other suitable existing Internet-based products, services, technologies or businesses, our operating expenses could increase while our revenues could be reduced. A significant portion of the Company's future growth and profitability may depend in part upon its ability to identify companies that are suitable acquisition candidates, to acquire those companies upon appropriate terms and to effectively integrate and expand their operations within its own infrastructure. We may not be able to identify additional candidates that are suitable for acquisition or to consummate desired acquisitions on favorable terms. Acquisitions involve a number of special risks, including the diversion of management's attention to the assimilation of the operations and personnel of the acquired companies, adverse short-term effects on the Company's operating results and the potential inability to integrate financial and management reporting systems. A significant portion of eUniverse's capital resources could be used for these acquisitions. Accordingly, eUniverse may require additional debt or equity financing for future acquisitions, which may not be available on terms favorable to eUniverse, if at all. Moreover, eUniverse may not be able to successfully integrate an acquired business into its business or to operate an acquired business profitably. If we are not able to integrate and expand the operations of acquired companies, without excessive costs, delays or other adverse developments, it could have a material adverse effect on our business. If we are unable to protect our trademarks and other proprietary rights, our reputation and brand could be impaired and we could lose customers. eUniverse regards its trademarks, trade secrets and similar intellectual property as valuable to its business, and relies on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with its employees, partners and others to protect its proprietary rights. There can be no assurance that the steps taken by eUniverse will be adequate to prevent misappropriation or infringement of its proprietary property. The Company has some of its trademarks or service marks registered with the United States Patent and Trademark Office and is currently applying for registration of a number of its trademarks and service marks. We may not be able to successfully prosecute our applications for these trademarks. See Business -- Domain Names, Patents, and Trademarks. Due the nature of our business our future operating results may fluctuate. If we are unable to meet the expectations of investors and public market analysts, the market price of our common stock may decrease. The Company expects to experience fluctuations in future quarterly and long-term operating results that may be caused by a variety of factors, many of which are outside eUniverse's control. Factors that may affect the Company's quarterly operating results include, without limitation, o the Company's ability to retain existing users, attract new users at a steady rate and maintain user satisfaction, o the announcement or introduction of new or enhanced content, Web sites, products and services, and strategic partnerships by eUniverse and its competitors, o seasonality of advertising sales as this revenue component is still material to the Company's overall revenue mix, o effectiveness of the Company's promotions and sales programs, o the level of use of the Internet and increasing consumer acceptance of the Internet for entertainment and the purchase of consumer products, services and activity based offerings, o eUniverse's ability to upgrade and develop its systems and infrastructure in a timely and effective manner, o the amount and timing of operating costs and capital expenditures relating to expansion of the Company's business, operations and infrastructure and the implementation of marketing programs, key agreements and strategic partnerships, and general economic conditions and economic conditions specific to the Internet, and 7 o acts of terrorism directed against the United States. As of March 31, 2002, the Company had cash of approximately $8 million and a working capital ratio of approximately 1.4 to 1. Additionally, the Company has been cash flow positive (with cash flow defined as earnings before interest, depreciation and amortization) for the past six operating quarters. Although the Company's financial condition has improved from the prior fiscal year, the Company may not be able to continue to generate sufficient working capital to finance its future growth. Additionally, should the need arise eUniverse may be unable to successfully obtain additional financing on terms acceptable to the Company in the public or private markets to meet its future operating needs. The eUniverse business commenced in April 1999, and we have a limited operating history upon which an evaluation of eUniverse and its prospects can be based. If we fail to meet the expectations of our investors and of public market analysts, the market price of our common stock may decline. Our prospects for financial success must be considered in light of the risks, expenses and difficulties frequently encountered by companies in new, unproven and rapidly evolving markets, such as the Internet market. To address these risks, eUniverse must, among other things, expand its customer base, respond effectively to competitive developments, continue to attract, retain and motivate qualified employees, and continue to upgrade its technologies. If the Company is not successful in further developing and expanding its entertainment content, product and services businesses, and other related business opportunities, our ability to maintain and increase profitability may not be achieved and our market price may decline. If the Company is unable to use new technologies effectively or adapt its Web sites, proprietary technology and transaction-processing systems to customer requirements or emerging industry standards, customers may not visit the network of Web sites, which could result in a decrease in the Company's revenues. To remain competitive, eUniverse must continue to enhance and improve the responsiveness, functionality and features of its Web sites and develop new features to meet customer needs. The Internet is characterized by rapid technological change, changes in user and customer requirements and preferences, frequent new product and service introductions, and the emergence of new industry standards and practices that could render our existing Web network and sites, technology and systems obsolete. The Company's success will depend, in part, on its ability to license leading technologies useful in its business, enhance its existing services, develop new, services and technology that address the needs of its customers, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. Competition in online business is intense. If the Company is unable to compete against current and future competitors, our revenues could decline. The online business market is new, rapidly evolving and intensely competitive, and eUniverse expects that competition will further intensify in the future. Barriers to entry are currently minimal, and current and new competitors can launch new sites at a relatively low cost. The primary competitive factors in providing entertainment and multi-channel products and services via the Internet are name recognition, variety of value-added offerings, ease of use, price, quality of service, availability of customer support and technical expertise. The Company's prospects for achieving its business objectives will depend heavily upon its ability to provide high quality, entertaining content, along with user-friendly Web site features and value-added Internet products and services. Other factors that will affect eUniverse's prospects for success include its ability to attract experienced and qualified personnel, particularly in the areas of management, sales and marketing, content development, product development and Web site design. In addition, the competition for advertising revenues, both on Internet Web sites and in more traditional media, is intense. If eUniverse fails to attract and retain significant sources of revenue from paid advertisements and sponsorships on its Web sites, the Company's business, results of operations and financial condition may be materially adversely affected. Risks Related to the Internet Industry Our market, users of the global computer network known as the Internet, is new and rapidly evolving. Our future results and growth may not be realized and our business could suffer if the use of the Internet does not continue to increase. Our business could suffer if Internet usage does not continue to grow. Internet usage may be inhibited for a number of reasons, including: o inadequate network infrastructure; o security concerns; o inconsistent quality of service; o lack of availability of cost-effective and high-speed service; o changes in government regulation of the Internet; and, o changes in communications technology 8 If Internet usage grows, the Internet infrastructure might not be able to support the demands placed on it by this growth or its performance and reliability may decline. In addition, future outages and other interruptions occurring throughout the Internet could lead to decreased use of our network of Web sites and harm our business. The Company could be sued for information retrieved from the Internet. Due to the fact that material may be downloaded from Web sites and may be subsequently distributed to others, there is a potential that claims will be made against eUniverse under legal theories, such as defamation, negligence, copyright or trademark infringement or other theories based on the nature and content of the material. These claims have been brought, and sometimes successfully pressed, against online services in the past. In addition, the Company could be exposed to liability with respect to the material that may be accessible through its products, services, and Web sites, including claims asserting that, by providing hypertext links to Web sites operated by third parties, we are liable for wrongful actions by those third parties through the Web sites. Although eUniverse carries general liability insurance, its insurance may not cover potential claims of this type, or the level of coverage may not be adequate to fully protect eUniverse against all liability that may be imposed. Any costs or imposition of liability or legal defense expenses that are not covered by insurance or in excess of insurance coverage could reduce the Company's working capital and have a material adverse effect on its business, results of operations and financial condition. Also, the legal effectiveness of the Company's terms and conditions of use is uncertain. Management is currently not aware of any claims that can be expected to have a material adverse impact on our financial condition or our ability to conduct our business. Government regulation and legal uncertainties could increase our costs and risks of doing business on the Internet. There are currently few laws or regulations that specifically regulate communications or commerce on the Internet. However, laws and regulations may be adopted in the future that address issues, such as user privacy, pricing, taxation and the characteristics and quality of products and services. For example, in the United States, the Communications Decency Act of 1996 prohibits obscene and other unlawful information and content from being transmitted over the Internet. Several other nations have taken actions to restrict the free flow of material deemed to be objectionable on the Internet. On October 21, 1998, the Internet Tax Freedom Act was adopted placing a three-year moratorium, beginning October 1, 1998 and continuing through October 21, 2001, on Internet access taxes, multiple taxes on electronic commerce, and discriminatory taxes on electronic commerce. On March 9, 2001, the Internet Tax Moratorium and Equity Act, a bill intended to foster the development of the Internet and electronic commerce, by amending the Internet Tax Freedom Act to effectively extend the moratorium on certain taxes on electronic commerce until December 31, 2005, was introduced and referred to the Senate's Committee on Finance. In addition, local telephone carriers have argued before the Federal Communications Commission that Internet service providers and online service providers should be required to pay fees for access to local telephone networks in a manner similar to long distance telephone carriers. Although the FCC has informally stated that it has no intention of assessing per-minute charges on Internet traffic or changing the way consumers obtain and pay for access to the Internet, if the efforts of the local telephone carriers are successful, costs for Internet access and usage could increase sharply. [is this matter still a live discussion item in congress - Chris to complete] Moreover, it may take years to determine the extent to which existing laws relating to issues such as property ownership, libel, taxation and personal privacy are applicable to the Internet. On January 3, 2001, the Online Privacy Protection Act of 2001, a bill to require the Federal Trade Commission to proscribe regulations to protect the privacy of personal information collected from and about individuals who are not covered by the Children's Online Privacy Protection Act of 1998 on the Internet and to provide greater individual control over the collection and use of that information, was introduced and referred to a House committee. The Online Privacy Protection Act would make it unlawful for an operator of a Web site or online service to collect, use or disclose personal information concerning an individual (age 13 and above) in a manner that violates regulations to be prescribed by the Federal Trade Commission requiring such operators to protect the confidentiality, security and integrity of personal information they collect from such individuals. The Act would also require such regulations to require such operators to provide a process for such individuals to consent to or limit the disclosure of such information. Pursuant to the Children's Online Privacy Protection Act, it is already unlawful for an operator of a Web site or online service directed at children, or any such operator that has actual knowledge that it is collecting personal information from a child, to collect personal information from a child. The Children's Online Privacy Protection Act also sets out requirements that must be followed by the Web site operator or online service provider. If we do not comply with these privacy protection laws, we could be subject to various penalties. In addition, any new laws or regulations relating to access to or use of the Internet could harm our business. If the Company is unable to protect its domain names, its reputation and brand could be impaired and it could lose customers. The Company owns numerous Internet domain names. See Domain Names, Patents and Trademarks on page 4 of this Form 10-K. National and international Internet regulatory bodies generally regulate the registration of domain names. The regulation of domain names in the United States and in other countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, the Company might not acquire or maintain the domain names listed in the Domain Names section or comparable domain names in all the countries in which it conducts business, which could harm its business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear and still evolving. Therefore, the Company might be unable to 9 prevent third parties from acquiring domain names that infringe or otherwise decrease the value of its trademarks and other proprietary rights. The Company may be not able to keep pace with rapid technological changes in the Internet industry, which could cause it to lose customers and revenue. Rapid technological developments, evolving industry standards and user demands, and frequent new product introductions and enhancements characterize the market for Internet products and services. These market characteristics are exacerbated by the emerging nature of the market and the fact that many companies are expected to introduce new Internet products and services in the near future. Our future success will depend on our ability to continually improve our content offerings and products and services. In addition, the widespread adoption of developing multimedia-enabling technologies could require fundamental and costly changes in the Company's technology and could fundamentally affect the nature, viability and measurability of Internet-based advertising and direct marketing, which may harm its business. Item 2. Facilities eUniverse currently leases approximately 38,000 sq. ft. of office space in two separate facilities in Los Angeles, California for its headquarters staff, including technical, sales and marketing, business development and administrative functions. Approximately 25,000 of the square feet was leased by the Company in April 2002, as part of a facilities expansion plan designed to accommodate the Company's current and future growth. The lease term for the recently obtained space runs through April 2006 with an initial monthly rental rate of $44,614. This lease arrangement includes an annual 3% escalation clause. The remaining 13,000 square feet of headquarters space is under lease at approximately $25,000 per month through December 30, 2004. Thereafter, the monthly rent obligation will decrease to approximately $7,000 as the lease term for a majority of the space will have expired. The Company intends to sub-lease some or all of this space. The Company leases office space in San Francisco of 2,133 square feet for sales and marketing staff. The terms of the agreement provide for monthly payments of $5,650 through expiration on June 30, 2002. The Company does not intend to renew this lease. eUniverse leases approximately 300 sq. ft. of office space for its sales and marketing staff in New York at a monthly cost of $650 on a month-to-month basis. The Company leases approximately 1,646 square feet of office space for its Case's Ladder subsidiary in Mount Vernon, Washington at a monthly cost of $1,300. The lease with respect to this facility expires on February 28, 2003 and will be evaluated for potential renewal closer to the expiration date. Management of the Company believes that the current available facilities are adequate to accommodate the needs of the business. Item 3. Legal Proceedings As previously disclosed, (i) on April 23, 2001, EP Opportunity Fund LLC and EP Opportunity Fund International, Ltd. (the "EP Funds") filed a Demand for Arbitration against Entertainment Universe, Inc. ("EUI"), a wholly owned subsidiary of the Company, and Brad Greenspan, Chairman and CEO of the Company, with the American Arbitration Association in Chicago, Illinois ("AAA Arbitration"), and (ii) on December 6, 2001, the Company filed a lawsuit against the EP Funds in Los Angeles Superior Court (the "California Action"). The AAA Arbitration and the California Action arose out of disputes related to the EP Funds Series A Preferred investment in the Company in or about April of 1999. On April 22, 2002, the parties to the AAA Arbitration and the California Action entered into a Settlement Agreement pursuant to which (i) the Company made a one-time cash payment to the EP Funds, (ii) the EP Funds received 43,000 shares of the Company's common stock from an unrelated, unaffiliated third-party by virtue of compromise by Mr. Greenspan of an unmatured right to receive such shares, and (iii) the parties exchanged mutual general releases and agreed to dismiss the AAA Arbitration and California Litigation with prejudice. The Company does not expect the terms of the settlement to have any material adverse effect on the Company. As previously disclosed, on July 6, 2001, Adolph Komorsky Investments, Inc. ("AKI"), an Illinois corporation with its principal place of business in Tarrytown, New York, filed a complaint against the Company in the Supreme Court of the State of New York, County of Westchester. AKI alleges that the Company breached a consulting agreement with AKI by failing and refusing to pay AKI cash and warrant consideration called for under the agreement. The Company denies AKI's allegations and has asserted defenses to the claims including the failure of AKI to perform its obligations under the consulting agreement which the Company formally terminated on June 29, 2001, approximately 45 days after the effective date of the agreement. On March 20, 2002, AKI filed its First Amended Complaint in the case pursuant to which AKI now seeks to recover damages from the Company's refusal to pay AKI warrants to purchase 300,000 shares of the Company's common stock and $120,000 in cash, which represent the maximum amount of consideration payable under the contract. The Company disputes AKI's alleged claims, believes that they are without merit and intends to vigorously defend the action. Discovery in the case has recently concluded and the parties are awaiting scheduling of a trial date by the Court. 10 As previously disclosed, on January 16, 2002, the Company was served with a patent infringement lawsuit filed against it by Tumbleweed Communications Corp. ("Tumbleweed") in the United States District Court for the Northern District of California (the "Tumbleweed Case"). The Amended Complaint filed by Tumbleweed alleged that online greeting products and services offered by the Company on certain of its websites infringe one or more claims of two patents held by Tumbleweed and respectively entitled "Private, Trackable URLs For Directed Document Delivery" and "Electronic Document Delivery System In Which Notification Of Said Electronic Document Is Sent To A Recipient Thereof" (collectively "the Patents"). On or about March 29, 2002, the Company and Tumbleweed entered into a Patent License Agreement pursuant to which (i) the Company purchased a license under the Patents for an undisclosed amount not reasonably expected to have a material adverse effect on the Company, (ii) the parties released each other from all claims and liabilities arising out of the subject matter of the Tumbleweed Case, and (iii) the parties agreed to dismiss the Tumbleweed Case with prejudice. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted during the fourth quarter of fiscal year 2002 to a vote of the Company's security holders, through the solicitation of proxies or otherwise. 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. (a) 1. Market Information As of May 31, 2002 there were 23,566,696 shares of the Company's common stock outstanding, which were held by 206 shareholders of record. From April 20, 2000 to present, our common stock has been listed on the Nasdaq Small Cap Market under the symbol EUNI. From April 30, 1999 to April 19, 2000, the common stock of eUniverse was traded on the OTC Electronic Bulletin Board under the symbol EUNI. The market price data provided in the following table includes data for eUniverse and Motorcycle Centers of America, Inc. The market prices provided in the table between April 1, 1999 and April 14, 1999 are for Motorcycle Centers, traded under the symbol MCAM. After the reorganization of Entertainment Universe, Inc. and Motorcycle Centers on April 14, 1999, the Company began trading on the OTC under the symbol MCAM. The Company's name was changed to eUniverse, Inc. on April 22, 1999, and eUniverse began trading under the symbol EUNI on April 30, 1999. The market price data prior to April 14, 1999 only provides the market price of MCAM. However, the historical information provided in other sections of this Form 10-K pertains to Entertainment Universe and its acquired subsidiaries. As a result, the market information provided below does not relate to the historical information provided in other sections hereof prior to April 14, 1999. The chart below sets forth the range of reported high and low bid quotations for the common stock of eUniverse for each full quarterly period from April 1, 2000 through March 31, 2002. The source of the quotations is Yahoo! Finance. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Range of High and Quarterly Period Ending Low Bid Quotations ----------------------- ------------------ March 31, 2002 (EUNI) .......... $ 4.1400 - 8.2600 December 31, 2001 (EUNI) ....... $ 2.0300 - 6.6000 September 30, 2001 (EUNI) ...... $ 2.1400 - 3.8000 June 30, 2001 (EUNI) ........... $ 1.4400 - 3.4000 March 31, 2001 (EUNI) .......... $ 1.7500 - 3.0000 December 31, 2000 (EUNI) ....... $ 1.5625 - 4.0000 September 30, 2000 (EUNI) ...... $ 3.1875 - 6.3750 June 30, 2000 (EUNI) ........... $ 4.7500 - 8.0000
(b) 1. Dividends To date, eUniverse has paid no cash dividends and has no intention to pay cash dividends on its common stock in the foreseeable future. 2. Recent Sales of Unregistered Securities On April 24, 2001, and February 13, 2002, the Company issued respectively 8,480 and 5,252 shares of its common stock valued at $37,500.00, in the aggregate, representing the final payments of the stock portion of the consideration paid by the Company in connection with its acquisition of RatedFun.com. On May 29, 2001, the Company issued 60,547 shares of its common stock valued at $403,576.00 in accordance with the Agreement and Plan of Reorganization with Gamer's Alliance dated January 25, 1999. This issuance represents contingent acquisition consideration paid by the Company based on performance targets for Gamer's Alliance. On June 22, 2001, the Company issued 85,000 shares of its common stock valued at $212,500.00 in connection with the previously disclosed settlement of the litigation involving, among others, the Company and The Isosceles Fund Ltd. 12 On June 28, 2001, and February 13, 2002, the Company issued respectively 7,992 and 11,726 shares of its common stock to the employee providing services in connection with FunPageLand.com and FunStun.com in exchange for services valued at $50,000 in the aggregate. On September 26, 2001, the Company issued 26,595 shares of its common stock valued at $75,000.00 representing partial payment of the consideration owed by the Company in connection with its acquisition of Spreadingjoy.com. On October 23, 2001, the Company issued: (i) 1,923,077 shares of its Series B Convertible Preferred Stock in exchange for an investment of $5 million pursuant to that certain Stock Purchase Agreement dated as of July 13, 2001 by and between the Company and 550 Digital Media Ventures Inc. ("550DMV"), an affiliate of Sony Broadband Entertainment Inc.; (ii) 3,058,462 shares of its common stock valued at $9.94 million in exchange for all of the membership interests in Indimi, L.L.C., owner of the Infobeat permission-based e-mail publishing business, pursuant to that certain Share Purchase Agreement dated as of July 13, 2001 by and among the Company, Indimi Inc., Indimi, L.L.C., 550DMV and Sony Music Entertainment Inc.; and (iii) 307,692 shares of the Company's common stock valued at $1 million to redeem a warrant to purchase 1,101,260 shares of the Company's common stock formerly issued to an affiliate of 550DMV. On October 23, 2001, the Company issued 50,000 shares of its common stock valued at $105,000.00 in connection with the previously disclosed settlement of the litigation involving, among others, the Company and the former shareholders of The Big Network, Inc. On February 2, 2002, the Company issued 30,349 shares of its common stock valued at $100,000.00 pursuant to that certain Asset Purchase Agreement by and between the Company and Vizx Corporation dated November 20, 2001, relating to the purchase by the Company of certain assets used in connection with the Company's skill-based gaming website. Pursuant to a consulting agreement dated April 4, 2001, the Company agreed to purchase financial and investor relations consulting services from ZA Associates, Inc., for a 30 month period. In connection with this agreement, the Company issued warrants for 300,000 shares of the Company's common stock at an exercise price of $1.25. The warrants have been valued at $293,462.86 in the Company's financial statements using the Black Scholes option pricing model with a risk free interest rate of 5.75%, a volatility of 128.28% with no expected dividend yield and a life of two years. On April 16, 2001, the Company issued a warrants to purchase 18,750 shares of the Company's common stock at an exercise price of $2.00 per share to a Series A Preferred Shareholder in connection with the shareholder's consent to the amendment and waiver of certain rights associated with the shareholder's preferred stock. The warrants have been valued at $25,637.55.00 in the Company's financial statements using the Black Scholes option pricing model with a risk free interest rate of 5.75%, a volatility of 124.38% with no expected dividend yield and a life of two years. On October 22, 2001, the Company issued warrants to purchase a total of 90,556 shares of the Company's common stock at an exercise price of $1.75 per share to various Series A Preferred Shareholders in connection with their consent to the amendment and waiver of certain rights associated with their preferred stock. The warrants have been valued at $110,073.00 in the Company's financial statements using the Black Scholes option pricing model with a risk free interest rate of 5.75%, a volatility of 100.10% with no expected dividend yield and a life of two years. On March 14, 2002, the Company entered into a Strategic Partnership Agreement with a U.S. game developer under which the Company purchased a license and development services for certain Web-based gaming content. In connection with this agreement, the Company issued a warrant for 30,000 shares of the Company's common stock at an exercise price of $5.03 per share, which warrant vests in 10,000 share increments at the end of each year of the term of the agreement. The warrants have been valued at $76,962.00 in the Company's financial statements using the Black Scholes option pricing model with a risk free interest rate of 5.75%, a volatility of 91.13% with no expected dividend yield and a life of two years. During the year ended March 31, 2002, 504,984 shares of the Company's Series A 6% Convertible Preferred Stock were converted into 952,397 shares of the Company's common stock. On February 15, 2002, the Company issued 10,000 shares of its common stock incident to partial, cashless exercise of a warrant to purchase 65,000 shares of Company common stock at an exercise price of $2.00 per share originally issued to a consultant of the Company on March 4, 2001. The remainder of the warrant post-exercise, namely the right to purchase 51,209 shares of Company common stock at $2.00 per share, remains outstanding. On February 21, 2002, the Company issued 75,223 shares of its common stock incident to cashless exercise of a warrant to purchase 120,000 shares of Company common stock at an exercise price of $2.75 per share originally issued to a Series A Preferred Shareholder of the Company on December 13, 2000. 13 On March 6, 2002, the Company issued 43,000 shares of its common stock incident to cashless exercise of a warrant to purchase 50,000 shares of Company common stock at an exercise price of $2.10 per share originally issued to a consultant of the Company on January 2, 2001. During the quarter ended March 31, 2002, the Company issued 25,000 shares of Company common stock incident to the exercise of employee stock options and an additional 1,980 shares of Company common stock for consultant stock options. The foregoing sales of common stock were made in reliance upon the exemptions from registration set forth in Section 4(2) of the Securities Act of 1933 and/or Rule 506 of Regulation D promulgated thereunder for transactions not involving a public offering. No underwriters were engaged in connection with the foregoing sales of securities. These sales were made without general solicitation or advertising. Each purchaser was an accredited investor or a sophisticated investor with access to all relevant information necessary to evaluate the investment who represented to the Company that the shares were being acquired for investment. Item 6. Selected Financial Data. The following selected financial data are derived from our audited financial statements presented as of March 31, 2002, 2001, 2000 and 1999. The results presented for the year ended March 31, 1999 are those of CD Universe, Inc., the financial predecessor of eUniverse. The historical results are not necessarily indicative of results to be expected for any future period or for the period ended. The historical results are not necessarily indicative of results to be expected for any future period. The effect of the merger along with other acquisitions is presented separately in pro forma statements. The data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the related notes to the financial statements included elsewhere in this Form 10-K. eUniverse, Inc. and Subsidiaries Consolidated Statements of Operations
Year Ended March 31, -------------------------------------------------------------- 2002 2001 2000 1999 ---- ---- ---- ---- CD Universe REVENUE $ 33,196,263 $ 15,668,203 $ 1,842,440 $ - COST OF GOODS SOLD 6,920,507 1,606,493 153,950 - GROSS PROFIT 26,275,755 14,061,710 1,688,490 - OPERATING EXPENSES: Marketing and sales (excludes stock-based compensation of $0, $447,065, and $379,006 respectively)....................................... 5,554,193 8,299,799 1,441,570 - Product development (excludes stock-based compensation of $0, ($19,656) and $37,326 respectively)....................................... 5,986,023 3,827,600 1,139,836 - General and administrative (excludes stock-based compensation of $0, ($164,598) and $164,598 respectively)....................................... 8,091,755 4,755,772 3,731,298 - Amortization of goodwill and other intangibles................................ 507,791 2,909,741 1,414,136 - Stock-based compensation.............................. - 262,811 580,930 - ----------- ----------- --------- ---------- TOTAL OPERATING EXPENSES................................... 20,139,762 20,055,723 8,307,770 - ----------- ----------- --------- ---------- OPERATING INCOME / (LOSS) 6,135,993 (5,994,013) (6,619,280) - NONOPERATING INCOME (EXPENSE) Interest income....................................... 52,425 18,801 60,931 - Interest and other financing expense.................. (577,457) (6,351,875) - - Impairment of goodwill................................ - (14,474,390) - - Loss allocated to minority interest................... 4,110 - Other gains and losses................................ (231,113) (320,682) - - ----------- ----------- --------- ---------- INCOME / (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES............................................... 5,379,849 (27,122,159) (6,554,239) - INCOME TAXES .............................................. - - - - ----------- ------------ --------- ---------- INCOME / (LOSS) FROM CONTINUING OPERATIONS $5,379,849 $(27,122,159) $(6,554,239) $ - =========== ============ =========== ========== DISCONTINUED OPERATIONS: Loss from operations discontinued segment (net of applicable income taxes of $0)......... 285,429 (13,917,167) (4,513,407) (407,164) ----------- ------------ --------- ---------- NET INCOME / (LOSS) $ 5,665,278 $(41,039,326) $(11,067,646) $ (407,164) =========== ============ ============ ========== Continuing operations earnings / (loss) per common share .. $ 0.26 $ (1.50) $ (0.42) na Discontinued operations earnings / (loss) per common share. $ 0.01 $ (0.77) $ (0.29) na ----------- ----------- --------- ---------- Basic earnings / (loss) per common share................... $ 0.27 $ (2.27) $ (0.70) na ----------- ----------- --------- ---------- Diluted earnings / (loss) per common share................. $ 0.21 na na na ----------- ----------- --------- ---------- Basic weighted average common shares outstanding........................................ 21,040,374 18,094,670 15,765,108 na ----------- ----------- --------- ---------- Shares outstanding for diluted earnings per share.......... 27,539,459 na na na ----------- ----------- --------- ----------
Balance Sheet Data March 31, 2002 March 31, 2001 March 31, 2000 -------------- -------------- -------------- Cash and cash equivalents.................................. 8,007,784 218,841 2,323,087 Working capital (deficit).................................. 4,196,448 (6,569,061) (787,006) Total assets............................................... 34,577,653 11,879,131 37,778,444 Total shareholders' equity (deficit)....................... 20,676,219 (1,558,489) 30,738,514
The accompanying notes are an integral part of these financial statements. 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with our financial statements and the accompanying notes that appear elsewhere in this report. The results for the current fiscal year 2002 reflect the consolidated operations of eUniverse, Case's Ladder, Gamer's Alliance, Big Network, VIZX Corporation (effective from November 20, 2001), Indimi LLC (effective from July 13, 2001), North Plains LLC (effective from May 13, 2001) and eCommerce Transactions (effective from June 12, 2001). Results for the comparable period in 2001 include only those of eUniverse, Case's Ladder, Gamer's Alliance and Big Network. Effective October 10, 2000, the assets of CD Universe which made up the products business segment of eUniverse were sold to CLBL, Inc., and the results of that segment are treated as a discontinued operation in the financial statements. 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. L90 Merger In January 2002, we entered into an Agreement and Plan of Merger with L90, Inc ("L90"). Pursuant to the merger agreement, following a special cash distribution by L90, eUniverse would acquire all of the outstanding shares of L90 at a price of approximately $0.20 per share or $5.1 million in the aggregate. Our net cash outflow, however, would be $2 million because L90 would leave $3.1 million in L90 as working capital. The Merger was subject to L90 shareholder approval and other customary closing conditions, including that there cannot have been any material adverse change in L90 or event likely to cause a material adverse change in L90. On January 28, 2002, we received a subpoena from the SEC, requesting documents relating to L90 in connection with an SEC investigation of L90. Shortly thereafter, we were made aware that the NASDAQ was also investigating L90. Neither eUniverse nor its potential acquisition of L90 were in any way related to the matters that were being investigated by the SEC and NASDAQ. On March 11, 2002, the Company announced it was terminating its merger agreement with L90 due to the pending SEC investigation of L90. Results of Operations Net Revenues During the years ended March 31, 2001 and 2000 ("fiscal 2001" and "fiscal 2000," resepectively), 100% of the Company's revenues from continuing operations were derived from paid third party advertising. During the year ended March 31, 2002 ("fiscal 2002"), the Company adopted a strategy to diversify its revenue mix by introducing a variety of proprietary products and services. For fiscal 2002, approximately 66% of the Company's revenues were derived from paid third party advertising with the remaining 34% of revenue coming from the Products and Services segment, which was launched in June, 2001. For the fourth quarter of fiscal 2002 Products and Services segment revenue represented nearly 50% of the overall revenue generated by the Company. Management of the Company believes that this trend will continue with Products and Services segment revenue eventually becoming the dominant revenue driver of the Company. Products and Services segment revenues are derived primarily from subscriptions, merchandise sales and fees charged for activity based games and other items. The Company's third party advertising commitments range from one week to three months with revenue derived from Cost Per Click (CPC), Cost Per Impressions (CPM) and Cost Per Acquisition (CPA) agreements with its customers. Services revenues include fees from the sale of non-refundable memberships and sponsorships that are recognized ratably as earned. Service revenues also include fees from the sale of non-refundable dating credits, which are recognized at the time of purchase. These credits are utilized in the Company's dating service. Electronic commerce transactions include product sales for items such as laser and inkjet printer supplies. For these transactions, the Company recognizes revenue upon shipment of its products. Revenue includes shipping and handling charges. Product fulfillment is outsourced to an independent third party. Revenues from barter transactions are recorded at the lower of the estimated fair value of advertisements received or the estimated fair value of the advertisements given with the difference recorded as an advance or prepaid. With respect to the discontinued CD, VHS and DVD sales operation, the Company recognized revenue upon shipment of its products. Revenue included shipping and handling charges. The Company also maintained a partner program whereby partners provided links on their Web sites that brought customers to the CD Universe Web site. Revenue generated from these linked sites was recognized upon shipment of the products. The partner received a commission of 5% to 15% of sales of the Company's products that originated from the site, recognized as a selling expense concurrent with the sale. 15
YEARS ENDED MARCH 31, (dollars in thousands) -------------------------------------------- 2002 2001 2000 ---- ---- ------ Revenues: Media/Advertising $21,859 $15,668 $1,842 Products and Services 11,337 -- -- ------- ------- ------ Total Revenues $33,196 $15,668 $1,842 ======= ======= ======
Fiscal Year 2002 For the year ended March 31, 2002, revenue increased 112% to $33.2 million, up from $15.7 million for fiscal 2001. The increase is due primarily to the introduction of the Products and Services segment which contributed approximately 65% of the overall increase in revenues. The Products and Services segment was launched in June 2001 with the introduction of the Company's dating site Cupid Junction. Throughout fiscal 2002, the Company launched several other product and service offerings, including a remanufactured and compatible inkjet cartridge store and a health and fitness site. A majority of the revenues generated from this segment were from subscription based services (e.g. dating) and the sale of impulse merchandise. The Company will continue to invest in this segment throughout fiscal 2003 and expects to introduce new products and services periodically throughout the year as well as innovations and upgrades to existing offerings. Revenues from Media and Advertising increased approximately 40% to $21.9 million due primarily to an increase in available advertising space, from newly launched and acquired sites, and an increase in the overall yield from available advertising inventory. Management expects that revenue from the Products and Services segment will continue to increase as percentage of overall revenues during fiscal 2002 as a greater percentage of available advertising inventory will be allocated to promote the Company's own proprietary products and services. Consequently, revenue growth from Media/Advertising may slow considerably during fiscal 2003. Revenue also includes barter and non-cash advertising where we exchange advertising on our sites for similarly valued online advertising or other services. The barter value was $645,000, or 1.9% of total revenue, for the year ending March 31, 2002. The Company had $499,000, or 3.2% of total revenue, in barter transactions in fiscal 2001. Fiscal Year 2001 For the year ended March 31, 2001, revenue increased 751% to $15.7 million, up from $1.8 million reported the same period for fiscal 2000. The increases were attributable to both the acquisitions that have occurred in the past year, primarily funpage web sites and the development of our advertising network. Revenue also includes barter and non-cash advertising where we exchange advertising on our sites for similarly valued online advertising or other services, or in exchange for equity ownership in the partner. The barter value was $499,000, or 3.2% of total revenue, for the year ending March 31, 2001. The Company had $266,000, or 14% of total revenue, in barter transactions the prior year. Operating Costs Our operating costs were as follows for the years indicated (dollars in thousands):
YEARS ENDED MARCH 31, ------------------------ 2002 2001 2000 ---- ---- ------ Operating costs: Cost of revenues ................. $6,921 $1,606 $154 Sales and marketing .............. $5,554 $8,300 1,442 Product development .............. $5,986 $3,828 1,140 General and administrative ....... $8,091 $4,756 3,731 Amortization of goodwill and other intangibles, stock compensation and other ....................... $ 508 $3,172 1,995 ------- ------- ----- Total Operating Costs ............. $27,060 $21,662 $8,462 ======= ======= ======
16 Cost of Revenues Fiscal Year 2002 Cost of revenues consists primarily of fees paid to third parties for media properties, license arrangements, ad sharing revenue arrangements for content and other service providers and cost of products for the commerce offerings within the Products and Services segment. During fiscal 2002, cost of revenues increased by 331% to $6.9 million, or 21% of total revenues from $1.6 million, or 10% of total revenues in fiscal 2001. The increase in absolute dollars was driven primarily by the introduction of our Products and Services segment in June 2001. Cost of commerce products sold during fiscal 2002 increased by $6.2 million from $0 in the prior fiscal year. This increase was partially offset by a $.8 million decrease in the cost of revenues for our Media/Advertising segment to $.8 million. The Company expects cost of revenues to continue to increase as a percentage of overall revenues as the Products and Services segment continues its rapid growth. Cost of revenues could potentially increase to 30% to 35% of overall revenues during fiscal 2003. Within the Products and Services segment there currently exists a significant concentration of risk in our inkjet cartridge business. We use a single supplier and fulfillment provider for our entire inkjet cartridge inventory. However, during fiscal 2003 the Company intends to pursue additional supply arrangements that would mitigate this risk. Fiscal Year 2001 For fiscal year 2001 and 2000 cost of revenues consisted primarily of fees paid to third parties for media properties. Cost of revenues increased by 943% to $1.6 million, or 10% of total revenues, for fiscal 2001, from $154,000, or 8% of total revenues, for fiscal 2000. The increase in absolute dollars was primarily due to the growth in our affiliate program. The affiliate program grew to 70 affiliates during fiscal 2001. However, in the fourth quarter, the Company restructured the program to keep only the top- performing web sites and reduced the number of affiliates to 14. Accordingly, cost of revenues decreased 86% to $49,000 in the quarter ended March 2001 from $346,000 in the quarter ended December 2000. The Company terminated or reduced minimum payment obligations to certain affiliates that exceeded related revenues. Sales and Marketing Fiscal Year 2002 Sales and marketing costs consist primarily of promotional and advertising costs, personnel costs, commissions, agency and consulting fees, and allocated overhead costs such as computer systems and facilities. The Company has a direct sales force that sells our inventory of advertisements to advertisers and advertising agencies. Sales and marketing costs decreased by 33% to $5.6 million, or 17% of total revenues, for the fiscal 2002, from $8.3 million, or 53% of total revenues, for the fiscal 2001. This $2.7 million decrease was primarily due to the restructuring of certain Web site development revenue-sharing contracts that completed during the fourth quarter of fiscal 2001, which significantly reduced the commission payouts to content creators. Specific changes for the year over the same period last year include the following: a decrease in commissions to our content creators of $3.1 million due primarily to the aforementioned restructuring of content creator commissions; a decrease in consulting and other services of $.1 million; a decrease in facilities expenses of $.1 million; an increase in advertising and promotion of $.2 million; and increased payroll and related costs of $.4 million. Stock-based compensation of expenses of approximately $0 and $.4 million for the fiscal years ended March 31, 2002 and 2001, respectively, are excluded from sales and marketing costs and shown separately in the financial statements. We plan to expand our direct sales, marketing and customer care teams during fiscal 2003 in effort to increase customer retention and drive new revenue growth. The Company's core strategy is to develop a longer term relationship with its customers and enhance the life time value of each relationship. The Company expects that sales and marketing costs will increase in absolute terms but should continue to decline as a percentage of overall revenue. Fiscal Year 2001 Sales and marketing costs increased by 476% to $8.3 million, or 53% of total revenues, for the year ended March 31, 2001, from $1.4 million, or 78% of total revenues, for the year ended March 31, 2000. This $6.9 million increase was driven by the rapid expansion of our sites, acquisitions that occurred throughout the year and increases in compensation expense associated with growth in our direct sales force and marketing staff. Specific increases for the year over the same period last year include the following: commissions and incentive compensation relating to our acquisitions of $3.0 million; advertising and promotion of $1.4 million including increased barter costs of $0.5 million; payroll and related of $1.3 million; consulting and other services of $0.5 million; facilities of $0.3 million; and other expenses of $0.4 million. 17 Stock-based compensation expenses of approximately $447,000 and $379,000 for the years ended March 2001 and 2000, respectively, are excluded from sales and marketing costs and shown separately in the financial statements. Product Development Fiscal Year 2002 Product development expenses consist of payroll and related expenses for the following: (1) developing and maintaining the Company's Web sites, (2) developing and maintaining key proprietary technology, and (3) developing proprietary products and services. Product and development costs increased by 56% to $6.0 million, or 18% of total revenues, for fiscal 2002, from $3.8 million, or 24% of total revenues, for fiscal 2001. The $2.2 million increase is primarily a result of growth in salaries and related and Internet expenses due to our rapid expansion in network traffic, Web site development and product and service development. Specific increases for the year over the same period last year include: payroll and related of $1.1 million; facilities and Internet fees of $.9 million; and consulting expenses of $.2 million. Stock-based compensation expenses of approximately $0 and ($.02 million) for fiscal years 2002 and 2001, respectively, are excluded from product development costs and shown separately in the financial statements. Management anticipates that product development costs will continue to increase in absolute terms due to an increase in compensation expenses for Web site and product and services design and development and increased Internet costs commensurate with our overall growth. However, in fiscal 2003 the Company expects product development costs to stay relatively flat, or decline slightly as a percentage of revenues. Fiscal Year 2001 Product and development costs increased by 236% to $3.8 million, or 24% of total revenues, for fiscal year 2001, from $1.1 million, or 62% of total revenues, for fiscal year 2000. The $2.7 million increase was primarily a result of growth in salaries and related and Internet expense due to our rapid expansion in network traffic and website development. Stock-based compensation expenses of approximately $(20,000) and $37,000 for fiscal years 2001 and 2000, respectively, are excluded from product development costs and shown separately in the financial statements. Specific increases for the year over the same period last year include payroll and related of $1.4 million and facilities and Internet fees of $1.3 million. General and Administrative Fiscal Year 2002 General and administrative expenses consist of payroll and related expenses for executive, finance, legal, human resources and administrative personnel, recruiting, professional fees and other general corporate expenses. General and administrative costs increased by 70% to $8.1 million, or 25% of total revenues, for fiscal year 2002, from $4.8 million, or 30% of total revenues, for fiscal year 2001. The $3.3 million increase was due primarily to growth in the number of management, legal and finance personnel, expansion of facilities and computer systems, and an increase in legal and accounting services to support the growth of our operations and infrastructure. Specific changes for the year over the same period last year include the following: an increase in payroll and related of $1.8 million; an increase in legal, consulting and accounting services of $1.0 million; an increase in other office, depreciation and facility expense increases of $0.6 million; and a decrease in recruiting expenses of $.1 million. For fiscal 2003, the Company anticipates that general and administrative costs will decline as a percentage of revenues as the business continues to obtain economies of scale in this area. 18 Stock-based compensation expenses of approximately $0 and ($.2 million) for fiscal years 2002 and 2001, respectively, are excluded from general and administrative costs and shown separately in the financial statements. Fiscal Year 2001 General and administrative costs increased by 27% to $4.8 million, or 30% of total revenues, for the fiscal year 2001, from $3.7 million, or 203% of total revenues, for the fiscal year 2000. The $1.1 million increase was due primarily to growth in the number of administrative personnel, expansion of facilities and computer systems, and an increase in legal and accounting services to support the growth of our operations and infrastructure. Specific increases for the year over the same period last year include the following: payroll and related of $0.5 million, recruiting expense of $0.2 million, legal and accounting services of $0.2 million, and other office, depreciation and facility expense increases of $0.2 million. We anticipate that general and administrative costs will increase commensurate with expansion plans. Stock-based compensation expenses of approximately $(164,000) and $164,000 for the fiscal years 2001 and 2000, respectively, are excluded from general and administrative costs and shown separately in the financial statements. Amortization of Goodwill and Other Intangible Assets
YEARS ENDED MARCH 31, (in thousands) ------------------------------------ 2002 2001 2000 ---- ---- -------- Amortization of goodwill and other intangibles $ 508 $2,910 $1,414
Fiscal Year 2002 The Company adopted SFAS 141 and SFAS 142 effective April 1, 2001 and accordingly, there was a substantially reduced cost of $.5 million associated with amortization of certain identifiable intangibles for the fiscal year 2002, as compared to a cost of $2.9 million for fiscal 2001. In accordance with the new accounting standards the Company will evaluate the purchased goodwill and other intangible amounts for potential impairment on at least an annual basis or upon the occurrence of a material adverse event in accordance with SFAS 141and SFAS 142. Amortization of goodwill and acquisition-related intangible assets for the fiscal year 2001 reflects the stock acquisitions of CD Universe, Cases Ladder, Gamer's Alliance, Big Network, Pokemon Village, Falcon Ventures, and the asset acquisitions on Justsaywow, Funone and Dustcloud. Fiscal Year 2001 Amortization of goodwill and acquisition-related intangible assets increased by 106% to $2.9 million for the fiscal year 2001 from $1.4 million for the fiscal year 2000. The increase is principally due to the larger acquisitions (the Big Network 9/99, Case's Ladder 6/99 and Gamer's Alliance 7/99) only having amortization for part of the prior period but for the full year in the current period. Effective January 1, 2001, the Company also changed the useful lives of these assets to 5 years from 10 years due to an assessment of anticipated future cash flows and the practice of comparable companies. The reduction in useful lives increased amortization by approximately $0.3 million in the quarter ended March 2001 compared to what would have been recorded had the Company used 10 years. In addition to the stock acquisitions of Big Network, Case's Ladder and Gamer's Alliance, the current period charges also reflect the acquisitions of Pokemon Village, Funone, JustSayWow, Dustcloud and other minor acquisitions. 19 Stock-Based Compensation Stock-based compensation is comprised of the portion of acquisition related consideration conditioned on the continued tenure of key employees, which must be classified as compensation expense under generally accepted accounting principles. Additional stock-based compensation is recorded for stock price fluctuations that affect compensation expense for options that were repriced in December 1999.
YEARS ENDED MARCH 31, (in thousands) ------------------------------------ 2002 2001 2000 ---- ---- -------- Stock-based Compensation ............. $ -- $263 $581
There was no cost associated with stock compensation for the fiscal year 2002, as compared to $.3 million for fiscal 2001. The expenses for the fiscal year 2001 are attributable to performance bonuses in connection with the acquisitions of JustSayWow, Funpageland and Pokemon Village while expenses for the prior period resulted from variable stock compensation in connection with repricing of options to employees in December 1999. Impairment Write-Down of Goodwill, Other Intangible Assets and Other Assets During the fourth quarter of fiscal year 2001, the Company ceased operations of the Big Network and wrote-down the book value of Case's Ladder goodwill to fair value. We performed asset impairment tests by business unit, the lowest level for which there are identifiable cash flows.
YEARS ENDED MARCH 31, (in thousands) ------------------------------------ 2002 2001 2000 ------ ------- ------- Impairment of Goodwill........... $ -- $14,474 $ --
In our review of Case's Ladder, we determined that the net goodwill balance prior to impairment as of March 31, 2001 of $6.3 million to be overstated by approximately $5.3 million. The Company calculated the impairment by the discounted cash flow method using an appropriate discount rate. The Company decided to shut down the Big Network Web site and terminate its employees during the quarter ended March 31, 2001. The Big Network, in the estimation of eUniverse, was not a viable business opportunity and its operations, technology and management could not be integrated into the Company's core business. As a result, the Company considered the entire March 31, 2001 net goodwill balance of $9.1 million to be impaired. The Company anticipates no future cash flows from Big Network and has written off the entire carrying value of the asset. Interest and Other Income, Net
YEARS ENDED MARCH 31, (in thousands) -------------------------------------- 2002 2001 2000 -------- -------- -------- Interest income ........................... $ 52 $ 19 $61 Interest and other financing expenses...... $ (577) $(6,352) $ -- Minority interest.......................... $ -- $ -- $4 Other non-recurring losses................. $ (231) $ (321) $ --
Interest and financing expense for the year was primarily due to the Company's short and long-term debt obligations. During the fourth quarter of fiscal 2001, the Company renegotiated certain short-term liabilities amounting to $1.9 million into three year interesting bearing notes. Interest on debt obligations increased approximately $.2 million from fiscal 2001 to $.5 million, due primarily to the conversion of the three year notes mentioned above. During fiscal year 2002, the Company had $0.1 million of financing expenses. During fiscal 2001, financing expenses totaled approximately $6.0 million included $2.2 million related to the issuance of warrants in September 2000 in connection with short-term loans provided by New Technology Holdings a/k/a 550 Digital Media Ventures (an affiliate of Sony); $1.8 million related to warrants issued to Video Game Partners, and $.8 million related to the issuance of warrants in connection with other financings. 20 Other non-recurring losses in fiscal year 2002 relate to the settlement of a previously disclosed litigation matter - see Legal proceedings. For fiscal year 2001, the loss relates primarily the write off of Email Shows totaling $.2 million and other expenses. During fiscal year 2000, there was no interest or financing expense. The loss on sale of assets represents primarily the write off of Email Shows totaling $230,000 and other expenses. Income Taxes [Merdinger, Fruchter to complete] Due to operating losses incurred since inception, we did not record a provision for income taxes in the year ended March 31, 2002. As of March 31, 2002, the balance of net deferred tax assets was $___________. Utilization of the Company's net operating loss carry forwards, which begin to expire in 2020, may be subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended. Due to uncertainties regarding reliability 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/(Loss) from Continuing Operations
YEARS ENDED MARCH 31, (in thousands) --------------------------------------- 2002 2001 2000 --------- --------- -------- Net Income/(Loss) ................................. $5,380 $(27,122) $(6,554)
For the fiscal year 2002, the Company reported net income of $5.4 million compared to a loss of $ 27.1 million for fiscal 2001. The Company attributes its improved operating results primarily to its stream-lined operating structure, greater yields from its third party advertising segment and the introduction of its Products and Services segment. For the fiscal year 2001, net loss from continuing operations increased by 313% to $27.1 million from $6.6 million for the year ended March 31, 2000. The increase in the net loss was due predominantly to the write down of goodwill, other intangible assets and other assets of $14.5 million, interest and financing expenses of $6.4 million, and an increase in the amortization of intangible assets of $1.5 million. Excluding such items, net loss would have been $3.4 million and $5.1 million for the years ended March 31, 2001 and 2000, respectively, for a $1.7 million improvement. Net Income/(Loss) from Discontinued Operations
YEARS END MARCH 31, (in thousands) ------------------------------------- 2002 2001 2000 -------- ------------ -------- Loss from discontinued operations........... $ 286 $(4,046,012) $(4,513,407) Loss from disposal of segment (net of taxes) ............................ $ -- $(9,871,155)$ --
For the year ended March 31, 2002, the net income from discontinued operations is due primarily to the favorable settlement of certain liabilities related to previous discontinued operations. During the third quarter of fiscal 2001, eUniverse disposed of the retail products (e-commerce) segment of its business. This transaction provided for the Company's subsidiary, CD Universe, to receive $1 million in exchange for the sale of tangible and intangible assets of the business to CLBL, Inc., a company owned by Charles Beilman, formerly a director and officer of eUniverse. Additionally, eUniverse received $500,000 from CBL for the purchase of advertising on the Company's sites over the next six months. A loss on the disposal of the segment of $9.9 million, principally consisting of a loss on disposal of intangible assets relating to CD Universe, was recognized during the third quarter of fiscal 2001. 21 Liquidity and Capital Resources During the prior three fiscal years, the Company has satisfied its cash requirements primarily from a combination of cash flow from operations, private placements of equity securities and short-term loans. For fiscal year 2002, net cash generated from operating activities was approximately $7.2 million compared to a use of cash of approximately $7.9 million for fiscal 2001. The trend to positive cash flow in fiscal 2002 was due primarily to the growth in the Company's overall revenues and from investments made throughout the year to stream-line the operating structure. During fiscal 2002, the Company introduced its Product and Services segment, which contributed approximately 34% of overall revenues for the year. Additionally, operating expenses remained in check as they declined significantly as a percentage of revenue and remained relatively flat on absolute basis compared with previous fiscal year. During fiscal 2003, the Company intends to make certain investments in people and other strategic items that may cause net operating cash flows to fluctuate from quarter to quarter. However, for the full year the overall positive trend in cash flow is expected to continue. Net operating cash flows for fiscal year 2002 consist of $5.7 million net income; non-cash expenses, including depreciation and amortization of $.81 million; bad debt charges of $.42 million; stock and stock warrants granted to outside consultants and affiliates of $.51 million; warrants granted to Series A preferred shareholders for approval of the Sony transaction of $.13 million; a net increase in accounts payable and other current liabilities of $2.6 million and other activity of $.54 million. These increases in operating cash flow were partially offset by an increase in accounts receivable and other current assets of $3.4 million. Net cash used in operating activities in fiscal year 2001 were due primarily to net losses, an increase in current assets, a decrease in current liabilities, offset by non-cash charges for goodwill and other asset impairments, a loss on the disposal of a segment, financing related costs and depreciation and amortization. For fiscal year 2002, net cash used in investing activities was $3.2 million compared to $.17 million of cash that was generated from this area in fiscal 2001. Investing activities for the fiscal 2002 include the purchase of various databases of subscribers $.63 million, the purchase of various Web sites and related assets $.87 million and the purchase of computer, telecommunications and other equipment of $1.7 million. During fiscal 2001, the Company received $1 million in proceeds for the sale of a discontinued e-commerce operation, CD Universe. These funds were partially offset by the purchase of Web sites and certain other fixed assets totaling $.84 million. Net cash provided by financing activities of $3.8 million for the year ended March 31, 2002 resulted from proceeds of $5 million from the sale of Preferred Series B shares to 550 Digital Media on October 23, 2001; partially offset by net long and short term loan repayments and restructurings of approximately $1.2 million. For fiscal 2001, net cash provided by financing activities of $5.6 million was generated from short-term loans from new investors of $5.3 million less repayments of $1.6 million and proceeds from long-term notes of $1.8 million, which include the restructuring of $2.1 million of certain short-term notes into long-term notes. As of March 31, 2002, the Company's principal commitments include obligations for leases amounting to approximately $.8 million annually. These lease commitments expire at various dates through the fiscal year 2007. At March 31, 2002, the Company had no off-balance sheet financing arrangements or undisclosed liabilities related to special purpose, related party or unconsolidated entities. Management of the Company believes that current cash on hand, together with net cash generated from operations, will provide it sufficient working capital for the next 12 months. However, the Company will continue to seek financing for certain equipment purchases and other fixed asset acquisitions. Additionally, for certain acquisitions and other investments the Company may seek additional financing from private debt or equity placements. Net cash used in operating activities was $7.9 million and $3.2 million for the years ended March 31, 2001 and 2000, respectively. Net operating cash flows for the year ended 2001 consist of the $41.0 million net loss and a reduction in current liabilities of $2.0 million offset by goodwill and other intangible impairment of $14.5 million, depreciation and amortization of $3.8 million; the loss from the disposal of discontinued operations of $9.9 million; non-cash financing related costs of $5.8 million; and other non-cash items of $1.2 million. The net losses before non-cash items included losses from operations for the discontinued segment of $4.0 million. The reduction in current liabilities of $2.0 million for the year ended 2001 resulted principally from decreases in deferred ad revenues of $2.4 million. Current assets declined $0.1 million due to increased receivables of $1.7 million related to the increase in ad revenues, offset by decreased prepaid expenses and deferred charges of $1.4 million and a decline in inventory related to discontinued operations of $0.4 million. 22 In the year ended March 31, 2000, net cash used in operating activities of $3.2 million was due to net losses excluding non-cash charges of $7.3 million and an increase in current assets of $1.7 million partially offset by an increase in current liabilities of $5.8 million. The net losses before non-cash items included losses from operations for the discontinued segment of $4.5 million. Current assets rose principally due to increased prepaid expenses related to the issuance of warrants for marketing services. The increase in current liabilities was due to increased accounts payable, principally related to the discontinued e-commerce operations, and increased accrued liabilities and deferred revenues. Net cash used in investing activities was $0.2 million and $2.6 million for the years ended March 31, 2001 and 2000, respectively. Investing activities for the year ended 2001 included proceeds of the sale of discontinued e-commerce operations for $1.0 million offset by $0.5 million for fixed asset purchases, and changes in other assets were $0.3 million. Net cash used in investing activities was $2.6 million for the year ended March 31, 2000. During the year, $0.7 million was used for acquisitions, consisting of $1.9 million in cash paid for the CD Universe acquisition, less $1.2 million received from acquisitions. Purchases of fixed assets amounted to $0.9 million and other asset changes were $0.9 million. Net cash provided by financing activities of $5.6 million for the year ended March 31, 2001 resulted from proceeds from short-term loans from new investors of $5.3 million less repayments of $1.6 million and proceeds from long-term notes of $1.8 million, which include the restructuring of $2.1 million of certain short-term notes into long-term notes. For the year ended March 31, 2000, cash flows from financing activities were $8.2 million, which resulted from net proceeds of $8.4 million from the sale of 1.8 million shares of preferred stock and 1,187,080 shares of common stock, less repayments of advances to an officer and affiliates. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. eUniverse places its cash and cash equivalents in banks with high quality standards. Cash investments consist of high quality overnight investments that bear immaterial exposure to interest rate fluctuations. Item 8. Financial Statements and Supplementary Data. Financial statements required pursuant to this item are included in Part IV, Item 14 of this Form 10-K and are presented beginning on page F-2. The supplementary financial information required by this item is included under the subsection entitled Quarterly Results of Operations/Supplementary Financial Information, beginning on page [ ]. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable. 23 PART III Item 10. Directors and Executive Officers of the Registrants.
Name Age Positions and Offices With eUniverse Brad D. Greenspan(1)(2)..................29 Chairman of the Board of Directors and Chief Executive Officer Brett C. Brewer(1)(2)....................29 President and Director Joseph L. Varraveto......................40 Executive Vice President and Chief Financial Officer Adam Goldenberg..........................21 Chief Operating Officer Christopher S. Lipp......................30 Senior Vice President and General Counsel Shawn Goldschein.........................37 Chief Strategic Officer Daniel L. Mosher(1)(3)...................29 Director Ryan A. Brant(4).........................30 Director Thomas Gewecke(1)(3).....................33 Director Jeff Lapin(3)............................44 Director
- -------------- (1) Member of the Compensation Committee. (2) Member of the Executive Committee. (3) Member of the Audit Committee. (4) Resigned effective November 1, 2001. Brad D. Greenspan has served as Chairman of the Board of Directors since April 14, 1999 and Chief Executive Officer since August 29, 2000. Mr. Greenspan is a member of eUniverse's Executive and Compensation Committees. In 1997, he founded Palisades Capital, Inc., a private Beverly Hills merchant bank, and served as its President until March 1999. Mr. Greenspan received a B.A. degree in political science/business from the University of California at Los Angeles in 1997. Brett C. Brewer has served as President and Director since August 29, 2000. Mr. Brewer is a member of eUniverse's Executive and Compensation Committees. He joined the Company in April 1999 and was named Vice President of its eCommerce Division in December 1999 and elected President of CD Universe, Inc., a subsidiary of eUniverse, in July 2000. Prior to joining eUniverse, Mr. Brewer helped run the Southern California Retail Sales Division of CB Richard Ellis between October 1996 and December 1998. Mr. Brewer received a B.A. degree in business/economics from the University of California at Los Angeles. Joseph L. Varraveto has served as Executive Vice President and Chief Financial Officer since January 2, 2001. Prior to joining eUniverse, Mr. Varraveto served as President and Chief Operating Officer of ememories.com. Prior to that, he served as acting Chief Financial Officer of AIR4LESS.com, a leisure travel Web site. Prior to entering the online world, Mr. Varraveto worked for PepsiCo's Frito Lay International Snack Foods Division for more than six years serving in a variety of management positions, including Vice President, Finance prior to leaving the Company in 1999. He also spent nine years at PriceWaterhouseCoopers working on corporate acquisitions, reorganizations, public offerings and debt offerings. Mr. Varraveto received a B.A. in business economics from the University of California at Santa Barbara. Adam Goldenberg has served as Chief Operating Officer since October 26, 2001. In 1997 Mr. Goldenberg founded Gamer's Alliance, Inc., an online entertainment portal, and served as its President until it was acquired by eUniverse in April 1999. Mr. Goldenberg served as Vice President, Strategic Planning of eUniverse from April 1999 to October 2001. eUniverse has benefited greatly from Mr. Goldenberg's six years of experience in Internet marketing, product development and management. Shawn Goldschein has served as Chief Strategic Officer since August 29, 2000. Prior to joining eUniverse, Mr. Goldschein served as Vice President of Marketing and Communications for WhatsHotNow.com and previously to that as Vice President of Strategic Planning for Rare Medium, where he was instrumental in generating new business while employed at each position. Prior to Rare Medium, Mr. Goldschein was employed by Icon New Media, where he served as General Manager and founder of the Company's Advertising/Sponsorship Division. Mr. Goldschein received a B.A. degree in finance and statistics from Syracuse University. Christopher S. Lipp has served as Senior Vice President and General Counsel since October 26, 2001, Vice President, General Counsel since May 1, 2001, Secretary since March 30, 2001 and Vice President, Business and Legal Affairs since January 11, 2001. Prior to joining eUniverse, Mr. Lipp was employed as an attorney in the Intellectual Property Group of Pillsbury Madison & Sutro LLP at Los Angeles, California. He has been a member of the California State Bar since 1997. Mr. Lipp received his J.D. from the University of Southern California Law School and a B.A. in government and sociology from Georgetown University. Daniel L. Mosher has served as Director since April 17, 2000. Mr. Mosher is a member of eUniverse's Compensation and Audit Committees. He is employed as Director of Corporate Development of Verisign, Inc. Prior to that, Mr. Mosher was employed 24 by Webvan Group, Inc. from May 1999 to May 2001, most recently as Director, Business Development. From January 1998 to May 1999, Mr. Mosher served in the Mergers and Acquisitions Department of Morgan Stanley Dean Witter Technology Group, an investment banking firm. From February 1996 to January 1998, he held several positions in the Corporate Finance Group of Arthur Andersen, focused on technology private placements. Mr. Mosher holds a B.S. in business administration from the University of California at Berkeley. Thomas Gewecke has served as Director and a member of the Audit Committee and Compensation Committees since October 23, 2001. Mr. Gewecke has been employed as Executive Vice President of 550 Digital Media Ventures Inc., a subsidiary of Sony Broadband Entertainment Inc. which manages a portfolio of digital media and technology investments, since July 2000. He has also served as Senior Vice President, New Technology and Business Development for Sony Music Entertainment Inc. where he is responsible for helping develop new digital products and strategy, since November 1999. Prior to joining Sony, Mr. Gewecke held various positions at PC World Communications, a subsidiary of International Data Group, from 1991 to 1999. Mr. Gewecke co-founded PC World Online in 1992, and served as Publisher of the PC World Online Services Group, a network of leading high technology Web and email products, from 1995 to 1999. Mr. Gewecke co-created a new media course for the UC Berkeley Graduate School of Journalism Master's Degree Program in 1995, and taught in the program through 1998. Mr. Gewecke received a B. A. degree in Social Studies from Harvard in 1991. Jeff Lapin has served as Director and member of the Audit Committee since June 20, 2002. Mr. Lapin is Vice Chairman and Chief Operating Officer of THQ, a global developer and publisher of interactive entertainment software for the major hardware platforms in the home video market. Mr. Lapin has been an employee of THQ since 1998. From July 1996 through October 1998, Mr. Lapin was the President of House of Blues, Inc. Hospitality and Executive Vice President of House of Blues, Inc. Entertainment. From January 1995 to June 1996, Mr. Lapin was the President and Chief Operating Officer of Starwood Hotels and Resorts (formerly known as Hotel Investors Trust), and from May 1991 to January 1995 Mr. Lapin was the President and Chief Executive Officer of Starwood Hotels & Resorts. Mr. Lapin was Vice President of Starwood Hotels and Resorts from January 1988 to May 1991 and the Secretary of Starwood Hotels & Resorts from September 1986 to May 1991. Mr. Lapin served as a Trustee of Starwood Hotels & Resorts from September 1992 to June 1996. Prior to his employment by Starwood, Mr. Lapin was an attorney at Mitchell, Silberberg & Knupp in Los Angeles. Each director of eUniverse serves for a one-year term until the next Annual Meeting of Shareholders and until his successor has been duly elected. Each officer of eUniverse serves at the pleasure of the Board of Directors. Agreements Concerning the Election of Directors In connection with the acquisition of Falcon Ventures by eUniverse, an agreement dated December 16, 1999 was entered into by and between Brad D. Greenspan and Take-Two Interactive Software, which gives Take-Two the right to select an individual to serve as a member of the Board of Directors of eUniverse for a period of three years from February 2, 2000. On January 22, 2001, Take-Two exercised its right to select a director by selecting Ryan A. Brant. Mr. Brant resigned from the Board of Directors in November 2001 for personal reasons. Take-Two's right to select a member of the Board of Directors has since terminated incident to Take-Two's divestiture of its investment in the Company. Pursuant to the Company's Certificate of Designation of Series B Convertible Preferred Stock, which gives the holders of Series B Preferred Stock (currently 550 Digital Media Ventures, Inc.) voting as a class the right to elect one, and, depending on the size of the Company's Board of Directors, up to three Directors, Thomas Gewecke was elected to the Board of Directors on October 19, 2001. Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Exchange Act (Section 16(a)) requires eUniverse's executive officers, directors, and persons who own more than ten percent of a registered class of eUniverse's equity securities (10% Stockholders) to file reports of ownership on a Form 3 and changes in ownership on a Form 4 or a Form 5 with the SEC. Based solely on its review of the copies of such forms received by eUniverse, or written representations from certain reporting persons, eUniverse believes that during fiscal year 2002 its executive officers, directors and 10% Stockholders complied with all applicable Section 16(a) filing requirements, except that the Form 3's required to be filed by Thomas Gewecke and Christopher S. Lipp (each of whom was either a director or executive officer of eUniverse during fiscal year 2002) and the Form 5's required to be filed by Brad D. Greenspan, Thomas Gewecke and Daniel L. Mosher (each of whom was either a director or executive officer of eUniverse during fiscal year 2002) were inadvertently filed late. 25 Item 11. Executive Compensation. The table below summarizes the compensation paid or awarded during the last three fiscal years to our Chief Executive Officer and our four other most highly compensated Executive Officers for services rendered to eUniverse in all capacities. These executives are referred to as the Named Executive Officers elsewhere in this Form 10-K. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION ------------------------------------------------- AWARDS PAYOUTS ------------------------ ---------- OTHER ANNUAL RESTRICTED SECURITIES LTIP ALL OTHER FISCAL SALARY BONUS COMPENSATION STOCK AWARD UNDERLYING PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) OPTIONS # ($) ($) - --------------------------- ---- ------ ----- ------------ ----------- ---------- ------- ------------ Brad D. Greenspan .......... 2002 178,125 95,000 -- -- -- -- -- Chairman of the Board 2001 99,800 -- 50,000(1) -- 800,000 -- and Chief Executive Officer 2000 -- -- 50,000(1) -- 340,000 -- -- Brett C. Brewer ............ 2002 131,667 99,375 -- -- 500,000 -- -- President and Director 2001 104,979 -- -- -- 750,000 -- -- 2000 75,000 -- -- -- 75,000 -- -- Joseph L. Varraveto ......... 2002 160,000 60,000 -- -- 50,000 -- -- Executive Vice President 2001 37,657 -- -- -- 350,000 -- -- and Chief Financial Officer(2) Adam Goldenberg ............ 2002 124,000 108,980 -- -- 675,000 -- -- Chief Operating Officer(3) 2001 96,000 -- -- -- 175,000 -- -- 2000 80,000 -- -- -- 85,000 -- -- Chris Lipp.................. 2002 134,875 37,500 -- -- 150,000 -- -- Senior Vice President and 2001 91,146 -- -- -- 150,000 -- -- General Counsel and 2000 16,346 -- -- -- 100,000 -- -- Secretary(4)
- --------------- (1) Represents consulting fees paid to Mr. Greenspan prior to his appointment as Chief Executive Officer of eUniverse on August 29, 2000. (2) Mr. Varraveto was appointed as Executive Vice President and Chief Financial Officer of eUniverse on January 2, 2001. (3) Mr. Goldenberg joined the Company in April 1999 as Vice President, Strategic Planning and was promoted to Chief Operating Officer in October 2001. (4) Mr. Lipp joined the Company in January 2000 as Vice President, Legal and Business Affairs; was appointed Secretary on March 30, 2001; was promoted to General Counsel on May 1, 2001 and promoted to Senior Vice President General Counsel on October 26, 2001. OPTION GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS
PERCENT OF TOTAL POTENTIAL REALIZABLE VALUE OPTIONS AT ASSUMED ANNUAL RATES NUMBER OF GRANTED TO OF STOCK PRICE APPRECIATION SECURITIES EMPLOYEES EXERCISE FOR OPTION TERM UNDERLYING IN FISCAL PRICE EXPIRATION ------------------------- NAME AND PRINCIPAL POSITION OPTIONS GRANTED YEAR $/SHARE DATE 5% 10% - --------------------------- --------------- ---- ------- ---- -- --- Brad D. Greenspan ..................... -- -- -- -- -- -- Chairman of the Board of Directors and Chief Executive Officer Brett C. Brewer........................ 500,000(1) 14% $2.00 5/02/11 $1,735,250 $1,865,500 President and Director Joseph L. Varraveto.................... 50,000(2) 1% $2.00 5/02/11 $ 173,525 $ 186,550 Executive Vice President and Chief Financial Officer Adam Goldenberg........................ 675,000(2) 19% $2.00 5/02/11 $2,342,588 $2,518,425 Chief Operating Officer Chris Lipp............................. 150,000(2) 4% $2.00 5/02/11 $ 520,575 $ 559,650 Senior Vice President and and General Counsel
26 (1) One fourth of the options follow the regular vesting schedule. Three fourths of the options vest based upon (Chris to provide details) (2) One third of the options vest and are exercisable one year from the date of grant. Thereafter, one eighth of the remaining options vest and are exercisable each three months until all optioned shares are vested. Aggregated Option Exercises in last Fiscal Year and Fiscal Year-end Option Values/SAR Values
Value of No. of Securities Unexercised Underlying Unexercised in-the-money Options/SAR's Options/SAR's No. of Shares at Fiscal Year-end at Fiscal Year-end Acquired Value Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - --------------------------- ------------- ----------- ----------- ------------- ----------- ------------- Brad D. Greenspan ......... -- -- 583,333 556,667 $ 738,000 $1,230,000 Brett C. Brewer ........... -- -- 737,500 587,500 $1,754,250 $1,695,750 Joseph L. Varraveto........ -- -- 116,667 283,333 $ 345,333 $ 851,167 Adam Goldenberg ........... -- -- 143,750 791,250 $ 179,375 $2,417,875 Chris Lipp ................ -- -- 129,167 270,833 $ 153,750 $ 696,750
Director Compensation Directors of eUniverse who are also employees or officers of eUniverse do not receive any compensation specifically related to their activities as directors, other than reimbursement for expenses incurred in connection with their attendance at Board of Directors meetings. On April 17, 2000, Daniel L. Mosher, for his first year of service as a non-employee director, received options for 63,750 shares of the Company's common stock, at market price per share at the date of grant, which vested on December 8, 2000, one year after the date that he became a director, and expire ten years after the date that he became a director. On January 22, 2001, for his second year of service as a non-employee director, Mr. Mosher received options for 25,000 shares of the Company's common stock, at market price per share at the date of grant, which vest one year after the date of grant and expire ten years after the date of grant. On January 22, 2001, Ryan A. Brant, for his first year of service as a non-employee director, received options for 73,750 shares of the Company's common stock, at market price per share at the date of grant, which vest one year from the date of grant and expire ten years after the date of grant. These options were cancelled upon Mr. Brant's voluntary resignation from the Board. On December 3, 2001, Thomas Gewecke, for his first year of service as a non-employee director, received options for 25,000 shares of the Company's common stock, at market price per share at the date of grant, which vest one year from the date of grant and expire ten years after the date of grant. For each board meeting they attend, non-employee directors are reimbursed for their expenses incurred in connection with their attendance at the meeting. Employment Agreements The Company currently has no employment agreements with any of its officers or Directors. Compensation Committee Interlocks and Insider Participation Prior to establishing the Compensation Committee, the Board of Directors as a whole performed the functions delegated to the Compensation Committee. No member of the Board of Directors or the Compensation Committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of eUniverse's Board of Directors or Compensation Committee. During eUniverse's fiscal year ending on March 31, 2002, the members of the Compensation Committee were Brad D. Greenspan, Brett C. Brewer, Daniel L. Mosher. Thomas Gewecke was elected to the Compensation Committee on October 26, 2001. Notwithstanding anything to the contrary set forth in any of eUniverse's previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might affect future filings, including this Form 10-K, the Compensation Committee Report on Executive Compensation set forth below, and the Stock Performance Graph set forth on page 29 in accordance with Securities Exchange Commission requirements, shall not be incorporated by reference into any such filings. 27 COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION General Decisions as to certain compensation of eUniverse's executive officers are made by the Compensation Committee of eUniverse's Board of Directors. Compensation Policies eUniverse's philosophy is to tightly link executive compensation to corporate performance and returns to stockholders. A significant portion of executive compensation is dependent upon the Company's success in meeting one or more specified goals and to the potential appreciation of the eUniverse common stock. Thus, a significant portion of an executive's compensation is at risk. The goals of the compensation program are to attract and retain exceptional executive talent, to motivate these executives to achieve the Company's business goals, to link executive and stockholders interests through equity-based plans, and to recognize individual contributions as well as overall business results. Each year the Compensation Committee conducts a review of the Company's executive compensation program. This review often includes data supplied by independent third party compensation consultants and is used to realign the Company's compensation programs to other comparable rapidly growing companies in the technology space. The key elements of eUniverse's executive compensation are generally base salary, bonus, stock options and benefits. The Compensation Committee's policies with respect to each of the elements are discussed below. While the elements of compensation are considered separately, the Compensation Committee also takes into account the complete compensation package provided by eUniverse to the individual executive. Base Salary. Base salaries for executive officers are determined by evaluating the responsibilities of the position and the experience of the individual, and by reference to the competitive marketplace for pertinent executive talent, including a comparison to base salaries for comparable positions at companies of similar size, complexity and within the same sector. Base salary adjustments are determined annually by evaluating the financial performance and, where appropriate, certain non-financial performance measures, of eUniverse, and the performance of each executive officer. Bonus. eUniverse's executive officers are generally eligible for annual and other cash bonuses. Individual and corporate performance objectives, both quarterly and annually, are established at the beginning of each fiscal year by the Compensation Committee. For fiscal 2002, the targets were based upon achieving certain profitability and operating free cash flow levels. A target amount payable was also established for each executive officer eligible for a particular bonus. The Compensation Committee also considers individual non-financial performance measures in determining bonuses. For fiscal 2003, the bonus structure was modified to enable an executive officer to achieve a higher bonus than the targeted amount should the performance goals be exceed by a certain percentage. Stock Awards Plan. The purpose of the eUniverse Stock Awards Plan is to provide an additional incentive to company employees to work to maximize stockholder value. To this end, the Compensation Committee grants to key executives stock options under the Company's 1999 Stock Awards Plan (the 1999 Plan) which generally vest (i.e., become exercisable) over a three-year period following the date of grant as follows: 33 1/3% on the first anniversary; and 1/12 each quarter thereafter. Options under the 1999 Plan are granted at the current market price, have a term of ten years from the date of grant, and subject to the above vesting restrictions, may be exercised at any time during such term. The 1999 Plan, which is administered by the Compensation Committee, was approved by the stockholders at the 2001 Annual Meeting. See table entitled Option Grants in Last Fiscal Year on page 26 summarizing options granted to each Named Executive Officer and vesting terms for each grant. Benefits. The benefits available to executive officers are the same as those afforded to all full-time employees, including medical, dental, death, disability coverage and a 401(k) plan. Chief Executive Officer Compensation The Compensation Committee determined the components of Mr. Greenspan's fiscal year 2002 compensation as follows: Base Salary. Mr. Greenspan's base salary of $170,000 was increased to $185,000 in September 29, 2001 to reflect changes in market conditions and complexities in the business and for performance for the previous twelve month period. Additionally, Mr. Greenspan was awarded a bonus of $95,000 for achieving certain operating objectives, primarily relating to revenue growth and profitability. Stock Awards Plan. Mr. Greenspan was awarded no additional stock options during fiscal 2002. Benefits. Mr. Greenspan was provided benefits under eUniverse's medical, dental, and disability plans consistent with those provided to other full-time employees. 28 As a member of the Compensation Committee, Mr. Greenspan participates in reviewing his annual salary and setting his bonus, subject to the review and approval of the Board of Directors. Other Executive Officers The compensation plans of most of eUniverse's other executive officers, including the persons listed in the Summary Compensation Table on page 26, provide for a base salary, bonus, option grants under eUniverse's 1999 Stock Awards Plan, and access to eUniverse's standard employee benefit plans. Submitted by the Compensation Committee of eUniverse's Board of Directors: Brad D. Greenspan, Daniel L. Mosher, Brett C. Brewer and Thomas Gewecke. PERFORMANCE GRAPH The following graph compares the yearly percentage change in eUniverse's cumulative total shareholder return on the Company's common stock to the cumulative total return of the Nasdaq Composite Index and a peer group of Internet stocks for the two fiscal years ended March 31, 2002. The peer group selected by Company consists of AOL, CNET Networks, Doubleclick, Overture and Yahoo. The graph assumes that the value of the investment in the Company's common stock and the comparison index was $100 on April 1, 2000 and assumes the reinvestment of dividends. The Company has never declared a dividend on its common stock. The stock price performance depicted in the graph below is not necessarily indicative of future price performance. PERFORMANCE DATA
Date EUNI Peer Group Nasdaq -------------------------------------------------- Apr-99 100.00 100.00 100.00 May-99 82.51 80.73 97.16 Jun-99 80.45 74.46 105.63 Jul-99 58.75 65.19 103.76 Aug-99 50.50 66.41 107.73 Sep-99 48.51 84.53 107.99 Oct-99 42.24 89.69 116.66 Nov-99 53.14 109.61 131.20 Dec-99 33.00 145.93 160.03 Jan-00 69.14 120.36 154.96 Feb-00 73.27 119.62 184.70 Mar-00 74.26 115.81 179.83 Apr-00 63.94 91.45 151.82 May-00 52.64 70.40 133.74 Jun-00 44.88 69.58 155.97 Jul-00 36.88 72.09 148.14 Aug-00 41.25 74.64 165.42 Sep-00 32.01 59.41 144.44 Oct-00 28.88 46.73 132.51 Nov-00 18.56 34.74 102.17 Dec-00 13.37 27.09 97.16 Jan-01 19.64 37.75 109.04 Feb-01 21.12 27.66 84.62 Mar-01 16.50 23.62 72.37 Apr-01 16.91 30.89 83.22 May-01 17.33 31.88 83.00 Jun-01 28.05 32.61 84.96 Jul-01 31.35 29.78 79.72 Aug-01 24.75 23.54 71.00 Sep-01 18.15 17.61 58.94 Oct-01 22.69 22.03 66.47 Nov-01 25.58 25.28 75.92 Dec-01 45.30 28.84 76.70 Jan-02 56.11 26.62 76.06 Feb-02 35.56 23.23 68.09 Mar-02 42.99 23.90 72.57
29 Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information as of May 31, 2002 with respect to the beneficial ownership of the Company's voting securities by the following individuals or groups: (a) each person who is known by eUniverse to own beneficially more than 5% of the Company's common stock, including our preferred stock on an as-converted basis, (b) each Director of eUniverse, (c) each Named Executive Officer (as defined below under the caption Compensation of Executive Officers) of eUniverse, and (d) all executive officers and Directors of eUniverse as a group.
Shares Percentage Beneficially Beneficially Name of Beneficial Owner Owned(1) Owned(2) - ------------------------ -------- -------- Brad D. Greenspan 8,469,334(3) 31.8% Brett C. Brewer 986,417(4) 3.7% Christopher S. Lipp 201,000(5) * Joseph L. Varraveto 152,167(6) * Adam Goldenberg 479,308(7) 1.8% Thomas Gewecke --(10) * Daniel L. Mosher 76,667(8) * 550 Digital Media Ventures, Inc. ("550 DMV") 5,289,231(9) 20.0% Directors and Executive Officers as a Group 10,364,893 39.2%(10)
* less than one percent. (1) Unless otherwise noted, all of the shares shown are held by individuals or entities possessing sole voting and investment power with respect to the shares. Shares not outstanding but deemed beneficially owned by virtue of the right of a person to acquire them within 60 days, whether by the exercise of options or warrants or the conversion of shares of preferred stock into shares of common stock, are deemed outstanding in determining the number of shares beneficially owned by the person or group. We are treating our Series A Preferred Stock and common stock as one class of voting securities because the holders of our Series A Preferred Stock have the right to vote their shares with the common stock on an as-converted basis. (2) The Percentage Beneficially Owned is calculated by dividing the Number of Shares Beneficially Owned by the total outstanding shares of common stock and preferred stock on an as-converted basis including shares beneficially owned by the person with respect to whom the percentage is calculated. (3) Includes 628,334 shares represented by options exercisable within 60 days. (4) Includes 785,417 shares represented by options exercisable within 60 days. (5) Includes 200,000 shares represented by options exercisable within 60 days. (6) Includes 133,167 shares represented by options exercisable within 60 days. (7) Includes 390,417 shares represented by options exercisable within 60 days. (8) Includes 74,167 shares represented by options exercisable within 60 days. (9) Includes 1,923,077 shares of Series B Preferred Stock on an as-converted basis. (10) Excludes attribution of beneficial ownership of shares owned by 550 DMV to Thomas Gewecke, who serves as a Director pursuant to 550 DMV's right of appointment, but who disclaims such beneficial ??????? 30 With respect to securities authorized for issuance under equity compensation plans, an aggregate of 9,000,000 shares of common stock have been reserved for issuance under the Company's 1999 Stock Award Plan.
Number of securities remaining available for Number of securities future issuance under to be issued upon Weighted-averages equity compensation exercise of exercise price of plans (excluding outstanding options, outstanding options, securities reflected in Plan Category warrants and rights warrants and rights column (a)) - ----------------------------------- ---------------------------------------------------------------------------- (a) (b) (c) Equity compensation plan approved by security holders......................... Options..................... 8,706,681 $3.16 293,319 Warrants..................... 2,079,901 $1.93 0 Preferred Stock conversion rights... 494,024 $6.00 0 ---------- ----- ------- 11,280,606 $3.06 293,319 Equity compensation plans not approved by security holders... 0 na 0 ---------- ----- ------- Total....................... 11,280,606 $3.06 293,319 ========== ===== =======
Item 13. Certain Relationships and Related Transactions. None. 31 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements. The following consolidated financial statements, and the related notes thereto, of eUniverse and the Report of Independent Auditors are filed as part of this Form 10-K. INDEX TO FINANCIAL STATEMENTS eUniverse, Inc. Financials......................................... F-1 - F-26 2. Financial Statement Schedules. Schedules not included herein are omitted because they are inapplicable or not required or because the required information is given in the consolidated financial statements and notes thereto. Separate financial statements of 50% or less owned subsidiaries accounted for by the equity method are not summarized herein and have been omitted because, in the aggregate, they would not constitute a significant subsidiary. 3. Exhibits. The Exhibits listed on the accompanying index to exhibits immediately following the signatures to this Form 10-K are filed as a part of, or incorporated by reference into, this Form 10-K. (b) Reports on Form 8-K. No Reports on Form 8-K were filed with the SEC by eUniverse during the last quarter of fiscal year 2002. 32 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS eUniverse, Inc. We have audited the accompanying consolidated balance sheets of eUniverse, Inc. and Subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of eUniverse, Inc. and Subsidiaries as of March 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Our audit referred to above included an audit of the financial statement schedule listed under item 14(a)(2). In our opinion, this financial statement schedule presents fairly, in all material respects, in relation to the financial statements taken as a whole, the information required to be stated therein. MERDINGER, FRUCHTER, ROSEN & CORSO, P.C. Certified Public Accountants New York, New York June 14, 2002 F-1 eUNIVERSE, INC. and Subsidiaries Consolidated Balance Sheets
March 31, March 31, 2002 2001 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents....................................... $8,007,784 $ 218,841 Accounts receivable, net of allowances for doubtful accounts of $452,239 and $123,000, respectively..... 5,022,745 2,676,675 Prepaid expenses .............................................. 1,488,069 491,553 Deferred charges and other current assets ..................... 551,100 440,061 ------------ ------------ Total Current Assets 15,069,697 3,827,130 FURNITURE AND EQUIPMENT, less accumulated depreciation of $563,120 and $264,383, respectively ......................... 2,293,836 902,004 GOODWILL, net of amortization of $545,769 and $7,404,624 respectively .................................... 12,298,241 4,739,981 OTHER INTANGIBLES, net of amortization of $649,803 and $160,559 respectively..................................................... 4,576,249 1,479,699 Deferred charges .................................................... 197,222 787,505 Deposits and other assets............................................ 142,407 142,812 ------------ ------------ TOTAL ASSETS $ 34,577,653 $ 11,879,131 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES Accounts payable............................................... $ 2,253,811 $ 2,870,997 Accrued expenses............................................... 4,153,122 2,592,745 Deferred Revenue............................................... 1,033,698 232,240 Notes payable.................................................. 3,010,918 3,760,209 Current maturities of notes payable, affiliates ............... 393,672 940,000 Capitalizable lease obligations, current....................... 28,028 - ------------ ------------ Total Current Liabilities 10,873,250 10,396,191 ------------ ------------ LONG-TERM DEBT 1,370,404 976,190 LONG-TERM DEBT AFFILIATES, LESS CURRENT MATURITIES 1,657,781 2,065,239 SHAREHOLDERS' EQUITY (DEFICIT) Preferred stock, $.10 par value; 40,000,000 shares authorized; 2,872,665 and 1,454,572 shares issued and outstanding, respectively....................... 287,267 145,457 Common stock, $.001 par value; 250,000,000 shares authorized; 23,542,219 and 18,817,502 issued and outstanding, respectively 23,542 18,815 Treasury stock.................................................. (36,000) - Additional paid-in capital...................................... 68,978,054 50,523,445 Deferred stock compensation cost................................ (211,874) (139,234) Retained deficit................................................ (48,364,771) (52,106,972) ------------ ------------ Total Shareholders' (Deficit)/Equity 20,676,219 (1,558,489) ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY $ 34,577,653 $ 11,879,131 ============ ============
The accompanying notes are an integral part of these financial statements. F-2 eUniverse, Inc. and Subsidiaries Consolidated Statements of Operations
Year Ended March 31, 2002 2001 2000 -------------- --------- -------- REVENUE $ 33,196,263 $ 15,668,203 $ 1,842,440 COST OF GOODS SOLD 6,920,507 1,606,493 153,950 GROSS PROFIT 26,275,755 14,061,710 1,688,490 OPERATING EXPENSES: Marketing and sales (excludes stock-based compensation of $0, $447,065, and $379,006 respectively)..... 5,554,193 8,299,799 1,441,570 Product development (excludes stock-based compensation of $0, ($19,656) and $37,326 respectively)...... 5,986,023 3,827,600 1,139,836 General and administrative (excludes stock-based compensation of $0, ($164,598) and $164,598 respectively).... 8,091,755 4,755,772 3,731,298 Amortization of goodwill and other intangibles......................................... 507,791 2,909,741 1,414,136 Stock-based compensation....................................... - 262,811 580,930 ---------- ---------- --------- TOTAL OPERATING EXPENSES........................................... 20,139,762 20,055,723 8,307,770 ---------- ---------- --------- OPERATING INCOME / (LOSS) 6,135,993 (5,994,013) (6,619,280) NONOPERATING INCOME (EXPENSE) Interest income................................................ 52,425 18,801 60,931 Interest and other financing expense........................... (577,457) (6,351,875) - Impairment of goodwill......................................... - (14,474,390) - Loss allocated to minority interest............................ 4,110 Other gains and losses......................................... (231,113) (320,682) - ---------- ---------- --------- INCOME / (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $5,379,849 (27,122,159) (6,554,239) INCOME TAXES...................................................... - - - ---------- ------------- ----------- INCOME / (LOSS) FROM CONTINUING OPERATIONS $5,379,849 $(27,122,159) $(6,554,239) ========== ============= =========== DISCONTINUED OPERATIONS: Loss from operations discontinued segment (net of applicable income taxes of $0)....................... 285,429 (13,917,167) (4,513,407) ---------- ------------- ----------- NET INCOME / (LOSS) $5,665,278 $(41,039,326) $(11,067,646) ========== ============= =========== Continuing operations earnings / (loss) per common share ......... $ 0.26 $ (1.50) $ (0.42) Discontinued operations earnings / (loss) per common share........ $ 0.01 $ (0.77) $ (0.29) ---------- ------------- ----------- Basic earnings / (loss) per common share.......................... $ 0.27 $ (2.27) $ (0.70) ---------- ------------- ----------- Diluted earnings / (loss) per common share........................ $ 0.21 na na ---------- ------------- ----------- Basic weighted average common shares outstanding............................................... 21,040,374 18,094,670 15,765,108 ---------- ------------- ----------- Shares outstanding for diluted earnings per share................. 27,539,459 na na ---------- ------------- -----------
The accompanying notes are an integral part of these financial statements. F-3 EUNIVERSE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK ADDITIONAL --------------------- ---------------------- PAID-IN RETAINED SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT TOTAL ------ --------- ------ --------- ------- ------- ----- Share issued to acquire option to purchase CD Universe................ -- $ -- 8,061,000 $ 8,061 $ 247,039 -- $ 255,100 Shares issued for merger related services............................ -- -- 1,539,000 1,539 47,145 -- 48,684 Shares issued pursuant to Rule 506 of Regulation D........................ -- -- 250,000 250 249,750 250,000 Shares issued pursuant to employment agreement........................... -- -- 200,000 200 6,036 -- 6,236 --------- -------- ---------- ------- ----------- ------------ --------- Balance, March 31, 1999.............. -- -- 10,050,000 10,050 549,970 -- 560,020 Sale of Preferred Stock.............. 1,795,024 179,502 6,282,584 6,462,086 Cost of offerings and issuance....... -- -- (2,184,449) (2,184,449) Shares issued in acquisition of eUniverse.com Website............... -- -- 15,000 15 59,985 60,000 Shares issued in acquisition of CD Universe, Inc.................... -- -- 2,425,000 2,425 7,272,575 7,275,000 Shares issued for services........... -- -- 392,436 392 500,206 500,598 Shares retained by former MCA Shareholders........................ -- -- 1,220,993 1,221 857,256 858,477 Shares issued in acquisition of Mega DVD................................. -- -- 4,605 4 52,496 52,500 Shares issued in acquisition of Cases Ladder, Inc......................... -- -- 700,000 700 6,999,300 7,000,000 Stock options issued in connection with acquisition of Cases Ladder, Inc................................. -- -- -- -- 1,111,100 1,111,100 Stock options issued in connection with services performed............. -- -- -- -- 67,248 67,248 Fair Value of the warrants issued.... -- -- -- -- 1,921,217 1,921,217 Shares issued in acquisition of Gamers Alliance, Inc................ -- -- 78,125 78 999,922 1,000,000 Additional Shares issued in acquisition of Gamers Alliance, Inc................................. -- -- 8,789 9 85,684 85,693 Shares issued to employees as compensation expense................ -- -- 42,506 42 269,561 269,603 Amortization of variable stock options issued to employees......... -- -- -- -- 207,010 207,010 Shares issued in acquisition of The Big Network, Inc.................... -- -- 1,440,000 1,440 8,818,560 8,820,000 Shares issued in acquisition of FunOne.com.......................... -- -- 8,733 9 49,991 50,000 Shares issued in acquisition of Falcon Ventures Corp................ -- -- 310,000 310 1,782,190 1,782,500 Shares issued in acquisition of PokemonVillage.com.................. -- -- 43,630 44 379,456 379,500 Shares issued in acquisition of JustSayWow.com...................... -- -- 11,976 12 99,988 100,000 Additional Shares issued in acquisition of Gamers Alliance, Inc................................. -- -- 8,789 9 51,626 51,635 Additional Shares issued in acquisition of The Big Network, Inc................................. -- -- 269,840 270 1,652,500 1,652,770 Shares issued to Take2 Corporation... -- -- 600,000 600 3,599,400 3,600,000 Stock options issued in connection with affiliate agreements........... -- -- -- -- 123,652 123,652 Net loss for the twelve months ended March 31, 2000...................... -- -- -- -- (11,067,646) (11,067,646) --------- -------- ---------- ------- ----------- ------------------------ Balance at March 31, 2000............ 1,795,024 179,502 17,630,422 17,630 41,609,028 (11,067,646) 30,738,514 Conversion of Preferred to common stock............................... (340,452) (34,045) 481,068 482 557,936 524,373 Cost of offering Stock conversion.... (524,373) (524,373) Additional Shares issued in acquisition of The Big Network, Inc................................. -- -- 90,160 90 552,140 552,230 Additional Shares issued in acquisition of Gamers Alliance, Inc................................. -- -- 19,531 19 103,493 103,512 Shares issued to employees as compensation expense................ -- -- 98,274 97 513,276 513,373 Less: Deferred stock compensation cost................................ -- -- (139,234) (139,234) Shares issued in acquisition of websites............................ -- -- 217,269 216 687,284 687,500 Shares issued in connection with services performed.................. -- -- 161,127 161 360,879 361,040 Shares issued in connection with financing activities................ -- -- 100,000 100 262,400 262,500 Shares issued in connection with assets purchased.................... -- -- 19,651 20 38,120 38,140 New shares to be issued to Isosceles........................... -- -- -- -- (212,500) (212,500) Cost of offering Warrants issued to preferred shareholders.............. -- -- -- -- (179,870) (179,870) Reversal of repriced employee options............................. -- -- -- -- (207,011) (207,011) Options issued to websites for right of first refusal.................... -- -- -- -- 71,115 71,115 Warrants issued in connection with financing activities................ -- -- -- -- 5,769,262 5,769,262 Warrants issued in connection with services to be performed............ -- -- -- -- 830,345 830,345 Options issued in connection with services performed.................. -- -- -- -- 291,921 291,921 Net loss for the twelve months ended March 31, 2001...................... -- -- -- -- (41,039,326) (41,039,326) --------- -------- ---------- ------- ----------- ------------ ----------- Balance at March 31, 2001............ 1,454,572 145,457 18,817,502 18,815 50,384,211 (52,106,972) (1,558,489) --------- -------- ---------- ------- ----------- ------------ ----------- --------- -------- ---------- ------- ----------- ------------ -----------
Preferred Stock Common Stock -------------------------- ----------------------- Shares Par Value Shares Par Value ---------------------------------------------------- Balance as of 3/31/01 1,454,572 145,457 18,817,502 18,815 Acquisition of eGames 30,349 30 Shares issued to the employee of Funpageland.com as compensation expense........................... - 7,992 8 Additional Shares issued in acquisition of Gamers Alliance, Inc.............................................. - 60,547 61 Shares issued in acquisition of ratedfun.com ..................................................... - 8,480 8 Shares issued to the employee of Send4Fun.com as compensation expense.............................. 17,000 17 Additional Shares issued in acquisition of Spreadingjoy.com ................................................. 26,595 27 Converv of Preferred to common stock (504,984) (50,497) 954,273 956 Cost of offring Stock conversion Exercise of Consultant Options 65,104 65 Exercise of Employee Options 25,000 25 Exercise of Warrants 128,223 128 Frank Westall shares to be cancelled in payment of note.............. Frank Westall shares re-issued in connection with note............... Ed Hilts shares to be cancelled in payment of note................... New common stock issued for InfoBeat 3,058,461 3,058 New common stock issued for Sony Warrant Redemption 307,693 308 Cancellation of Sony Warrants New preferred stock issued in connection with the Sony Transaction 1,923,077 192,308 Beneficial conversion of Sony preferred stock issued below market New Warrants issued to Preferred shareholders in connection with Sony transaction ................................................. New Warrants issued in connection with services to be performed (ZA Associates)..................... Options granted to consultant........................................ New warrants issued in connection with services to be performed...... New warrants issued to G. and R. Whitten............................. Big Network Settlement 50,000 50 New shares to be issued to Isosceles................................. -- 85,000 85 Take 2 Settlement Agreement (100,000) (100) - - Net income for the twelve months ended March 31, 2002 ---------------------------------------------------- Balance as of March 31, 2002 2,872,665 287,267 23,542,219 23,542 ==================================================== Additional Paid-in Retained Treasury Stock Capital Deficit Total ------------------------------------------------------- Balance as of 3/31/01 50,384,211 (52,106,972) (1,558,489) ------------------------------------------------------- Acquisition of eGames 99,970 100,000 Shares issued to the employee of Funpageland.com as compensation expense........................... 24,992 25,000 Additional Shares issued in acquisition of Gamers Alliance, Inc.............................................. 403,515 403,576 Shares issued in acquisition of ratedfun.com ..................................................... 18,742 18,750 Shares issued to the employee of Send4Fun.com as compensation expense.............................. 43,733 43,750 Additional Shares issued in acquisition of Spreadingjoy.com ................................................. 74,973 75,000 Converv of Preferred to common stock 421,436 371,895 Cost of offring Stock conversion (371,894) (371,894) Exercise of Consultant Options (65) - Exercise of Employee Options 85,925 85,950 Exercise of Warrants (128) - Frank Westall shares to be cancelled in payment of note.............. (34,000) (34,000) Frank Westall shares re-issued in connection with note............... 6,000 6,000 Ed Hilts shares to be cancelled in payment of note................... (8,000) (8,000) New common stock issued for InfoBeat 9,936,942 9,940,000 New common stock issued for Sony Warrant Redemption 999,693 1,000,000 Cancellation of Sony Warrants (1,000,000) (1,000,000) New preferred stock issued in connection with the Sony Transaction 4,807,693 5,000,000 Beneficial conversion of Sony preferred stock issued below market 1,923,076 (1,923,076) - New Warrants issued to Preferred shareholders in connection with Sony transaction ................................................. 110,074 110,074 New Warrants issued in connection with services to be performed (ZA Associates)..................... 293,344 293,344 Options granted to consultant........................................ 84,528 84,528 New warrants issued in connection with services to be performed...... 82,319 82,319 New warrants issued to G. and R. Whitten............................. 25,638 25,638 Big Network Settlement 104,950 105,000 New shares to be issued to Isosceles................................. 212,415 212,500 Take 2 Settlement Agreement 100 - - - - Net income for the twelve months ended March 31, 2002 5,665,278 5,665,278 ------------------------------------------------------- Balance as of March 31, 2002 (36,000) 68,766,181 (48,364,771) 20,676,219 =======================================================
See accompanying notes to the financial statements. F-4 eUNIVERSE, INC. AND SUBSIDIARIES Consolidated Statements of Cash flows
Year Ended March 31, --------------------------------------------- 2002 2001 2000 ---- ---- ---- OPERATING ACTIVITIES Net income (loss) ......................................... $ 5,665,278 $(41,039,326) $(11,067,646) Transactions not requiring cash: Depreciation ........................................... 299,904 243,333 143,955 Amortization ........................................... 507,791 3,520,547 2,440,038 Impairment of goodwill ................................. -- 14,474,390 -- Loss from discontinued operations ...................... -- 9,871,155 -- Bad Debts .............................................. 423,554 460,962 59,039 Non-cash employee compensation ......................... -- 262,811 373,920 Loss on write-off of investment ........................ 20,000 320,684 Amortization of variable stock option issued to employees ......................... -- (207,011) 207,010 Stock and warrants granted to outside consultants and affiliates ................. 517,134 397,491 567,204 Non-cash financing related costs ....................... 129,056 5,763,891 -- Loss allocated to minority interest .................... -- -- (4,110) Changes in current assets.................................. (3,452,808) (80,330) (1,763,158) Changes in current liabilities............................. 2,521,734 (1,975,986) 5,809,149 Others..................................................... 544,841 104,822 -- ---------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,176,485 (7,882,566) (3,234,599) ---------- ----------- ----------- INVESTING ACTIVITIES Proceeds through acquisitions ............................. -- -- 330,983 Proceeds through reverse acquisition ...................... -- -- 858,477 Proceeds through sale of assets ........................... -- 1,000,000 -- Changes in other assets ................................... -- (257,200) (907,115) Purchases of fixed assets.................................. (1,673,069) (463,959) (899,287) Purchases of intangible assets............................. (1,501,859) (113,711) (2,015,000) ---------- ----------- ------------ NET CASH USED IN INVESTING ACTIVITIES (3,174,929) 165,130 (2,631,942) ---------- ----------- ------------ FINANCING ACTIVITIES Proceeds from issuance of common stock .................... -- -- 2,505,000 Payment to repurchase common stock ........................ -- -- (20,000) Financing costs............................................ -- -- (6,672) Advance from officer ...................................... -- -- 157,769 Repayment of advances from officer......................... 34,000 -- (105,000) Repayment of loan from affiliates.......................... -- -- (74,808) Proceeds from short term notes............................. -- 5,326,114 -- Repayment of short term notes.............................. (3,038,543) (1,613,775) -- Proceeds from long term notes.............................. 2,262,866 1,815,851 -- Repayment of long term notes............................... (470,936) Proceeds from sale of preferred stock...................... 5,000,000 -- 5,875,204 Proceeds from sale of options.............................. -- 85,000 -- Advances to Employees...................................... -- -- (153,200) ---------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 3,787,386 5,613,190 8,178,293 ---------- ----------- ----------- CHANGE IN CASH AND CASH EQUIVALENTS ........................... 7,788,942 (2,104,246) 2,311,752 Cash and cash equivalents, beginning of period................. 218,841 2,323,087 11,335 ---------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... 8,007,784 $ 218,841 $ 2,323,087 =========== ========== =========== CASH PAID DURING THE YEAR FOR: Interest Expense........................................... $ 232,233 $ 218,841 $ -- =========== ========== =========== Income taxes............................................... $ -- $ -- $ -- =========== ========== ===========
The accompanying notes are an integral part of these financial statements. F-5 eUNIVERSE, INC. Statements of Cash flows
Year Ended March 31, --------------------------------------------- 2001 2001 2000 ----------------------------- ------------ OTHER NON-CASH FINANCIAL ACTIVITIES Stock issued in connection with acquisitions: Acquisition Big Network................................................ 552,230 10,472,770 Acquisition Gamer's Alliance........................................... 403,576 103,513 1,137,328 Acquisition of CD Universe............................................. - 7,275,000 Acquisition Cases Ladder............................................... - 7,000,000 Acquisition of debsfunpage.com......................................... - 1,782,500 Acquisition Falcon Ventures............................................ - Acquisition of eUniverse.com website(1)................................ - 60,000 Acquisition of MegaDVD.com(1).......................................... - 52,500 Acquisition of FunOne.com(1)........................................... - 124,319 50,000 Acquisition of Pokemonvillage.com...................................... - 379,500 Acquisition of Justsaywow.com.......................................... - 225,000 100,000 Acquisition of Funpageland.com......................................... - 25,000 Acquisition of DustCloud.com........................................... - 150,000 Acquisition of Deb's FunPages.com...................................... 50,000 Acquisition of eGames.com.............................................. 100,000 Acquisition of ratedfun.com............................................ 18,750 37,500 Acquisition of send4fun.com............................................ - 300,000 Acquisition of spreadingjoy.com........................................ 75,000 150,000 Stock issued in connection with the preferred stock offering, 319,000 shares.................................................. - 159,500 Amortization of variable stock options issued to employees.................. - (207,010) 207,010 Stock issued in connection with services performed, shares.................. - 331,098 10,000 Stock issued to employees, 42,506 shares.................................... 269,603 Shares issued to Isosceles(2)............................................... 212,500 (212,500) Stock options issued in connection with the acquisition of Cases Ladder shares.................................................... - 1,111,100 Shares returned to treasury in payment of amounts due from employees............................................................ (36,000) Stock issued for legal services in connection with Big Network settlement agreements ........................................ 105,000 Warrants issued in connection with placement agent services................. - 1,214,567 Stock issued in connection with services performed.......................... 43,750 Stock issued to employees, 7,992 and 59,447 shares respectively............. 25,000 Warrants issued in connection with Affiliate agreements..................... 93,989 Stock options issued in connection with services performed and to be performed............. ......................................... 72,640 67,248 Stock options issued in connection with affiliate agreements................ - 71,115 123,652 Shares issued to Take 2 Corporation in connection with services............. - 262,500 1,600,000 Fair value of warrants issued............................................... - 6,599,607 Warrants issued in connection with financing activities (see Notes Payable section) .............................................. - Shares issued in connection with services performed......................... - 361,040 Shares issued in connection with assets purchased .......................... - 38,140 Warrants issued in connection with services performed and to be performed ......................................................... - 291,922 312,878 Warrants issued in connection with services performed and to be performed(1) ...................................................... 401,419 Warrants issued to preferred shareholders................................... 110,073 299,783 Stock issued in connection with purchase of Infobeat from 550 DMV(3) ......................................................... 9,940,000 Warrants cancelled that were issued to 550 DMV(3) .......................... 1,000,000 Stock issued in connection with 550 DMV warrant cancellation(3) ............ (1,000,000) Issuance of below market preferred shares to 550 DMV in connection with Sony purchase agreement(3) .............................. 1,923,076 Beneficial conversion of below market preferred shares to 550 DMV(3) ........................................................... (1,923,076) 8,922,376 34,110,026
(1) The Company agreed to a two year investor realtions services agreement that commenced on April 4, 2001. As consideration forthese services, the Company issued warrants for 300,000 shares of the Compnay's common stock with an exercise price of $1.25. The warrants have been valued at $293,462 in the financial statements using the Black-Scholes model with a risk-free rate of 5.75%, a volatility of 128% with no expected dividend yield and a life of two years. The warrants expire on 4/3/2003. (2) Shares issued in satisfaction of settlement agreement February 2, 2001 with the Isosceles Fun Limited. (3) 550 Digital Media Ventures (Sony) share purchase agreement as previously disclosed The accompanying notes are an integral part of these financial statements. F-6 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 (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 content and certain proprietary products and services. During the reporting period, the Company had two primary reporting segments: (1) Media/Advertising, and (2) Products and Services. The Company conducts operations from facilities located in Los Angeles, CA; San Francisco, CA; New York, NY and Mount Vernon, WA. The financial statements being presented include the accounts of eUniverse, Inc. and its wholly owned subsidiaries. Prior to fiscal 2002, the Company engaged in sales of audio CDs, videotapes (VHS), and digital videodisks ("DVDs") over the Internet. This business was discontinued in October 2000. All significant inter-company transactions and balances have been eliminated in consolidation. 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 owned approximately 91.6 percent of MCA after the reverse acquisition. The Company acquired CD Universe on April 14, 1999, a company whose business was selling compact audio CDs, videotapes and DVDs over the Internet (see Note 4 - Business Combinations). Subsequent to this, MCA changed its name to eUniverse, Inc. (2) ACCOUNTING POLICIES 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 service revenue upon fulfillment and delivery of customer's advertising. Additionally, the Company derives revenue from the sale of non-refundable memberships and sponsorships that are recognized ratably as earned. The Company also earns revenue from services and electronic commerce transactions. Service revenue includes fees from the sale of non-refundable memberships and sponsorships that are recognized ratably as earned. Service revenue also includes fees from the sale of non-refundable dating credits, which are recognized at the time of purchase. These credits are utilized in the Company's dating service. Electronic commerce transactions include, but are not limited to, sales of laser and inkjet printer supplies. For these transactions, the Company recognizes revenue upon shipment of its products. Revenue includes shipping and handling charges. Fulfillment for these products is outsourced to an independent third party. Barter transactions are recorded at the lower of the estimated fair value of advertisements received or the estimated fair value of the advertisements given with the difference recorded as an advance or prepaid. During the years ended March 31, 2002, 2001 and 2002 the Company recorded $645,000, $499,000 and $266,000 as bartered advertising revenue, respectively. With respect to the discontinued e-commerce operations, the Company recognized revenue upon shipment of its products. Revenue included shipping and handling charges. The Company also maintained a partner program whereby partners provided links on their Web sites that brought customers to the CD Universe Web site. Revenue generated from these linked sites was recognized upon shipment of the products. The partner received a commission of 5% to 15% of sales of the Company's products that originated from the site, recognized as a selling expense concurrent with the sale. ADVERTISING AFFILIATES AGREEMENTS The Company has entered into advertising affiliate agreements under which minimum advertising payments are guaranteed to the affiliates in return for obtaining the exclusive right by the Company to sell sponsorships on the affiliates' Web sites. Sponsorship is defined by these agreements as advertising such as banners, buttons and pop-up windows of third parties on the affiliates' Web sites. The fees payable to the affiliates are accrued as cost of advertising revenue in the period that such revenue is earned. F-7 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 ROYALTY PAYMENTS The Company had agreements to share revenue with individuals independent of the Company. The Company was 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 generated advertising revenue, a corresponding liability was accrued and was recorded as a cost of revenue (see Note 13 - Accrued Expenses). COMPARATIVE PERIODS Prior period financial statements have been restated to conform to the current period presentation in regard to the presentation of results from discontinued operations and for certain reclassifications related to current period continuing operations. 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. DEFERRED CHARGES Deferred charges consist of the unamortized fair value of warrants or options issued principally in connection with the securing of financing, investor relations services and online advertising and are amortized over service periods generally ranging from one to three years. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred. Estimated useful lives are as follows: Leasehold improvements......................... Life of the lease Computer equipment............................. 5 years Telephone equipment............................ 5 years Computer software.............................. 5 years Furniture, fixtures and other.................. 10 years
INTANGIBLE ASSETS Intangible assets consist of goodwill, customer lists, and domain names. Excess cost over the fair value of net assets acquired (or goodwill) was amortized on a straight-line basis over 5 years effective January 1, 2001. These assets will be assessed for impairment annually or upon an adverse change in operations. Customer lists and certain domain names are being amortized on a straight-line basis over a period of 5 years. Through December 31, 2000 goodwill and domain names were amortized over 10 years. Effective April 1, 2001, the Company adopted SFAS 141 and SFAS 142. Should events or circumstances occur subsequent to the acquisition of a business which bring into question the realization or impairment of the related goodwill, the Company will evaluate the remaining useful life and balance of goodwill and make adjustments, if required. The Company's principal consideration in determining an impairment includes the strategic benefit to the Company of the particular assets as measured by undiscounted current and future operating income of that specified group of assets and expected undiscounted cash flows. Should an impairment be identified, a loss would be reported to the extent that the carrying value of the related goodwill exceeds the fair value of that goodwill as determined by discounted future cash flows. ORGANIZATION COSTS In accordance with American Institute 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. F-8 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 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 amounts 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 values 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. Notes payable carrying values approximate fair value as the notes were negotiated at available market rates or interest imputed at available market rates for notes with unstated interest. COMPREHENSIVE INCOME The Company has adopted SFAS 130, Reporting Comprehensive Income. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. There are no items of other comprehensive income (loss) for the years ended March 31, 2002, 2001, and 2000. 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. During the years ended March 31, 2002 and 2001 advertising expense from continuing operations amounted to $1,551,870 and $1,526,859, respectively. The Company had no direct-response advertising during the periods presented. EARNINGS PER SHARE The computation of basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect. Securities that would have potentially diluted basic earnings per share that were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive are as follows:
March 31, 2002 2001 2000 ------ ------ ---- Convertible debt..................... 311,560 Convertible preferred stock.......... -- 1,454,572 1,795,024 Warrants............................. -- 3,100,146 1,026,677 Options ............................. 16,678 6,694,439 4,037,594 ------- ---------- --------- Total................................ 328,238 11,249,157 6,859,295 ======= ========== =========
F-9 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 (3) DISCONTINUED OPERATIONS In September 2000, the Company decided to discontinue its e-commerce operations. This segment consisted of the sale of CD's, DVD's and videotapes, and computer games. The sale of the assets relating to this segment was consummated on October 10, 2000. The assets were sold to CLBL, Inc. a Connecticut corporation owned by a significant shareholder of the Company. The proceeds from the sale consisted solely of a note receivable from the purchaser in the amount of $1,000,000. The purchaser has paid off this note, in its entirety, as of the date of these statements. The revenue from the discontinued operations for the twelve months ended March 31, 2001 and 2000 was $4,382,634 and $9,091,757 respectively. Major assets disposed of consist of the following approximate values (in $000's): Net goodwill, $9,576; net customer list, $167; net domain names, $108; net fixed assets, $610; merchandise inventory $350; and prepaid expenses of $65. As a result of this discontinuance, the consolidated financial statements of eUniverse, Inc. and the related notes to the consolidated financial statements and supplemental data have been restated to reflect the results of operations and assets of the e-commerce segment of business as a discontinued operation in accordance with generally accepted accounting principles. The loss on disposal of the e-commerce segment was approximately, $9.9M. This loss provided for reserves necessary to write down assets disposed of to their net realizable values. (4) BUSINESS COMBINATIONS In December 2001, the Company purchased the assets of VIZX Corporation, which held assets known on the Internet as eMusicGames.com and SportsTriviaClub.com. The Company agreed to pay $100,000 valued in common stock, $150,000 cash, and a portion of net income generated from the assets starting either 4 months after the closing date, or 30 days after gross revenues exceed $100,000, and ending 60 months thereafter. The total aggregate acquisition price, shall not exceed $10.15 million. In October 2001, the Company purchased the assets of Hobbyrat.com. The Company agreed to pay a portion of net revenue generated from the assets starting 30 days after the closing date, and ending 12 months thereafter. Should the amount of the seller's portion of the net revenue be less than $50,000 at the end of 12 months, the seller has the right to repurchase the assets at a bargain price unless the Company pays to the seller the difference between $50,000 and the revenue collected by the seller. In October 2001, the Company purchased the assets of FitnessHeaven.com. The Company agreed to pay a portion of net revenue generated from the assets starting 30 days after the closing date, and ending 21 months thereafter. The total payments shall not exceed $1.3 million, and should the amount of the seller's portion of the net revenue be less than $110,000 at the end of 21 months, the seller has the right to repurchase the assets at a bargain price unless the Company pays to the seller the difference between $110,000 and the revenue collected by the seller. In July 2001, the Company purchased the assets and web site of expage.com for $240,000 to be paid in installments of $10,000 per month over a 24 month period. In addition to the purchase, the Company agreed to pay a portion of net revenue generated from the web site over the next 24 months. Should the amount of the seller's portion of the net revenue be less than $110,000 at the end of 24 months, the Company will pay the seller monthly payments of the greater of 10% of net monthly revenues or $10,000 until the seller has received $110,000. On July 13, 2001, the Company entered into a Share Purchase Agreement with 550 Digital Media Ventures, Inc. (the Investor), a subsidiary of Sony Music Entertainment, Inc., for the purchase of web site and other assets owned by Indimi, LLC(Indimi), known as the InfoBeat Business (InfoBeat) in a business combination accounted for as a purchase. The purchase price of $9.94 million exceeded the fair value of the net assets of InfoBeat by an estimated $8.1 million. In connection with the Share Purchase Agreement, the Company also agreed to redeem a warrant issued to the Investor through the issuance of the Company's common stock valued at $1 million. The Company will test the amount of purchased goodwill and other intangibles for impairment on annual basis or upon the occurrence of an adverse event in accordance with SFAS 141 Business Combinations and SFAS 142 Goodwill and Other Intangible Assets, which were approved in July 2001. The results of operations of Indimi will be included with the results of the Company from July 13, 2001. Simultaneously with the execution of the Share Purchase Agreement with the Investor, the Company entered into a Stock Purchase Agreement by which the Investor agreed to invest $5 million in the Company in exchange for issuance by the Company of shares of Series B Senior Convertible Preferred Stock, at a purchase price of $2.60 per share. Further information on this transaction and certain related transactions are included in the Recent Transactions section of the Company's Form 10-K/A for fiscal year 2001 filed on July 30, 2001. F-10 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 As part of this transaction, the secured promissory note due the investor with a current balance of $2,289,764 was extended to March 31, 2003. The Company may convert this note to preferred shares or common stock, subject to certain conditions. The Company completed its acquisition of Indimi, L.L.C. and Infobeat and the associated preferred stock issuance for $5 million on October 23, 2001. Please see the Form 8-K filed on November 7, 2001 for specific details of the transaction. Between July 13, 2001, the date of the share purchase agreement and October 23, 2001, the Company and 550 Digital Media Ventures entered into an interim operating agreement. The Company had control over the assets of Indimi during this period as a result. In June 2001, the Company acquired the website and technology assets of Funbug.com for a purchase price of approximately $200,000 that will be paid based on a percentage of revenues. At the end of 30 months, in the event that $200,000 is not paid to the seller, the Company may, at its option, pay the remainder of the $200,000 to the seller or sell the assets back to the seller for $1. The estimated fair value of tangible and identifiable intangibles is $0 and the purchase price has been allocated to goodwill. Total goodwill recorded through acquisitions has been amortized on a straight-line basis over ten years through December 31, 2000. Effective beginning with the quarter ended March 2001, the Company revised the amortization period to five years. On April 1, 2001, the Company adopted SFAS 141 and 142. (see Note 2 - Accounting Policies, Intangible Assets). The Company will no longer amortize goodwill or intangibles with indefinite lives. The operations of the acquired entities have been included in the statements of operations from the dates of acquisition. Had the acquisition occurred at the beginning of the period, there would have been no change to revenue, net income or earnings per share for the period. During the year ended March 31, 2002, the estimated fair value of assets acquired and liabilities assumed is summarized as follows:
eGames Expage Hi-Speed Media Infobeat IntelligentX ---------------------------------------------------------------------- Fixed assets - computers $17,500 Customer lists 240,000 633,130 360,000 400,000 Domain & trade names, logos 50,000 1,500,000 License agreement Platform technology 50,000 Web site content, databases 25,000 Capitalized lease obligation (28,028) Goodwill 135,528 8,080,000 ---------------------------------------------------------------------- Total $250,000 $240,000 $633,130 $9,940,000 $400,000 Others -------- Fixed assets - computers Customer lists 14,163 Domain & trade names, logos License agreements 315,000 Platform technology Web site content, databases Capitalized lease obligation Goodwill -------- Total $329,163
Total goodwill recorded through the acquisitions is $7,672,732 and will be tested annually for impairment. During the year ended March 31, 2001, the Company acquired certain Web sites including FunnyGreetings, Send4Fun, SpreadingJoy, DebsFunPages, RatedFun, and DustCloud. The Company also made investments in Email Shows and Moviemaker for $250,000 and $30,584, respectively, which were accounted for using the cost method.
Goodwill Domain Names Total -------- ------------ --------- FunnyGreetings.............. $1,380,000 $ 500,000 $1,880,000 Send4Fun.................... 487,500 162,500 650,000 SpreadingJoy................ -- 300,000 300,000 Deb's Funpages............. 187,500 62,500 250,000 RatedFun................ -- 175,000 175,000 DustCloud................ 110,000 40,000 150,000 Others................... -- 26,500 26,500 ---------- ---------- ---------- $2,165,000 $1,266,500 $3,431,500 ========== ========== ==========
F-11 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 PRO FORMA INFORMATION The operations of the acquired entities have been included in the statements of operations from the dates of acquisition. Pro forma information as if the foregoing acquisitions had occurred at the beginning of the period presented is as follows:
PRO FORMA YEAR ENDING March 31, 2002 -------------- Revenue................................ $33,680,928 Net income.............................. 2,729,537 Income per weighted average common share $ .12 Income per diluted share .......... $ .10
(5) AMORTIZATION AND IMPAIRMENT OF INTANGIBLE ASSETS The net carrying value of goodwill and other intangibles recorded through acquisitions is $6,219,680 as of March 31, 2001 and $16,940,490 as of March 31, 2002. Effective April 1, 2001, the Company adopted SFAS 141 and SFAS 142. These assets are being assessed for impairment at least annually or upon an adverse change in operations. The assets were amortized on a straight-line basis over five years effective beginning January 1, 2001. Prior to that date, the Company amortized goodwill and other intangibles on a straight-line basis over ten years. The Company evaluated the reduction in goodwill amortization periods based on management's assessment of future cash flows and the practice of other firms in the Internet industry. Since March 31, 2001, the Company has not noted any material adverse events that could cause an impairment of the net carrying value of goodwill or other intangible assets as of March 31, 2002. The following are the goodwill and other intangible assets that will no longer be amortized:
March 31, ------------------------- 2002 2001 ------------------------- Intangible Assets $ 1,473,302 $1,479,699 Goodwill 12,298,241 4,739,981 ------------------------- Total $13,771,543 $6,219,680
The operations of acquired entities are included in the statement of operations from the dates of acquisition. The Company has assessed the value of its goodwill and other intangibles as of March 31, 2001. Reviews were performed on its subsidiaries, Big Network and Case's Ladder, and the enterprise as a whole. Events triggering this review included the closure of the Big Network due to declining Web site traffic, and the obsolescence and reduced need of Big Network customer service technology following the discontinuation of operations of the e-commerce subsidiary CD Universe in October 2000. The Company's decision to place Case's Ladder for sale was based on a decline in Web site traffic and the lack of synergy with other Company services and markets. Valuations were based upon discounted cash flows and a review of comparable companies. The Company determined the amount of the impairment charge by comparing the carrying values of goodwill and related intangible assets such as domain name rights to their fair values. As a result of this review, the intangibles related to Big Network were written-off with an impairment charge of $9,097,730, its pre-impairment carrying value as of March 31, 2001. Case's Ladder was reduced from a pre-impairment value of $6,406,660 to a revised value of $1,030,000 with an impairment charge of $5,376,660. Since that time, the sales and prospects of Case's Ladder have improved substantially and eUniverse intends to maintain its investment in Case's Ladder for the foreseeable future. Based on a separate review of investments in Email Shows and Moviemaker, Email Shows was revalued to $20,000 from a purchase price of $250,000. The investment in Moviemaker of $30,584 was written off due to the investment's limited resources and prospects. During the year ended March 31, 2002, the remaining carrying value of the $20,000 Email Shows investment was written off. F-12 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 (6) FIXED ASSETS Fixed assets, at cost, consist of the following:
March 31, ----------------------------- 2002 2001 ----------------------------- Furniture and fixtures $26,593 $25,575 Computers and equipment 2,568,297 898,519 Purchased software 262,067 242,293 ----------------------------- 2,856,957 1,166,387 Less: accumulated depreciation (563,120) (264,383) ----------------------------- Fixed assets, Net $2,293,836 $902,004 =============================
Accumulated amortization of purchased software as of March 31, 2002 and March 31, 2001, is $109,658 and $61,028, respectively. Depreciation expense for the reporting periods were as follows:
Year Ended March 31, 2002 2001 2000 -------- -------- ------- Depreciation expense $299,904 $243,334 $143,955
(7) OTHER INTANGIBLES Other Intangibles consist primarily of the cost of Web site domain names and customer lists acquired:
March 31, ------------------------------ 2002 2001 ------------------------------ Expage.com domain name $240,000 License agreements $315,000 Mailing list names 633,130 Infobeat customer names 360,000 Infobeat domain name 1,500,000 IntelligentX customer names/domain name 400,000 eGames platform technology 50,000 eGames tradenames, logos, URLs 50,000 eGames Web site content, databases 25,000 Other 14,163 ------------------------------ $3,587,294 $0 Less: accumulated amortization (484,347) ------------------------------ Other Intangibles, Net $3,102,947 $0 ==============================
The above Web sites are valued at their fair value based on management's judgment and are being amortized on a straight-line basis over the period of five years. Customer lists, which were part of e-commerce operations that were discontinued in October 2000 were amortized on a straight-line basis over a period of three years. Amortization expense for goodwill and intangible assets for the years ending March 31, 2002, 2001 and 2000 was $507,791, $2,909,741, and $1,414,136 respectively. F-13 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 (8) PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses consist of the short-term portion of the fair value of warrants or options issued or cash payments made in advance for marketing or other services to be rendered as follows:
March 31, --------------------------- 2002 2001 ----------------------------- Co-marketing agreement shares $326,700 $695,600 Prepaid eGames advance $300,000 Prepaid marketing expenses 107,142 26,900 Prepaid investment banking expenses 23,333 46,666 Prepaid investor relations expenses 9,677 22,579 Prepaid licensing agreements 242,521 Prepaid insurance, advances & other 141,604 62,942 Prepaid inventory 337,092 ----------------------------- 1,488,069 854,687 Less: Non-current portion Co-marketing agreement shares (326,500) Prepaid investment banking expenses (23,333) Prepaid investor relations expenses (13,301) ----------------------------- Total $1,488,069 $491,553 =============================
(9) DEFERRED CHARGES Deferred charges consist of the short-term portion of the unamortized fair value of warrants or options issued principally in connection with the securing of financing and investor relations services. Options issued to advertising affiliates for continued online advertising services are also included. All such options and warrants have been valued using the Black-Scholes method option pricing model (see also Note 15 - Warrants).
March 31, --------------------------- 2002 2001 --------------------------- Options: Advertising network affiliates $0 $22,708 Consultants Warrants: Granted for services 748,322 841,724 --------------------------- 748,322 864,432 Less: Non-current portion Options granted to advertising network 0 (1,687) Options granted to consultants Warrants granted for services (197,222) (422,684) --------------------------- Total $551,100 $440,061 ===========================
(10) INCOME TAXES The components of the provision for income taxes for the year ended March 31, 2002 and 2001 are as follows:
2002 2001 ---- ---- Current tax expense U.S. Federal....................................... $ -- $ -- State and local.................................... -- -- -------- -------- Total current........................................... -- -- -------- -------- Deferred tax expense U.S. Federal....................................... -- -- State and local.................................... -- -- -------- -------- Total deferred.......................................... -- -- -------- -------- Total tax provision from continuing operations.......... $ -- $ -- ======== ========
F-14 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 The reconciliation of the effective income tax rate to the Federal statutory rate is as follows:
2002 2001 ---- ---- 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% ==== ====
At March 31, 2002, the Company had net carry forward losses of $19,524,000, of which $2,210,000 will expire in 2020 and $17,314,000 in 2021. A valuation allowance equal to the tax benefit for deferred taxes has been established due to the uncertainly of realizing the benefit of the tax carry forward. Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amount used for income tax purposes. Significant components of the Company's deferred tax assets (liabilities) are as follows:
March 31, ------------------------------------------ 2002 2001 2000 ------------------------------------------ Non-current deferred tax assets (liabilities): Stock compensation $ 286,800 286,800 ($93,500) Amortization expense 136,200 22,500 (12,500) Financing charges 2,290,200 2,070,500 0 Loss carry forward 5,887,000 8,862,700 3,092,000 ------------------------------------------ 8,600,200 11,242,500 3,198,800 Less: Valuation allowance (8,600,200) (11,242,500) (3,198,800) ------------------------------------------ Net deferred tax assets (Liabilities) $0 $0 $0 ==========================================
(11) NOTES PAYABLE Notes payable consist of the following:
March 31, ------------------------------- 2002 2001 ------------------------------- Notes payable: 550 Digital Media Ventures (Sony) (1) $2,289,764 $2,289,764 FunBug $80,000 Funny Greetings - Affiliate 393,672 940,000 Saggi Capital (3) 450,000 450,000 SFX Entertainment, Inc. (2) 313,626 1,020,445 ---------------------------- 3,527,062 4,700,209 Less: discount on FunnyGreetings note (122,472) ---------------------------- 3,404,590 4,700,209 ============================
1) The New Technology Holdings note was restructured as part of the Sony financing. The amount of $2,289,764 is now a short-term liability to 550 Digital Media Ventures that comes due March 31, 2003. The note is convertible to common or preferred stock subject to certain conditions (See Note 4, Business Combinations) 2) Subsequent to December 31, 2001, the payment terms of this note were extended to January 1, 2004 from August 26, 2002. the note is collateralized by 2,600,000 shares of common common stock. Principal and interest payments are quarterly over the life of the note. 3) On August 13, 2001, Saggi Capital purchased the $450,000 note from Videogame Partners. The note is payable in stock on June 12, 2002. F-15 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 (12) LONG TERM DEBT Long Term Debt - Affiliates and Other consist of the following:
March 31, ---------------------------------- 2002 2001 ---------------------------------- Long term debt: Deb'sFunPages - Affiliate (1) 287,336 312,326 FunBug 120,000 FunnyGreetings - Affiliate (2) 353,493 900,289 FunPageLand (1) 112,863 112,863 JustSayWow (1) 951,313 976,199 Send4Fun (1) 712,006 739,752 SFX 491,174 ----------------------------- $3,028,185 $3,041,429 =============================
1. As of March 1, 2001 the Company entered into settlements of amounts due pursuant to agreements and promissory notes with certain existing employees that had developed Web sites as listed above and related content for the Company. Current obligations of $1,164,950 were settled by entering into promissory notes having a term of 30 months and with the entire principal due on September 1, 2003. Interest accrues at 8% with payments of interest only payable at different dates for the various notes through September 2003. The note holders have the right at any time to convert the unpaid balance of the note into shares of unregistered, restricted common stock of the Company at $6 per share. 2. In July 2001, the Company amended its agreement with an employee for the purchase of Funnygreetings.com. Under the prior agreement, the Company was obligated to pay $2,000,000. Under the new agreement, the Company reduced the obligation to $1,200,000 less $86,000 already received by the seller. The Company made an additional payment of $129,814 in connection with Company financing which closed October 23, 2001 with 550 Digital Media Ventures as previously reported. The remaining balance of $984,146 shall be payable in thirty monthly installments subject to certain advertising revenues being achieved on the Funnygreetings.com web site. In the event revenue performance is not achieved in a given month, the monthly payment is reduced to $20,000. The total current portion of this debt is $393,672. The remaining long term portion of this note is $353,493. (13) Accrued Expenses
March 31, ------------------------------------- 2002 2001 ------------------------------------- Accrued professional services $757,430 $236,500 Accrued acquisition payments 397,558 923,076 Accrued compensation 868,613 105,000 Accrued affiliate payments 212,345 90,000 Accrued marketing 58,250 0 Accrued interest 486,312 277,205 Accrued royalties 487,130 0 Other accrued expenses 885,484 960,964 ------------------------------------- Total $ 4,153,122 $ 2,592,745 =====================================
(14) DISCONTINUED OPERATIONS In September 2000, the Company decided to discontinue its CD and DVD e-commerce operations. This segment consisted of the sale of CD's, DVD's and videotapes, and computer games. The sale of the assets relating to this segment was consummated on October 10, 2000. The assets were sold to CLBL, Inc. a Connecticut corporation owned by a significant shareholder of the Company. The proceeds from the sale consisted solely of a note receivable from the purchaser in the amount of $1,000,000. The purchaser has paid off this loan, in its entirety, as of the date of these statements. Net Income/(losses) from the discontinued operations for the years ended March 31, 2001, and 2000 were $285,429 and $(4,054,645), respectively. As a result of this discontinuance, the consolidated financial statements of eUniverse, Inc. and the related notes to the consolidated financial statements and supplemental data have been restated to reflect the results of operations and assets of the e-commerce segment of business as a discontinued operation in accordance with generally accepted accounting principles. The loss on disposal of the e-commerce segment was approximately $9.9M. This loss provided for reserves necessary to write down assets disposed of to their net realizable values. F-16 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 (14) COMMITMENTS AND CONTINGENCIES a) The Company leases various facilities under non-cancelable operating lease agreements that expire within the next four years. Future minimum lease payments under these non-cancelable operating leases are as follows:
March 31, --------------- 2003 $823,959 2004 857,026 2005 811,150 2006 583,578 2007 48,750 --------------- Total $3,124,463 ===============
Rent expense from continuing operations for the reporting periods were as follows:
Year Ended March 31, 2002 2001 2000 ------ ------ ------ Rent expense $551,214 $345,845 $69,206
Item 3. Legal Proceedings As previously disclosed, (i) on April 23, 2001, EP Opportunity Fund LLC and EP Opportunity Fund International, Ltd. (the "EP Funds") filed a Demand for Arbitration against Entertainment Universe, Inc. ("EUI"), a wholly owned subsidiary of the Company, and Brad Greenspan, Chairman and CEO of the Company, with the American Arbitration Association in Chicago, Illinois ("AAA Arbitration"), and (ii) on December 6, 2001, the Company filed a lawsuit against the EP Funds in Los Angeles Superior Court (the "California Action"). The AAA Arbitration and the California Action arose out of disputes related to the EP Funds Series A Preferred investment in the Company in or about April of 1999. On April 22, 2002, the parties to the AAA Arbitration and the California Action entered into a Settlement Agreement pursuant to which (i) the Company made a one-time cash payment to the EP Funds in an amount not reasonably expected to have a material adverse effect on the Company, (ii) the EP Funds received 43,000 shares of the Company's common stock from an unrelated, unaffiliated third-party by virtue of compromise by Mr. Greenspan of an unmatured right to receive such shares, and (iii) the parties exchanged mutual general releases and agreed to dismiss the AAA Arbitration and California Litigation with prejudice. The associated liability has been recorded in the financial statements. As previously disclosed, on July 6, 2001, Adolph Komorsky Investments, Inc. ("AKI"), an Illinois corporation with its principal place of business in Tarrytown, New York, filed a complaint against the Company in the Supreme Court of the State of New York, County of Westchester. AKI alleges that the Company breached a consulting agreement with AKI by failing and refusing to pay AKI cash and warrant consideration called for under the agreement. The Company denies AKI's allegations and has asserted defenses to the claims including the failure of AKI to perform its obligations under the consulting agreement which the Company formally terminated on June 29, 2001, approximately 45 days after the effective date of the agreement. On March 20, 2002, AKI filed its First Amended Complaint in the case pursuant to which AKI now seeks to recover warrants to purchase 300,000 shares of the Company's common stock and $120,000 in cash representing the maximum amount of consideration payable under the contract. The Company disputes AKI's alleged claims, believes that they are without merit and intends to vigorously defend the action. Discovery in the case has recently concluded and the parties are awaiting scheduling of a trial date by the Court. The company entered into certain revenue sharing arrangements during the year. Expense related to these agreements were $758,000 for the current year and approximately $180,000 owed as of March 31, 2002. (15) EQUITY COMPENSATION PLANS STOCK COMPENSATION For the year ended March 31, 2001, an expense of $469,822 for stock-based compensation has been recorded to reflect the value of additional shares to be issued related to the Web site performance of Funone.com, JustSayWow.com, funpageland.com and PokemonVillage.com. On September 15, 1999, the Company cancelled 1,932,000 stock 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 and a vesting period of three years to the same employees. Compensation expense related to these option of $207,011 has been recorded in the March 31, 2000 financial statements. During the current reporting period, this amount for $207,011 was reversed to reflect the fact that the fair market value as of the statement date remains below the exercise price of these options. 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.
Year Ended March 31, ---------------------------- 2002 2001 ---------------------------- Marketing and Sales $447,065 Product Development (19,656) General and Administrative (164,598) ---------------------------- Total stock-based compensation $0 $262,811 ============================
F-17 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 PROFIT SHARING PLAN: During the years ended March 31, 2002 and 2001, the Company maintained an agreement with Equitable Life Assurance Society of the United States (Equitable) to provide its employees with a Profit Sharing (401K) Plan. The highlights of this plan other than limits specified by law are: 1- Matching contribution by the Company of 100% of the first 3% of gross salary contribution by the employees plus an additional 50% of the next 2%. For the years ended March 31, 2002 and 2001, the Company's matching contribution expenses were $110,990 and $72,613, respectively. 2- 100% immediate vesting of the Company's matching contributions. STOCK OPTIONS: Under the Company's 1999 Stock Award Plan, stock options may be granted to officers, directors, employees and consultants. An aggregate of 9,000,000 shares of common stock have been reserved for issuance under the Plan. Typically, options granted under the plan will vest ratably over 3 years with 1/3 vesting after 12 months and the remaining vesting in 1/12 increments each 3 months thereafter. For the years ended March 31, 2002 and 2001 the plan's activities were as follows:
WEIGHTED NUMBER OF EXERCISE AVERAGE SHARES PRICE PRICE ---------------------------------------------- Outstanding at 3-31-1999.................................. -- -- -- Granted................................................... 5,314,570 $3.00 - 13.00 $6.92 Cancelled................................................. (2,919,176) 6.00 - 13.00 8.51 Reissued.................................................. 1,642,200 6.00 6.00 Exercised................................................. -- Forfeited................................................. -- ---------------------------------------------- Outstanding at 3-31-2000.................................. 4,037,594 $3.00 - 13.00 $5.39 Granted................................................... 5,355,130 1.75- 7.98 3.17 Cancelled................................................. (2,698,285) 2.75-13.00 5.95 Exercised................................................. -- Forfeited................................................. -- ---------------------------------------------- Outstanding at 3-31-2001.................................. 6,694,439 $ 1.75-11.40 $4.15 Granted................................................... 3,525,074 1.75- 7.98 2.28 Cancelled................................................. (1,404,499) 2.75-11.40 3.47 Exercised................................................. (108,333) 2.14 Forfeited................................................. -- ---------------------------------------------- Outstanding at 3-31-2002.................................. 8,706,681 $ 1.75-7.00 $3.16 Options exercisable at 3-31-2002 ......................... 3,032,546 $ 2.75-6.71 $4.11 ---------------------------------------------- These totals are segregated as follows: Outstanding at 3-31-2002 at exercise prices up to $3.00 7,007,171 $ 1.75-3.00 Outstanding at 3-31-2002 at exercise prices over $3.00 1,699,510 $ 3.44-7.00 Exercisable at 3-31-2002 at exercise prices up to $3.00 1,775,962 $ 2.75-3.00 Exercisable at 3-31-2002 at exercise prices over $3.00 1,256,584 $ 3.44-6.71
The weighted average remaining life of the options is 23 months. The Company uses the intrinsic value method (APB Opinion 25) to account for its stock options granted to officers, directors, and employees. Under this method, compensation expense is recorded over the vesting period based on the difference between the exercise price and quoted market price on the date the options are granted. Since the Company has granted all its stock options at an exercise price equal to or above the quoted market value on the measurement date, no compensation expense related to grants of stock options to employees has been recorded. F-18 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 Pursuant to FASB Interpretation No. 44, the Company accounts for its repriced options as a variable plan. Compensation is measured as the difference between the fair market value and the exercise price of the option at the reporting period, recognized in the financial statements over the service period. Had the Company chosen the fair value method of accounting for transactions involving stock option issuance to employees pursuant to SFAS 123, the Company would have recorded an additional $2,999,149 and $3,977,032 in compensation cost for the years ended March 31, 2002 and March 31, 2001, respectively, as presented by the pro forma statement below:
Year Ended March 31, --------------------------------------------- 2002 2001 2000 --------------------------------------------- Net income / (loss) as reported $5,665,278 ($41,039,326) ($11,067,646) Pro forma net income / (loss) $2,666,129 ($45,557,058) ($12,891,697) Net income / (loss) per common share $0.27 ($2.27) ($0.70) Pro forma net income / (loss) per common share $0.13 ($2.52) ($0.82) Net income / (loss) per diluted share $0.21 na na Pro forma net income / (loss) per diluted share $0.10 na na
For fiscal year 2002, the Black Scholes option-pricing model with a risk free interest rate ranging from 4.52% to 6.67%, a volatility ranging from 69.505% to 134.85%, zero dividend yield and an expected life of three years for the options was used to determine the fair value of options rendered. The weighted average fair value of the options issued during the year was $3.16. For fiscal year 2001, the Black Scholes option-pricing model with a risk free interest rate ranging from 5,665% to 6.434%, a volatility ranging from 71.05% to 134.85%, zero dividend yield and an expected life of three years for the options was used to determine the fair value of options rendered. The weighted average fair value of the options issued during the year was $2.34. For fiscal year 2000, the Black-Scholes option-pricing model with a risk free interest rate ranging from 5.017% to 6.434%, a weighted average volatility of 66.54%, zero dividend yield and an expected life of three years for the options was used. In addition to the stock options granted to employees, the Company has granted 30,000 options with an exercise price of $2.75 to a consultant valued at $72,640. These options have been recorded pursuant to SFAS 123 based on the fair market value of the equity instruments issued using the Black Scholes option pricing model with a risk free interest rate of 5.75%, a volatility of 88.7% with no expected dividend yield and a life of two years. The options expire on December 3, 2003. WARRANTS: The Company has granted warrants to purchase common stock in connection with debt and services. Stock purchase warrant activity is summarized as follows:
NUMBER OF SHARES EXERCISE PRICE ---------------------------------- Outstanding at 3-31-1999 .......... -- -- Granted ........................... 1,026,677 $2.74-10.00 Exercised ......................... -- Forfeited ......................... -- -------------------------------- Outstanding at 3-31-2000 .......... 1,026,677 $2.74-10.00 Granted ........................... 2,575,813 $1.00- 6.00 Exercised ......................... (80,000) 6.00 Cancelled ......................... (422,344) $4.75- 6.00 Forfeited ......................... -- -------------------------------- Outstanding at 3-31-2001 .......... 3,100,146 $1.00- 7.00 Granted ........................... 911,806 $1.00- 2.50 Exercised ......................... 0 na Cancelled ......................... (1,932,051) $1.00- 7.00 Forfeited ......................... -- -------------------------------- Outstanding at 3-31-2002 .......... 2,079,901 $1.00- 4.50 -------------------------------- Warrants exercisable at 3-31-2002.. 1,986,845 $1.00- 4.50 --------------------------------
The Company has granted warrants to purchase common stock in connection with debt and services. F-19 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 During the quarter ended December 31, 2001, in conjunction with Sony investment, the Company cancelled 1,101,260 warrants originally issued to New Technology Holdings in September 2000 at exercise prices ranging from $4.50 to $6.00. (See note 4, Business Combinations) Also, The Company issued warrants for 93,056 shares of the Company's common stock at an exercise price of $1.75 to Preferred Series A shareholders. The warrants have been valued at $110,073 in the financial statements using the Black Scholes option-pricing model with a risk free interest rate of 5.75%, a volatility of 100.1% with no expected dividend yield and a life of 24 months. The warrants become exercisable on January 9, 2003 and expire on January 9, 2005. (16) PREFERRED STOCK SERIES A On April 14, 1999 the Company 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 stock 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 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. As of March 31, 2002, preferred shareholders had converted a total of 845,436 shares of preferred stock into 1,435,515 shares of common stock. 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 and 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 a 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. On December 21, 1999, the Company approached the holders of its Series A Preferred Stock to forgo three items in their purchase agreements in return for being granted warrants to purchase common stock equaling 20% of the number of shares owned by them (10% at an exercise price of $6.00 and 10% at an exercise price of $8.00). The items modified were: 1- The Company would not be required to notify preferred shareholders at least thirty days prior to acquiring the stock or assets of another company so long as the Company is the surviving entity. 2- The Company would not be required to file a registration statement to register the shares of its Common Stock issuable upon conversion of the Preferred Stock in the event the Company was able to raise at least $5 million in additional capital or debt issuance within six months of which at least $3 million (Minimum Proceeds) had to be raised within 4 months. 3- The shareholders agreed not to convert their Preferred Stock to Common Stock until August 15, 2000, provided the Company raised the Minimum Proceeds. However, 20% of such shares may be sold during any 30 day period beginning April 15, 2000 in the event that the average weekly closing price of the Company's Common Stock is greater than $12.00 per share. F-20 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 As of March 31, 2000, the Company had received consent to the above conditions from Preferred Shareholders holding 911,718 shares and a total of 182,344 warrants were issued. These warrants expired December 31, 2000 with none of them being exercised. Beginning November 2000, the Company approached the holders of its Series A Preferred Stock to forgo conversion rights in their purchase agreements in return for being granted warrants to purchase common stock equaling 20% and 25% of the number of shares owned by them at exercise prices ranging from $2.00 to $2.75. The shareholders agreed not to convert their preferred shares into common shares for a period of 6 months except in the amount of 20% of their holdings. As of March 31, 2001 nine shareholders holding 616,834 preferred shares had agreed to these terms and 135,021 warrants had been issued. These warrants expire one year from the date of issuance. SERIES B On July 13, 2001, the Company entered into a Stock Purchase Agreement by which 550 Digital Media Ventures Inc., an affiliate of Sony Broadband Entertainment Inc agreed to invest $5 million in the Company in exchange for issuance by the Company of shares of Series B Preferred, at a purchase price of $2.60 per share. The holders of the Series B Preferred are entitled to participate pro rata in any dividends paid on the Company's common stock on an as-if-converted basis. In addition, the holders of the Series B Preferred are entitled to receive noncumulative dividends in preference to any dividend on the Company's common stock of $0.208 per annum, when, as and if declared by the Board. In the event of any liquidation or winding up of the Company, the holders of the Series B Preferred shall be entitled to liquidating distributions up to the aggregate original issue price of the Series B Preferred plus any accrued but unpaid dividends and then to participate pro rata with common shareholders on an as-converted basis following payment of the liquidation preference of the Series A Preferred holders. A merger, acquisition, sale of voting control or sale of substantially all of the assets of the Company in which the shareholders of the Company do not own a majority of the outstanding shares of the surviving corporation shall be deemed to be a liquidation. The Series B Preferred may be converted, at any time, into the Company's common stock at the then applicable conversion rate at the election of the holders of at least a majority of the outstanding Series B Preferred. The initial conversion rate shall be 1:1, subject to a weighted average adjustment (based on all outstanding shares of the Company's preferred stock and common stock) to reduce dilution in the event that the Company issues additional equity securities (other than the shares reserved as employee shares pursuant to any employee stock option plan) at a purchase price less than the applicable conversion price. The conversion price is also subject to proportional adjustment for stock splits, stock dividends, recapitalization and the like. The Company has the right to convert the Series B Preferred into shares of the Company's common stock within 60 days of the public filing of its Form 10-Q or 10-K report, as applicable, evidencing the Company's achievement of four consecutive post-closing quarters of operating profits equal to or greater than $750,000 for each applicable quarter. Each share of Series B Preferred has a number of votes equal to the number of shares of the Company's common stock then issuable upon conversion of such share of Series B Preferred. Additionally, the holders of Series B Preferred are entitled to designate at least one and not more than three members of the Board, depending on the size of the Board. Certain material transactions by the Company shall require a two-thirds consent of the Board, until such time as the Investor no longer owns at least 75% of its original Series B Preferred shares. The Company also granted preemptive rights to the Investor to participate in any private sales of equity by the Company on the same terms as offered to other investors. Further information has been previously disclosed in the definitive proxy dated September 27, 2001. (17) SEGMENTED DISCLOSURES Based on the criteria established by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company currently operates in two principal business segments globally. The Company does not allocate any operating expenses other than direct cost of sales to its Goods and Services segment, as management does not use this information to measure the performance of the operating segment. Management does not believe that allocating these expenses is material in evaluating the segment's performance. F-21 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 Summarized information by segment as excerpted from the internal management reports is as follows (in thousands): Year Ended March 31, 2002:
Media/ Products and Advertising Services Total ----------- -------- ----- Net sales $22,085 $11,111 33,196 Gross profit 21,298 4,978 26,276
(18) MAJOR CONCENTRATIONS For the year ended March 31, 2002, the Company used a single supplier and fullfillment provider for its inkjet cartridge inventory. (19) RELATED PARTY TRANSACTIONS The Company entered into settlement of amounts due agreements and promissory notes with a certain existing Company employee that had developed Web sites and related content for Company (see Note 12 - Long Term Debt - Affiliates). (20) SUBSEQUENT EVENTS Subsequent to March 31, 2002: o On May 3, 2002, the Company entered into a 24 month master lease and security agreement to borrow $1.1 million from Transamerica Equipment Financial Services Corporation for the sales leaseback of certain equipment necessary to run the eUniverse network of Web sites. The lease rate excluding applicable sales taxes is $52,525 per month and is secured by an $825,000 letter of credit. o On May 6, 2002, the Company entered into an agreement to sublease additional office space for its new headquarters in Los Angeles, CA. The agreement expires May 6, 2006. The rental rate is $44,613 per month with 3% annual escalation through the expiration date. F-22 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 QUARTERLY RESULTS OF OPERATIONS/SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) The following table presents certain unaudited consolidated quarterly results of operations for the twelve quarters ended March 31, 2002. This information is unaudited but reflects all adjustments that are, in the opinion of the management, necessary for a fair presentation of consolidated results of the operations. These adjustments, consisting of normal recurring adjustments and accruals, were made on a basis consistent with the annual audited financial statements and generally accepted accounting principles. The consolidated quarterly data should be read in conjunction with audited financial statements and notes to such statements presented elsewhere in this report. The results of operations for any quarter are not necessarily indicative of the results for any future period.
INCOME/ NET (LOSS) INCOME/(LOSS) FROM FROM NET GROSS CONTINUING DISCONTINUED INCOME QUARTER ENDED REVENUES PROFIT OPERATIONS OPERATIONS (LOSS) ------------- -------- ------ ---------- ------------ ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) March 31, 2002.......... $11,315 $7,998 $2,159 250 $2,409 December 31, 2001....... 10,128 7,618 1,903 106 2,009 September 30, 2001...... 6,703 5,815 923 (71) 852 June 30, 2001........... 5,050 4,845 395 -- 395 March 31, 2001.......... $4,239 $4,189 $(17,191) -- $(17,191) December 31, 2000....... 4,566 4,221 (2,748) (311) (3,059) September 30, 2000...... 4,093 3,456 (5,676) (11,503) (17,179) June 30, 2000........... 2,770 2,196 (1,507) (2,103) (3,610) March 31, 2000.......... $1,105 $ 966 $ (2,646) $ (2,110) $ (4,756) December 31, 1999....... 421 432 (2,082) (925) (3,007) September 30, 1999...... 251 234 (1,263) (799) (2,062) June 30, 1999........... 65 56 (563) (680) (1,243) March 31, 1999.......... $ -- -- -- $ (137) $ (137) December 31, 1998....... -- -- -- (118) (118) September 30, 1998...... -- -- -- (81) (81) June 30, 1998........... -- -- -- (71) (71)
WEIGHTED WEIGHTED CONTINUING DISCONTINUED BASIC DILUTED AVERAGE AVERAGE OPERATIONS OPERATIONS INCOME/ INCOME/ COMMON COMMON INCOME/(LOSS) INCOME/(LOSS) (LOSS) (LOSS) SHARES SHARES PER COMMON COMMON PER PER QUARTER ENDED BASIC DILUTED SHARE SHARE COMMON SHARE COMMON SHARE ------------- ------ ------- ------------ ------------ ------------ ------------ March 31, 2002.......... 23,468 29,759 $ .09 $ .01 $ .10 $.08 December 31, 2001....... 22,515 30,071 .08 -- .09 .07 September 30, 2001...... 19,274 21,870 .05 -- .04 .04 June 30, 2001........... 18,933 21,315 .02 -- .02 .02 March 31, 2001.......... 18,515 18,515 $(.93) $ -- $(.93) $(.93) December 31, 2000....... 18,120 18,120 (.15) (.02) (.17) (.17) September 30, 2000...... 17,933 17,933 (.32) (.64) (.96) (.96) June 30, 2000........... 17,744 17,744 (.08) (.12) (.20) (.20) March 31, 2000.......... 17,157 17,157 (.16) (.12) (.28) (.28) December 31, 1999....... 16,272 16,272 (.13) (.05) (.18) (.18) September 30, 1999...... 15,317 15,317 (.08) (.05) (.13) (.13) June 30, 1999........... 12,222 12,222 (.05) (.06) (.11) (.11) March 31, 1999.......... N/A N/A N/A N/A N/A N/A December 31, 1998....... N/A N/A N/A N/A N/A N/A September 30, 1998...... N/A N/A N/A N/A N/A N/A June 30, 1998........... N/A N/A N/A N/A N/A N/A
F-23 eUNIVERSE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002, 2001 and 2000 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (UNAUDITED)
ADDITIONS BALANCE AT ADDITIONS CHARGED TO BEGINNING OF THROUGH COST AND BALANCE AT DESCRIPTION PERIOD ACQUISITIONS EXPENSES DEDUCTIONS END OF PERIOD - ----------- ------ ------------ -------- ---------- ------------- Allowance for doubtful accounts: Year ended March 31, 2002...... $123,000 $ -- $423,554 $(94,315) $452,239 Year ended March 31, 2001...... 78,214 -- 460,962 (416,176) 123,000 Year ended March 31, 2000...... -- 19,175 69,539 (10,500) 78,214
F-24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on July 1, 2002. eUNIVERSE, INC. By /s/ BRAD D. GREENSPAN ................................ Brad D. Greenspan Chairman of the Board of Directors Chief Executive Officer Under the requirements of the Securities Act of 1934, this Form 10-K has been signed on July 1, 2002 by the following persons on behalf of the Registrant in the capacities indicated. By /s/ JOSEPH L. VARRAVETO ................................ Joseph L. Varraveto Chief Financial Officer (principal financial officer and principal accounting officer) By /s/ BRAD D. GREENSPAN ................................ Brad D. Greenspan Chairman of the Board of Directors (principal executive officer) By /s/ BRETT D. BREWER ................................ Brett D. Brewer Director By /s/ DANIEL L. MOSHER ................................ Daniel L. Mosher Director By /s/ THOMAS GEWECKE ................................ Thomas Gewecke Director By /s/ JEFF LAPIN ................................ Jeff Lapin Director INDEX TO EXHIBITS Exhibit Number Exhibit Title/Description - ------- -------------------------- 3.01 -- Articles of Incorporation of eUniverse.(1) 3.02 -- Amendment to Articles of Incorporation of eUniverse regarding change of name.(1) 3.03 -- Certificate of Amendment of Articles of Incorporation regarding issuance of Preferred Stock.(1) 3.04 -- Bylaws of eUniverse.(1) 3.05 -- Amendment to Bylaws.(1) 3.06 -- Designation of Preferred Stock of Motorcycle Centers of America, Inc. dated April 7, 1999, as filed with the Secretary of the State of Nevada, which defines the rights and preferences of the Preferred Stock of eUniverse.(1) 3.06.01 First Amendment to Designation of Stock of eUniverse, Inc. f/k/a Motorcycle Centers of America, Inc. and First Amended and Restated Certificate of Designation of Series A 6% Convertible Preferred Stock of eUniverse, Inc., dated as of February 2, 2000.(6) 3.06.02 Certificate of Correction of Series A 6% Convertible Preferred Stock of eUniverse, Inc., dated as of December 27, 2001.* 3.06.03 Second Amendment to Designation of Stock of eUniverse, Inc. f/k/a Motorcycle Centers of America, Inc. and Second Amended and Restated Certificate of Designation of Series A 6% Convertible Preferred Stock of eUniverse, Inc., dated as of January 4, 2000.* 3.07 -- Certificate of Designation of Series B Convertible Preferred Stock of eUniverse, Inc., dated October 19, 2001.(14) 10.01 -- Stock Purchase Agreement by and between Palisades Capital, Inc. and Charles Beilman, dated as of October 1, 1998 (the "Stock Purchase Agreement").(1) 10.02 -- Amendment to Stock Purchase Agreement, dated December 29, 1998.(1) 10.03 -- Amendment No. 2 to Stock Purchase Agreement, dated February 11, 1999.(1) 10.04 -- Amendment No. 3 to Stock Purchase Agreement, dated as of March , 1999.(1) 10.05 -- Amendment Number 4 to Stock Purchase Agreement, dated as of June 9, 1999.(1) 10.06 -- Agreement and Plan of Reorganization by and among Motorcycle Centers of America, Inc., Entertainment Universe, Inc. and the principal officers of Entertainment Universe, Inc., dated April 9, 1999.(1) 10.07 -- Entertainment Universe, Inc. Regulation D Subscription Agreement, dated as of April , 1999.(1) 10.08 -- Entertainment Universe, Inc. Registration Rights Agreement, dated as of April 1999.(1) 10.09 -- Assignment and Assumption Agreement by and between Entertainment Universe, Inc. and Motorcycle Centers of America, Inc., dated as of April 14, 1999.(1) 10.10 -- Stock Purchase Agreement by and among Motorcycle Centers of America, Inc. and the shareholders of Case's Ladder, Inc., dated as of April 21, 1999.(1) 10.13 -- Letter agreement between Entertainment Universe, Inc. and E.P. Opportunity Fund, L.L.C. regarding appointment of a director of Entertainment Universe, Inc., dated April 6, 1999.(1) 10.15 -- Agreement and Plan of Reorganization by and among eUniverse, Inc., Gamer's Alliance, Inc., and Larry N. Pevnick and Robin T. Pevnick, Ten Ent., and Stan Goldenberg and Andrea R. Goldenberg, Ten Ent., dated as of the 1st day of July, 1999.(6) 10.15.1 - Second Amendment to Agreement and Plan of Reorganization by and among eUniverse, Inc., Gamer's Alliance, Inc., and Larry N. Pevnick and Robin T. Pevnick, Ten Ent., and Stan Goldenberg and Andrea R. Goldenberg, Ten Ent., dated as of the 12th day of November, 1999.(1) 10.16 -- Agreement and Plan of Reorganization by and among eUniverse, Inc., The Big Network, Inc., Stephen D. Sellers, John V. Hanke and Michael Sellers, dated July 30, 1999 (effective as of August 31, 1999).(6) 10.17 -- Letter Agreement by and among Brad D. Greenspan, Charles Beilman, Stephen D. Sellers and John V. Hanke regarding appointment of a director of eUniverse, Inc., dated as of August 31, 1999.(6) 10.19 -- Employment Agreement by and between eUniverse, Inc. and Stephen D. Sellers, dated as of August 31, 1999.(6) 10.21 -- eUniverse, Inc. Registration Rights Agreement dated July 30, 1999.(6) 10.23 -- Engagement Letter by and among Gerard Klauer Mattison & Co., Inc. by Entertainment Universe, Inc. and Brad Greenspan, dated February 24, 1999.(6) 10.24 -- Indemnification Agreement by Entertainment Universe, Inc. and Brad Greenspan in favor of Gerard Klauer Mattison & Co., Inc., dated February 24, 1999.(6) 10.25 -- eUniverse, Inc. 1999 Stock Awards Plan.(6) 10.27 -- Employment Agreement by and between eUniverse, Inc. and Martin Hamilton, dated as of October 25, 1999. Mr. Martin terminated his employment on March 2, 2000 to pursue other business opportunities.(1) 10.28 -- Web Advertising Agreement by and between eUniverse, Inc. and Mpath Interactive, Inc., dated as of August 13, 1999 and terminated as of February 1, 2000. Portions of Exhibit 10.28 have been omitted pursuant to a request for confidential treatment, which was granted by the SEC.(2) 10.29 -- eUniverse, Inc. Common Stock Purchase Warrant to Gerard Klauer Mattison & Co., Inc., dated April 14, 1999.(1) 10.30 -- Asset Purchase Agreement by and between eUniverse, Inc. and Scott Smith d/b/a Pokemonvillage.com and Quake City Gaming Network, dated as of February 1, 2000.(3) 10.31 -- Letter agreement by and among eUniverse, Inc. Take-Two Interactive Software, Inc. and Falcon Ventures Corporation, dated as of February 2, 2000.(3) 10.32 -- Employment Agreement by and between eUniverse, Inc. and William R. Wagner dated as of April 5, 1999.(3) 10.33 -- Letter Agreement by and between eUniverse, Inc. and Christian Walter d/b/a Justsaywow.com dated February 20, 2000.(4) 10.34 -- Lease by and between Hamms Building Associates and Falcon Ventures Corp., dated as of July 27, 1999.(5) 10.35 -- eUniverse, Inc. Common Stock Purchase Warrant to Michael Zaroff, dated December 10, 1999.(5) 10.36 -- eUniverse, Inc. Common Stock Purchase Warrant to Bob Agriogianis, dated December 10, 1999.(5) 10.37 -- eUniverse, Inc. Common Stock Purchase Warrant to Mark Bergman, dated January 15, 2000.(5) 10.38 -- eUniverse, Inc. Common Stock Purchase Warrant to Mark Bergman, dated February 15, 2000.(5) 10.39 -- Stock Option Agreement by and between eUniverse, Inc. and Charles Beilman, dated as of January 26, 2000.(5) 10.39.01 First Amendment to Stock Option Agreement by and between eUniverse, Inc. and Charles Beilman, dated as of March 31, 2000.(5) 10.39.02 Second Amendment to Stock Option Agreement by and between eUniverse, Inc. and Charles Beilman, dated as of May 31, 2000.(6) 10.39.03 Third Amendment to Stock Option Agreement by and between eUniverse, Inc., Charles Beilman and Martin, Gasparrini & Chioffi, LLP, dated as of June 16, 2000.(6) 10.39.04 Fourth Amendment to Stock Option Agreement by and between eUniverse, Inc. and Charles Beilman, dated as of July 31, 2000.(8) 10.39.05 Fifth Amendment to Stock Option Agreement by and between eUniverse, Inc. and Charles Beilman, dated as of October 10, 2000.(9) 10.39.06 Sixth Amendment to Stock Option Agreement by and between eUniverse, Inc. and Charles Beilman, dated as of October 30, 2000.(10) 10.39.07 Seventh Amendment to Stock Option Agreement by and between eUniverse, Inc. and Charles Beilman, dated as of February 2, 2001.(12) 10.40 -- Letter agreement between eUniverse, Inc. and former shareholders of The Big Network, Inc. which provides eUniverse, Inc. with the right to purchase a minimum of 500,000 shares of eUniverse, Inc. common stock from former shareholders of The Big Network, Inc. (the "Big Network Buyout Agreement"), the closing of which shall occur on or before April 24, 2000.(5) 10.40.01 First Amendment providing for extension of closing date of the Big Network Buyout Agreement to May 5, 2000.(7) 10.40.02 Second Amendment providing for extension of closing date of the Big Network Buyout Agreement to May 19, 2000.(7) 10.40.03 Third Amendment providing for extension of closing date of the Big Network Buyout Agreement to May 19, 2000.(7) 10.41 -- eUniverse, Inc. Common Stock Purchase Warrant to Salomon Grey Financial Corporation, dated March 14, 2000 (terminated).(5) 10.42 -- eUniverse, Inc. Common Stock Purchase Warrant to Salomon Grey Financial Corporation, dated March 14, 2000 (terminated).(5) 10.43 -- Agreement by and between eUniverse, Inc. and Take-Two Interactive Software, Inc., dated as of March 16, 2000, providing for account marketing services.(5) 10.44 -- Agreement by and between eUniverse, Inc. and Take-Two Interactive Software, Inc., dated as of March 16, 2000, providing for programming services.(5) 10.45 -- Letter agreement by and among eUniverse, Inc. and Erik MacKinnon and Dan Barnes d/b/a Dustcloud Media, dated March 29, 2000.(6) 10.47 -- Asset Purchase Agreement by and between CD Universe, Inc. and CLBL, Inc., dated as of October 3, 2000.(9) 10.48 -- Letter agreement by and among eUniverse, Inc., Take-Two Interactive Software, Inc. and Charles Beilman, dated October 30, 2000.(10) 10.48.01 First Amendment to letter agreement by and among eUniverse, Inc., Take-Two Interactive Software, Inc. and Charles Beilman, dated November 6, 2000.(10) 10.49 -- Side letter agreement by and among eUniverse, Inc., Take-Two Interactive Software, Inc. and Brad D. Greenspan (with respect to Sections 2 and 4 only), dated October 30, 2000.(10) 10.49.01 First Amendment to Side Letter Agreement by and among eUniverse, Inc., Take-Two Interactive Software, Inc. and Brad D. Greenspan, dated November 6, 2000.(10) 10.50 -- Employment Agreement by and between eUniverse, Inc. and Will Griffin, dated as of September 1, 2000.(11) 10.51 -- eUniverse, Inc. Common Stock Purchase Warrant to VideoGame Partners, LLP, dated September 8, 2000.(12) 10.52 -- Stock Purchase Agreement by and between eUniverse, Inc. and 550 Digital Media Ventures, Inc., dated as of July 13, 2001.(13) 10.53 -- Share Purchase Agreement by and among eUniverse, Inc., Indimi, L.L.C., Indimi, Inc., 550 Digital Media Ventures, Inc. and Sony Music Entertainment, Inc., dated as of July 13, 2000.(13) 10.55 -- Registration Rights Agreement by and between eUniverse, Inc. and 550 Digital Media Ventures Inc., dated as of October 23, 2001.(14) 10.56 -- Letter agreement by and between eUniverse, Inc. and 550 Digital Media Ventures Inc., dated as of October 23, 2001, regarding amendment of that certain Secured Note and Warrant Purchase Agreement dated September 6, 2000.(14) 10.57 -- eUniverse, Inc. Common Stock Purchase Warrant issued to Nicholas Agriogianis, dated April 4, 2001.(15) 10.58 -- eUniverse, Inc. Common Stock Purchase Warrant issued to Marci Zaroff, dated April 4, 2001.(15) 10.59 -- eUniverse, Inc. Common Stock Purchase Warrant issued to Saggi Capital Corp., dated September 25, 2001.(15) 10.60 -- eUniverse, Inc. Common Stock Purchase Warrant issued to Bridge Ventures, Inc., dated September 25, 2001.(15) 10.61 -- eUniverse, Inc. Common Stock Purchase Warrant issued to Nicholas Agriogianis, dated September 25, 2001.(15) 10.62 -- eUniverse, Inc. Common Stock Purchase Warrant issued to Marci Zaroff, dated September 25, 2001.(15) 10.63 -- Agreement and Plan of Merger, dated as of January 2, 2002, by and among eUniverse, Inc., a Nevada corporation, L90 Acquisition Corporation, a Delaware corporation, and L90, Inc., a Delaware corporation.(16) 10.64 -- Form of Voting Agreement between eUniverse, Inc. and each of William Apfelbaum, John Bohan, Mark Roah and C.J. Cardinali.(16) 10.65 -- Form of Warrant issued to certain eUniverse, Inc. Series A Preferred Stockholders as of October 22, 2001.(17) 21.01 -- Subsidiaries of eUniverse, Inc.(5) 23.01 -- Consent of Merdinger, Fruchter, Rosen & Corso, PC.* - ----------- * Filed herewith (1) Incorporated by reference to eUniverse's Form 10 filed on June 15, 1999 (Registration File No. 0-26355). (2) Incorporated by reference to eUniverse's Form 10-Q filed on November 15, 1999. (3) Incorporated by reference to eUniverse's Form 10-Q filed on February 14, 2000. (4) Incorporated by reference to eUniverse's Form 8-K filed on March 13, 2000. (5) Incorporated by reference to eUniverse's Form S-1 filed on March 23, 2000 (Registration File No. 333-33084). (6) Incorporated by reference to eUniverse's Form 8-K filed on June 28, 2000. (7) Incorporated by reference to eUniverse's Form 10-K filed on July 14, 2000. (8) Incorporated by reference to eUniverse's Form 10-Q filed on August 14, 2000. (9) Incorporated by reference to eUniverse's Form 8-K filed on October 24, 2000. (10) Incorporated by reference to eUniverse's Form 10-Q filed on November 14, 2000. (11) Incorporated by reference to eUniverse's Form S-3 filed on December 8, 2000. (12) Incorporated by reference to eUniverse's Form 10-Q filed on February 14, 2001. (13) Incorporated by reference to eUniverse's Form 10-K filed on July 16, 2001. (14) Incorporated by reference to eUniverse's Form 8-K filed on November 7, 2001. (15) Incorporated by reference to eUniverse's Form 10-Q filed on November 14, 2001. (16) Incorporated by reference to eUniverse's Form 8-K filed on January 10, 2002. (17) Incorporated by reference to eUniverse's Form 10-Q filed on February 14, 2002. EX-3 3 ex3-0602.txt EXHIBIT 3.06.02 Exhibit 3.06.02 Office Use Only: ------------------------------ [GRAPHIC] DEAN HELLER Certificate of Secretary of State Correction (PURSUANT TO NRS 78.0295 and 80.007) ------------------------------ 101 North Carson Street, Suite 3 Carson City, Nevada 79701-4786 (775) 684-5708 - -------------------------------------------------------------------------------- Important: Read attached instructions before completing. Certificate of Correction (Pursuant to NRS 78, 80, 81, 82, 86, 88, 88A & 89) - Remit in Duplicate - 1. The name of the entity for which correction is being made: eUniverse, Inc. ----------------------------------------------------------------------------- 2. Description of the original document for which correction is being made: First Amendment to Designation of Stock of eUniverse, Inc. f/k/a Motorcycle Centers of America, Inc. and First Amended and Restated Certificate of Designation of Series A 6% Convertible Preferred Stock of eUniverse, Inc. 3. Filing date of the original document: June 6, 2000 -------------- 4. Description of the inaccuracy or defect: Paragraph number 2 contains typographical errors (i) stating that the authorized number of shares of preferred stock is fifteen million (15,000,000) and that the par value is $.001 per share; and (ii) referring to the Company's "articles of incorporation" as "certificate of incorporation." The first paragraph of the resolutions contains typographical errors stating that the authorized number of shares of preferred stock is fifteen million (15,000,000) and that the par value is $.001 per share. Section number 1 of the resolutions contains a typographical error stating that the par value is $.001 per share. 5. Correction of the inaccuracy or defect. "2. The Articles of Incorporation of the Company authorize the issuance of forty million (40,000,000) shares of preferred stock, $.10 par value per share ("Preferred Stock"), and expressly vest in the Board of Directors of the Company the authority provided therein to issue any or all of said shares in one (1) or more series and by resolution or resolutions to establish the designation and number and to fix the relative rights and preferences of each series to be issued." "RESOLVED, that ten million (10,000,000) of the forty million (40,000,000) authorized shares of Preferred Stock of the Company shall be designated Series A 6% Convertible Preferred Stock, $.10 par value per share, and shall possess the rights and preferences set forth below:" "Section 1. Designation and Amount. The shares of such series shall have a par value of $.10 per share and shall be designated as Series A 6% Convertible Stock (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be ten million (10,000,000). The Series A Preferred Stock shall be offered at a purchase price of Three Dollars and Sixty Cents ($3.60) per share (the "Original Series A Issue Price"), with a six percent (6%) per annum accretion rate as set forth herein." 6. Signature: /s/ Christopher S. Lipp Secretary, VP & General Counsel 12/27/01 ---------------------------- ----------------------------------- -------- Authorized Signature Title* Date *If entity is a Corporation, it must be signed by an Officer; a Limited-Liability Company, by a manager or managing members; a Limited Partnership, by a General Partner; a Limited-Liability Partnership, by a Managing Partner; a Business Trust, by a Trustee. IMPORTANT: Failure to include any of the above information and remit the proper fees may cause this filing to be rejected. EX-3 4 ex3-0603.txt EXHIBIT 3.06.03 Exhibit 3.06.03 SECOND AMENDMENT TO DESIGNATION OF STOCK OF eUNIVERSE, INC. F/K/A MOTORCYCLE CENTERS OF AMERICA, INC. and SECOND AMENDED AND RESTATED CERTIFICATE OF DESIGNATION OF SERIES A 6% CONVERTIBLE PREFERRED STOCK OF eUNIVERSE, INC. Pursuant to the provisions of Section 78.1955 of the Nevada Revised Statutes, the undersigned Company hereby adopts the following Second Amended and Restated Certificate of Designation of Series A 6% Convertible Preferred Stock (the "Certificate of Designation"), that was approved as of the 22nd day of October, 2001 by holders of the requisite percentage of shares of such preferred stock pursuant to Section 7 of the First Amended and Restated Certificate of Designation of Series A 6% Convertible Preferred Stock of eUniverse, Inc.: It is hereby certified that: 1. The name of the Company (hereinafter called the "Company") is eUniverse, Inc., a Nevada corporation. 2. The Articles of Incorporation of the Company authorize the issuance of forty million (40,000,000) shares of preferred stock, $.10 par value per share ("Preferred Stock"), and expressly vest in the Board of Directors of the Company the authority provided therein to issue any or all of said shares in one (1) or more series and by resolution or resolutions to establish the designation and number and to fix the relative rights and preferences of each series to be issued. 3. The Board of Directors of the Company, pursuant to the authority expressly vested in it as aforesaid, has adopted the following resolutions creating a Series A 6% Convertible issue of Preferred Stock: RESOLVED, that ten million (10,000,000) of the forty million (40,000,000) authorized shares of Preferred Stock of the Company shall be designated Series A 6% Convertible Preferred Stock, $.10 par value per share, and shall possess the rights and preferences set forth below: Section 1. Designation and Amount. The shares of such series shall have a par value of $.10 per share and shall be designated as Series A 6% Convertible Preferred Stock (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be ten million (10,000,000). The Series A Preferred Stock shall be offered at a purchase price of Three Dollars and Sixty Cents ($3.60) per share (the "Original Series A Issue Price"), with a six percent (6%) per annum accretion rate as set forth herein. Section 2. Rank. The Series A Preferred Stock shall rank: (a) junior to any other class or series of capital stock of the Company other than Common Stock (defined below) hereafter created specifically ranking by its terms senior to the Series A Preferred Stock (collectively, the "Senior Securities"); (b) senior and prior to all of the Company's Common Stock, $.001 par value per share ("Common Stock"); (c) senior and prior to any class or series of capital stock of the Company hereafter created not specifically ranking by its terms senior to or on parity with any Series A Preferred Stock of whatever subdivision (collectively, with the Common Stock, "Junior Securities"); and (d) on parity with any class or series of capital stock of the Company hereafter created specifically ranking by its terms on parity with the Series A Preferred Stock ("Parity Securities") in each case as to distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary (all such distributions being referred to collectively as "Distributions"). Section 3. Dividends. The Series A Preferred Stock will bear no dividends, and the holders of the Series A Preferred Stock ("Holders") shall not be entitled to receive dividends on the Series A Preferred Stock. Section 4. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Company ("Liquidation Event"), either voluntary of involuntary, the then Holders of shares of Series A Preferred Stock shall be entitled to receive, immediately after any distributions to Senior Securities required by the Company's Articles of Incorporation or any certificate of designation, and prior in preference to any distribution to Junior Securities but in parity with any distribution to Parity Securities, an amount per share equal to the sum of (i) the Original Series A Issue Price for each outstanding share of Series A Preferred Stock and (ii) an amount equal to six percent (6%) of the Original Series A Issue Price, per annum, accruing daily, for the period that has passed since the date that, in connection with the consummation of the purchase by Holder of shares of Series A Preferred Stock from the Company, the escrow agent first received in its possession funds representing full payment for the shares of Series A Preferred Stock (such amount being referred to herein as the "Premium"). If upon the occurrence of such event, and after payment in full of the preferential amounts with respect to the Senior Securities, the assets and funds available to be distributed among the Holders of the Series A Preferred Stock and Parity Securities shall be insufficient to permit the payment to such Holders of the full preferential amounts due to the Holders of the Series A Preferred Stock and the Parity Securities, respectively, then the entire assets and funds of the Company legally available for distribution shall be distributed among the Holders of the Series A Preferred Stock and the Parity Securities, pro rata, based on the respective liquidation amounts to which each such series of stock is entitled by the Company's Articles of Incorporation and any certificate(s) of designation relating thereto. (b) Upon the completion of the distribution required by Subsection 4(a), if assets remain in this Company, they shall be distributed to holders of Junior Securities in accordance with the Company's Articles of Incorporation including any duly adopted certificate(s) of designation. (c) At each Holder's option, a sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of shall be deemed to be a Liquidation Event as defined in Section 4(a) hereof; provided, further that (i) a consolidation, merger, acquisition, or other business combination of the Company with or into any other publicly traded company or companies, including those trading on -2- the OTC Bulletin Board, shall not be treated as a Liquidation Event as defined in Section 4(a) but instead shall be treated pursuant to Section 5(d) hereof, and (ii) a consolidation, merger, acquisition, reorganization or other business combination of the Company with or into any other non-publicly traded company or companies where the Company is not the surviving company, shall be treated as a Liquidation Event as defined in Section 4(a). The Company shall not effect any transaction described in Subsection 4(c)(ii) unless it first gives thirty (30) business days prior written notice of such transaction during which time the Holder shall be entitled to immediately convert any or all of its shares of Series A Preferred Stock into Common Stock at the Conversion Price, as defined below, then in effect. (d) In the event that, immediately prior to the closing of a transaction described in Section 4(c) hereof which would constitute a Liquidation Event, the cash distributions required by Section 4(a) or otherwise hereunder, have not been made, the Company shall either: (i) cause such closing to be reasonably postponed until such cash distributions have been made, (ii) cancel such transaction, in which event the rights of the Holders of Series A Preferred Stock shall be the same as existing immediately prior to such proposed transaction, or (iii) agree, and shall require that any successor company resulting from a Liquidation Event agrees, to make such distributions as quickly after the closing of such Liquidation Event as reasonably practicable, upon the same terms and in the same amounts as the Company would have made if such distribution was made immediately prior to the closing of such transaction. Section 5. Conversion. Subject to Section 4(c) herein, the record Holder(s) of the Series A Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. The record Holder of Series A Preferred Stock shall be entitled to convert (i) up to five percent (5%) of its Series A Preferred Stock immediately and (ii) up to an additional five percent (5%) of its Series A Preferred Stock at any time following 120 days after the Effective Date (as defined herein), each in accordance with the formula set forth below. At any time following six months after the Effective Date, the record Holder of the Series A Preferred Stock shall be entitled to convert any or all of the aggregate principal amount of the Series A Preferred Stock at the office of the Company or its designated transfer agent (the "Transfer Agent"), into that number of fully-paid and non-assessable shares of Common Stock calculated in accordance with the following formula (the "Conversion Rate"): Number of shares of Common Stock issued upon conversion of one (1) share of Series A Preferred Stock = (.06) (N/365) ($3.60) + $3.60 ----------------------------- Conversion Price where, N = the number of days between (i) the Initial Issuance Date (as defined below) and (ii) the applicable Date of Conversion (as defined in Section 5(b)(iv) below) for -3- the shares of Series A Preferred Stock for which conversion is being elected, and Conversion Price = $3.60; provided that if the average closing bid price of the Company's Common Stock over the 20 consecutive trading days immediately preceding January 16, 2002 is less than $3.60 per share, then the Conversion Price of the Series A Preferred Stock shall be equal to such 20 day average closing bid price, but in no event shall be less than $2.00. As used herein, "Initial Issuance Date" shall mean April 14, 1999 and "Effective Date" shall mean the date of filing of this Second Amended and Restated Certificate of Designation of Series A 6% Convertible Preferred Stock with the Nevada Secretary of State. For purposes hereof, any Holder which acquires shares of Series A Preferred Stock from another Holder (the "Transferor") and not upon original issuance from the Company shall be entitled to exercise such Holder's conversion right as to the percentages of such shares specified under Section 5(a) in such amounts and at such times such that the number of shares eligible for conversion by such Holder at any time shall be in the same proportion that the number of shares of Series A Preferred Stock acquired by such Holder from its Transferor bears to the total number of shares of Series A Preferred Stock originally issued by the Company to such Transferor (or its predecessor Transferor). For purposes hereof, the term "Closing Bid Price" shall mean the closing bid price of the Company's Common Stock on the Nasdaq SmallCap Market, or if no longer traded on the Nasdaq SmallCap Market, the closing bid price on the principal national securities exchange or the over-the-counter system on which the Common Stock is so traded and if not available, the mean of the high and low prices on the principal national securities exchange or the over-the-counter system on which the Common Stock is so traded. (b) Mechanics of Conversion. In order to convert Series A Preferred Stock into full shares of Common Stock, the Holder shall send via facsimile, or otherwise deliver, on or prior to 11:59 p.m., New York City time (the "Conversion Notice Deadline") on the Date of Conversion, a copy of the fully executed notice of conversion ("Notice of Conversion") to the Company at the office of the Company and to its designated transfer agent (the "Transfer Agent") for the Series A Preferred Stock stating that the Holder elects to convert, which notice shall specify the Date of Conversion, the number of shares of Series A Preferred Stock to be converted, the applicable Conversion Price and a calculation of the number of shares of Common Stock issuable upon such conversion (together with a copy of the front page of each certificate to be converted). Upon receipt by the Company of a facsimile copy of a Notice of Conversion, the Company shall immediately send, via facsimile, a confirmation of receipt of the Notice of Conversion to the Holder which shall specify that the Notice of Conversion has been received and the name and telephone number of a contact person at the Company whom the Holder should contact regarding information related to the Conversion. No later than one (1) business day after receipt of such confirmation of receipt of Notice of Conversion, the Holder shall surrender to a common courier for delivery to the office of the Company or the Transfer Agent, the original certificates representing the Series A Preferred Stock being converted (the "Preferred Stock Certificates"), duly endorsed for transfer; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of -4- Common Stock issuable upon such conversion unless either the Preferred Stock Certificates are delivered to the Company or its Transfer Agent as provided above, or the Holder notifies the Company or its Transfer Agent that such certificates have been lost, stolen or destroyed (subject to the requirements of subparagraph (i) below). In the case of a dispute as to the calculation of the Conversion Rate, the Company shall promptly issue to the Holder the number of Shares that are not disputed and shall submit the disputed calculations to its outside accountant via facsimile within three (3) days of receipt of Holder's Notice of Conversion. The Company shall cause the accountant to perform the calculations and notify the Company and Holder of the results no later than two (2) business days from the time it receives the disputed calculations. The accountant's calculation shall be deemed conclusive absent manifest error. (i) Lost or Stolen Certificates. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing shares of Series A Preferred Stock, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of the Preferred Stock Certificate(s), if mutilated, the Company shall execute and deliver new Preferred Stock Certificate(s) of like tenor and date. However, the Company shall not be obligated to re-issue such lost or stolen Preferred Stock Certificates if Holder contemporaneously requests the Company to convert such Series A Preferred Stock into Common Stock. (ii) Delivery of Common Stock Upon Conversion. The Company shall, or shall cause the Transfer Agent, no later than the close of business on the third (3rd) business day (the "Deadline") after receipt by the Company or the Transfer Agent of a facsimile copy of a Notice of Conversion and receipt by Company or the Transfer Agent of all necessary documentation duly executed and in proper form required for conversion, including the original Preferred Stock Certificates to be converted (or after provision for security or indemnification in the case of lost or destroyed certificates, if required), to issue and surrender to a common courier for either overnight or (if delivery is outside the United States) two (2) day delivery to the Holder at the address of the Holder as shown on the stock records of the Company (A) a certificate for the number of shares of Common Stock to which the Holder shall be entitled as aforesaid, and (B) certificate(s) representing the number of shares of Series A Preferred Stock not being exchanged, if necessary. (iii) No Fractional Shares. If any conversion of the Series A Preferred Stock would create a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion, in the aggregate, shall be the next higher number of shares. (iv) Date of Conversion. The date on which conversion occurs (the "Date of Conversion") shall be deemed to be the date set forth in such Notice of Conversion, provided (i) that the advance copy of the Notice of Conversion is sent via facsimile to the Company before 11:59 p.m., New York City time, on the Date of Conversion, and (ii) that the original Preferred Stock Certificates representing the shares of Series A Preferred Stock to be converted are surrendered by depositing such certificates with a common courier, for -5- delivery to the Company or the Transfer Agent as provided above, as soon as practicable after the Date of Conversion, provided that the Date of Conversion shall not occur less than six (6) months after the Initial Issuance Date. The person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record Holder or Holders of such shares of Common Stock on the Date of Conversion. (v) Taxes. The Company shall pay any and all taxes (other than transfer taxes) which may be imposed with respect to the issuance and delivery of the shares of Common Stock pursuant to conversion of the Series A Preferred Stock. (c) Automatic Conversion or Redemption. If at any time after 12 months following the initial effectiveness of the required registration of the Company's Common Stock (under Section 2 of the Company's Registration Rights Agreement relating to its Series A Preferred Stock) the Closing Bid Price of the Company's Common Stock is $16.00 or more for twenty (20) consecutive trading days ("Automatic Conversion Event"), then at any time following the Automatic Conversion Event (regardless of whether the Closing Bid Price of the Company's Common Stock shall at any time following the Automatic Conversion Event be less than $16.00), each share of Series A Preferred Stock outstanding on the date of the Automatic Conversion Event or, if not a business day, the first business day thereafter ("Termination Date") automatically, at the option of the Company, shall either (i) be converted ("Automatic Conversion") into Common Stock on such date at the Conversion Rate then in effect (calculated in accordance with the formula in Section 5(a) above), and the Termination Date shall be deemed the Date of Conversion with respect to such conversion for purposes of this Certificate of Designation, or (ii) be redeemed ("Automatic Redemption") by the Company for cash in an amount equal to the Stated Value (as defined below) of the shares of Series A Preferred Stock being redeemed. If the Company elects to redeem, on the Termination Date, the Company shall send to the Holders of outstanding Series A Preferred Stock notice (the "Automatic Redemption Notice") via facsimile of its intent to effect an Automatic Redemption of the outstanding Series A Preferred Stock. If the Company does not send such notice to Holder on such date, an Automatic Conversion shall be deemed to have occurred. If an Automatic Conversion occurs, the Company and the Holders shall follow the applicable conversion procedures set forth in this Certificate of Designation; provided, however, that the Holders are not required to send the Notice of Conversion contemplated by Section 5(b) hereof. If the Company elects to redeem, each Holder of outstanding Series A Preferred Stock shall send their certificates representing the Series A Preferred Stock to the Company within five (5) days of the date of receipt of the Automatic Redemption Notice from the Company, and the Company shall pay the applicable redemption price to each respective Holder within five (5) days of the receipt of such certificates. The Company shall not be obligated to deliver the redemption price unless the certificates representing the Series A Preferred Stock are delivered to the Company, or, in the event one or more certificates have been lost, stolen, mutilated or destroyed, unless the Holder has complied with Section 5(b)(i). If the Company elects to redeem under this Section 5(c) and the Company fails to pay the Holders the redemption price within five (5) days of its receipt of the certificates representing the shares of Series A Preferred Stock to be redeemed as required by this Section 5(c), then an Automatic Conversion shall be deemed to have occurred and, upon receipt of the Preferred Stock certificates, the Company shall immediately deliver to the Holders the certificates representing the number of shares of Common Stock to which the Holders would have been entitled upon Automatic Conversion. -6- As used herein, "Last Closing Date" shall mean the date of the last closing of a purchase and sale of the Series A Preferred Stock that occurs pursuant to the offering of the Series A Preferred Stock by the Company, and "Stated Value" shall mean the Original Series A Issue Price (as defined in Section 1 hereof) together with the accreted but unpaid Premium as defined in Section 4(a). (d) Adjustments to Conversion Price. The Conversion Price shall be subject to adjustment from time to time as follows: (i) Upon Issuance of Common Stock. If the Company shall, at any time or from time to time after the Effective Date, issue any shares of Common Stock (other than an issuance of Common Stock as a dividend or in a split of or subdivision in respect of which the adjustment provided for in Section 5(d)(iv) applies), options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock, or options to purchase or rights to subscribe for such convertible or exchangeable securities (other than Excluded Stock (as defined below)) without consideration or for consideration per share less than the Conversion Price in effect immediately prior to such issuance, then such Conversion Price shall forthwith be lowered to a price equal to the price obtained by multiplying: (A) the Conversion Price in effect immediately prior to the issuance of such Common Stock, options, rights or securities by (B) a fraction of which (x) the denominator shall be the number of shares of Common Stock outstanding on a fully diluted basis immediately after such issuance and (y) the numerator shall be the sum of (i) the number of shares of Common Stock outstanding on a fully diluted basis immediately prior to such issuance and (ii) the number of additional shares of Common Stock which the aggregate consideration for the number of shares of Common Stock so offered would purchase at the Conversion Price. For purposes of this Section 5(d), "fully diluted basis" shall be determined in accordance with the treasury stock method of computing fully diluted earnings per share in accordance with GAAP (as defined below). (ii) Upon Acquisition of Common Stock. If the Company or any of its subsidiaries shall, at any time or from time to time after the Effective Date, directly or indirectly, redeem, purchase or otherwise acquire any shares of Common Stock, options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock (other than shares of Series A Preferred Stock that are redeemed according to their terms), or options to purchase or rights to subscribe for such convertible or exchangeable securities, for a consideration per share greater than the Fair Market Value (as defined below) (plus, in the case of such options, rights, or securities, the additional consideration required to be paid to the Company upon exercise, conversion or exchange) per share of Common Stock immediately prior to such event, then the Conversion Price shall forthwith be lowered to a price equal to the price obtained by multiplying: -7- (A) the Conversion Price in effect immediately prior to such event by (B) a fraction of which (x) the denominator shall be the Fair Market Value per share of Common Stock immediately prior to such event and (y) the numerator shall be the result of dividing: (a) (1) the product of (A) the number of shares of Common Stock outstanding on a fully diluted basis and (B) the Fair Market Value per share of Common Stock, in each case immediately prior to such event, minus (2) the aggregate consideration paid by the Company in such event (plus, in the case of such options, rights, or convertible or exchangeable securities, the aggregate additional consideration to be paid by the Company upon exercise, conversion or exchange), by (b) the number of shares of Common Stock outstanding on a fully diluted basis immediately after such event. (iii) For the purposes of any adjustment of a Conversion Price pursuant to paragraph (i) of this Section 5(d), the following provisions shall be applicable: (1) In the case of the issuance of Common Stock for cash in a public offering or private placement, the consideration shall be deemed to be the amount of cash paid therefor before deducting therefrom any discounts, commissions or placement fees payable by the Company to any underwriter or placement agent in connection with the issuance and sale thereof. (2) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the Fair Market Value thereof. (3) In the case of the issuance of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock, or options to purchase or rights to subscribe for such convertible or exchangeable securities (except for options to acquire Excluded Stock): (A) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subparagraphs (i) and (ii) above), if any, received by the Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (B) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such -8- convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities, options, or rights were issued and for a consideration equal to the consideration received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in paragraphs (i) and (ii) above); (C) on any change in the number of shares or exercise price of Common Stock deliverable upon exercise of any such options or rights or conversions of or exchanges for such securities, other than a change resulting from the anti-dilution provisions thereof, the applicable Conversion Price shall forthwith be readjusted to such Conversion Price as would have been obtained had the adjustment made upon the issuance of such options, rights or securities not converted prior to such change or options or rights related to such securities not converted prior to such change been made upon the basis of such change; and (D) no further adjustment of the Conversion Price adjusted upon the issuance of any such options, rights, convertible securities or exchangeable securities shall be made as a result of the actual issuance of Common Stock on the exercise of any such rights or options or any conversion or exchange of any such securities. (iv) Upon Stock Dividends, Subdivisions or Splits. If, at any time after the Effective Date, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, following the record date for the determination of holders of Common Stock entitled to receive such stock dividend, or to be affected by such subdivision or split-up, the Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of Series A Preferred Stock shall be increased in proportion to such increase in outstanding shares. (v) Upon Combinations. If, at any time after the Effective Date, the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, following the record date to determine shares affected by such combination, the Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Series A Preferred Stock shall be decreased in proportion to such decrease in outstanding shares. (vi) Upon Reclassifications, Reorganizations, Consolidations or Mergers. In the event of any capital reorganization of the Company, any reclassification of the stock of the Company (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or any consolidation or merger of the Company with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock), each share of Series A Preferred Stock shall -9- after such reorganization, reclassification, consolidation, or merger be convertible into the kind and number of shares of stock or other securities or property of the Company or of the successor corporation resulting from such consolidation or surviving such merger, if any, to which the holder of the number of shares of Common Stock deliverable (immediately prior to the time of such reorganization, reclassification, consolidation or merger) upon conversion of such Series A Preferred Stock would have been entitled upon such reorganization, reclassification, consolidation or merger. The provisions of this clause shall similarly apply to successive reorganizations, reclassifications, consolidations, or mergers. The Company shall not effect any such reorganization, reclassification, consolidation or merger unless, prior to the consummation thereof, the successor corporation (if other than the Company) resulting from such reorganization, reclassification, consolidation, shall assume, by written instrument, the obligation to deliver to the holders of the Series A Preferred Stock such shares of stock, securities or assets, which, in accordance with the foregoing provisions, such holders shall be entitled to receive upon such conversion. (vii) Deferral in Certain Circumstances. In any case in which the provisions of this Section 5(d) shall require that an adjustment shall become effective immediately after a record date of an event, the Company may defer until the occurrence of such event issuing to the holder of any Series A Preferred Stock converted after such record date and before the occurrence of such event the shares of capital stock issuable upon such conversion by reason of the adjustment required by such event and issuing to such holder only the shares of capital stock issuable upon such conversion before giving effect to such adjustments; provided, however, that the Company shall deliver to such holder an appropriate instrument or due bills evidencing such holder's right to receive such additional shares. (viii) Other Anti-Dilution Provisions. If the Company has issued or issues any securities on or after the Effective Date containing provisions protecting the holder or holders thereof against dilution in any manner more favorable to such holder or holders thereof than those set forth in this Section 5, such provisions (or any more favorable portion thereof) shall be deemed to be incorporated herein as if fully set forth herein and, to the extent inconsistent with any provision herein, shall be deemed to be substituted therefor. (ix) Appraisal Procedure. In any case in which the provisions of this Section 5(d) shall necessitate that the Appraisal Procedure (as defined below) be utilized for purposes of determining an adjustment to the Conversion Price, the Company may defer, until the completion of the Appraisal Procedure and the determination of the adjustment, issuing to the holder of any share of Series A Preferred Stock converted after the date of the event that requires the adjustment and before completion of the Appraisal Procedure and the determination of the adjustment, the shares of capital stock issuable upon such conversion by reason of the adjustment required by such event and issuing to such holder only the shares of capital stock issuable upon such conversion before giving effect to such adjustment; provided, however, that the Company shall deliver to such holder an appropriate instrument or due bills evidencing such holder's right to receive such additional shares. -10- (vii) (x) Exceptions. Section 5(d) shall not apply to (i) any issuance of Common Stock upon exercise of any warrants or options awarded to employees or directors of the Company pursuant to an employee stock option plan or stock incentive plan approved by the Board of Directors, (ii) any issuance of Common Stock upon conversion of the Preferred Stock or (iii) any issuance of Common Stock or Preferred Stock pursuant to the closing of that certain Stock Purchase Agreement by and between the Company and 550 Digital Media Ventures Inc. dated as of July 13, 2001 (the "Stock Purchase Agreement"), that certain Share Purchase Agreement by and among the Company, Indimi, L.L.C., Indimi Inc., 550 Digital Media Ventures Inc. and Sony Music Entertainment Inc. dated as of July 13, 2001 and related transactions, including issuance of Preferred Stock upon conversion of the Promissory Note, as defined in the Stock Purchase Agreement (collectively, the "Excluded Stock"). For purposes hereof, the following terms shall have the following respective meanings herein: "Appraisal Procedure," if applicable, means the following procedure to determine the fair market value, as to any security, for purposes of the definition of "Fair Market Value" or the fair market value, as to any other property (in either case, the "Valuation Amount"). The Valuation Amount shall be determined in good faith jointly by the Board of Directors and the holders of more than 50% of the issued and outstanding shares of Series A Preferred Stock (the "Majority Holder"); provided, however, that if such parties are not able to agree on the Valuation Amount within a reasonable period of time (not to exceed twenty (20) days), the Valuation Amount shall be determined by an investment banking firm of national recognition, which firm shall be reasonably acceptable to the Board of Directors and the Majority Holder. If the Board of Directors and the Majority Holder are unable to agree upon an acceptable investment banking firm within ten (10) days after the date either party proposed that one be selected, the investment banking firm will be selected by an arbitrator located in New York City, New York, selected by the American Arbitration Association (or if such organization ceases to exist, the arbitrator shall be chosen by a court of competent jurisdiction). The arbitrator shall select the investment banking firm (within ten (10) days of his appointment) from a list, jointly prepared by the Board of Directors and the Majority Holder, of not more than six investment banking firms of national standing in the United States, of which no more than three may be named by the Board of Directors and no more than three may be named by the Majority Holder. The arbitrator may consider, within the ten-day period allotted, arguments from the parties regarding which investment banking firm to choose, but the selection by the arbitrator shall be made in its sole discretion from the list of six. The Board of Directors and the Majority Holder shall submit their respective valuations and other relevant data to the investment banking firm, and the investment banking firm shall, within thirty days of its appointment, make its own determination of the Valuation Amount. The final Valuation Amount for purposes hereof shall be the average of the two Valuation Amounts closest together, as determined by the investment banking firm, from among the Valuation Amounts submitted by the Company and the Majority Holder and the Valuation Amount calculated by the investment banking firm. The determination of the final Valuation Amount by such investment banking firm shall be final and binding upon the parties. The Company shall pay the fees and expenses of the investment banking firm and -11- arbitrator (if any) used to determine the Valuation Amount. If required by any such investment banking firm or arbitrator, the Company shall execute a retainer and engagement letter containing reasonable terms and conditions, including, without limitation, customary provisions concerning the rights of indemnification and contribution by the Company in favor of such investment banking firm or arbitrator and its officers, directors, partners, employees, agents and affiliates. "Business Day" means a day other than a Saturday, Sunday or day on which banking institutions in New York are authorized or required to remain closed. "Fair Market Value" means, as to any security, the Twenty Day Average (as defined below) of the average closing prices of such security's sales on all domestic securities exchanges on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the Nasdaq National Market System as of 4:00 P.M., New York City time, on such day, or, if on any day such security is not quoted in the Nasdaq National Market System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar or successor organization (and in each such case excluding any trades that are not bona fide, arm's length transactions). If at any time such security is not listed on any domestic securities exchange or quoted in the Nasdaq National Market System or the domestic over-the-counter market, the "Fair Market Value" of such security shall be the fair market value thereof as determined in accordance with the Appraisal Procedure, using any appropriate valuation method, assuming an arms-length sale to an independent party. In determining the Fair Market Value of any class or series of Common Stock, a sale of all of the issued and outstanding Common Stock will be assumed, without giving regard to the lack of liquidity of such stock due to any restrictions (contractual or otherwise) applicable thereto or any discount for minority interests and assuming the conversion or exchange of all securities then outstanding that are convertible into or exchangeable for Common Stock and the exercise of all rights and warrants then outstanding and exercisable to purchase shares of such stock or securities convertible into or exchangeable for shares of such stock; provided, however that such assumption will not include those securities, rights and warrants convertible into Common Stock where the conversion, exchange or exercise price per share is greater than the Fair Market Value; provided, further, however, that Fair Market Value shall be determined with regard to the relative priority of each class or series of Common Stock (if more than one class or series exists). "Fair Market Value" means with respect to property other than securities, the "fair market value" determined in accordance with the Appraisal Procedure. "GAAP" means United States generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board, which are in effect from time to time. -12- "Twenty Day Average" means, with respect to any prices and in connection with the calculation of Fair Market Value, the average of such prices over the twenty Business Days ending on the Business Day immediately prior to the day as of which "Fair Market Value" is being determined. Section 6. Voting Rights. Except as otherwise provided herein or by law, the Holder(s) of Series A Preferred Stock, by virtue of their ownership thereof, shall be entitled to cast the number of votes per share thereof on each matter submitted to the Company's holders of Common Stock for voting as equals the number of votes which could be cast by the Holders of the number of shares of Common Stock into which such shares of Series A Preferred Stock could be converted pursuant hereto immediately prior to the taking of such vote (including, without limitation, any shares of Common Stock which would be issuable in payment of accrued and unpaid interest thereon if such shares were converted on the record date and the Company elected to pay such interest in Common Stock). Such vote shall be cast together with those cast by the Holders of Common Stock and not as a separate class except as otherwise provided herein. Section 7. Protective Provision. So long as shares of Series A Preferred Stock are outstanding, the Company shall not without first obtaining the approval (by vote or written consent, as provided by Nevada Law) of the Holders of at least seventy-five percent (75%) of the then outstanding shares of Series A Preferred Stock, and at least seventy-five percent (75%) of the then outstanding Holders: (a) alter or change the rights, preferences or privileges of the Series A Preferred Stock or any securities so as to affect adversely the Series A Preferred Stock; (b) create any new class or series of stock having a preference over or on parity with the Series A Preferred Stock with respect to Distributions (as defined in Section 2 above) or increase the size of the authorized number of Series A Preferred Stock; or (c) do any act or thing not authorized or contemplated by this Certificate of Designation which would result in taxation of the holders of shares of the Series A Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended). In the event Holders of at least seventy-five percent (75%) of the then outstanding shares of Series A Preferred Stock and at least seventy-five percent (75%) of the then outstanding Holders agree to allow the Company to alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock, pursuant to Subsection (a) above, so as to affect the Series A Preferred Stock, then the Company will deliver notice of such approved change to the Holders of the Series A Preferred Stock that did not agree to such alteration or change (the "Dissenting Holders") and Dissenting Holders shall have the right for a period of thirty (30) Business Days to convert pursuant to the terms of this Certificate of Designation as they exist prior to such alteration or change (notwithstanding any other provision herein to the contrary) or continue to hold their shares of Series A Preferred Stock, as amended. -13- Section 8. Status of Converted Stock. In the event any shares of Series A Preferred Stock shall be converted pursuant to Section 5 hereof, the shares of Preferred Stock so converted shall be canceled, shall return to the status of authorized but unissued Preferred Stock of no designated series, and shall not be re-issuable by the Company as Series A Preferred Stock. Section 9. Preference Rights. Nothing contained herein shall be construed to prevent the Board of Directors of the Company from issuing one (1) or more series of Preferred Stock with dividend and/or liquidation preferences junior to the dividend and liquidation preferences of the Series A Preferred Stock. Section 10. Authorization and Reservation of Shares of Common Stock. (a) Authorized and Reserved Amount. The Company shall have authorized and reserved and keep available for issuance not less than three million nine hundred thousand (3,900,000) shares of Common Stock (subject to adjustment for stock splits, stock dividends, reclassifications and similar types of events) issuable upon conversion of all outstanding Series A Preferred Stock for the purpose of effecting the conversion of the Series A Preferred Stock (including any shares of Common Stock as a Conversion Failure Payment under Section 11 hereof or issuable upon the failure of the Company to pay a Redemption Amount in accordance with Section 5(c) hereof) issued or to be issued to the Holders (the "Reserved Amount"). The Reserved Amount shall be at least two hundred percent (200%) of the number of shares of Common Stock issuable upon conversion of the Series A Preferred Stock. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to provide for the full conversion of all outstanding Series A Preferred Stock, and issuance of the shares of Common Stock in connection therewith. During any period in which the Reserved Amount is less than two hundred percent (200%) of the number of shares of Common Stock issuable on three (3) consecutive trading days upon conversion of the outstanding Series A Preferred Stock (without giving effect to any limitation on conversion or exercise thereof), the Company shall not reserve or issue shares of Common Stock for any purposes other than the conversion of the Series A Preferred Stock. (b) Increases to Reserved Amount. Without limiting any other provision of this Section 10, if the Reserved Amount for any three (3) consecutive trading days (the last of such three (3) trading days being the "Reservation Trigger Date") is less than two hundred percent (200%) of the number of shares of Common Stock issuable upon conversion of Series A Preferred Stock on such trading days (a "Share Authorization Failure"), the Company shall immediately notify all Holders of such occurrence and shall take all necessary action to increase the Reserved Amount to two hundred percent (200%) of the number of shares of Common Stock then issuable upon conversion of the Series A Preferred Stock within (i) fifteen (15) days following a Reservation Trigger Date if such increase requires solely approval of the Company's Board of Directors and (ii) sixty (60) days following a Reservation Trigger Date if such increase requires approval of the Company's shareholders. (c) Reduction of Reserved Amount Under Certain Circumstances. Prior to complete conversion of all Series A Preferred Stock, the Company shall not reduce the number of shares required to be reserved for issuance under this Section 10 without the written consent of all -14- Holders except for a reduction proportionate to a reverse stock split effected for a business purpose other than affecting the obligations of Holder under this Section 10, which reverse stock split affects all shares of Common Stock equally. (d) Allocation of Reserved Amount. Each increase to the Reserved Amount shall be allocated pro rata among the Holders based on the number of Series A Preferred Stock held by each Holder at the time of the establishment of or increase in the Reserved Amount. In the event a Holder shall sell or otherwise transfer any of such Holder's Series A Preferred Stock, each transferee shall be allocated a pro rata portion of such transferor's Reserved Amount. Any portion of the Reserved Amount which remains allocated to any person or entity which does not hold any Series A Preferred Stock shall be allocated to the remaining Holders, pro rata based on the number of Series A Preferred Stock then held by such Holders. Section 11. Failure to Satisfy Conversions. (a) Conversion Failure Payments. If, at any time, (x) a Holder submits a Notice of Conversion (or is deemed to submit such notice pursuant to Section 5(d) hereof), and the Company fails for any reason to deliver, on or prior to the expiration of the Deadline ("Delivery Period") for such conversion, such number of shares of Common Stock to which such converting Holder is entitled upon such conversion, or (y) the Company provides notice (including, but not limited to, any published announcement) to any Holder at any time of its intention not to issue shares of Common Stock upon exercise by any Holder of its conversion rights in accordance with the terms of this Certificate of Designation (each of (x) and (y) being a "Conversion Failure"), then the Company shall pay to such Holder, in the case of a Conversion Failure described in clause (x) above, and to all Holders, in the case of a Conversion Failure described in clause (y) above, damages in an amount equal to the lower of: (i) "Damages Amount" x "D" x .005; and (ii) the highest interest rate permitted by applicable law, where: "D" means the number of days beginning the date of the Conversion Failure through and including the Cure Date with respect to such Conversion Failure; "Damages Amount" means the Original Series A Issue Price for each share of Series A Preferred Stock subject to conversion plus all accrued and unpaid interest thereon as of the first day of the Conversion Failure; "Cure Date" means (i) with respect to a Conversion Failure described in clause (x) of its definition, the date the Company effects the conversion of the shares of Series A Preferred Stock submitted for conversion and (ii) with respect to a Conversion Failure described in clause (y) of its definition, the date the Company undertakes in writing to issue Common Stock in satisfaction of all conversions of Series A Preferred Stock in accordance with the terms of this Certificate of Designation. -15- The payments to which a Holder shall be entitled pursuant to this Section are referred to herein as "Conversion Failure Payments." The parties agree that the damages caused by a breach hereof would be difficult or impossible to estimate accurately. A Holder may elect to receive accrued Conversion Failure Payments in cash or to convert all or any portion of such accrued Conversion Failure Payments, at any time, into Common Stock at the lowest Conversion Price in effect during the period beginning on the date of the Conversion Failure through the Cure Date for such Conversion Failure. In the event a Holder elects to receive any Conversion Failure Payments in cash, it shall notify the Company in writing no later than three (3) Business Days after the Deadline and failure to so notify the Company shall entitle the Company, in its sole discretion, to elect to make such Conversion Failure Payments in cash, Common Stock or some combination of the two. In the event a Holder elects to convert all or any portion of the Conversion Failure Payments, such Holder shall indicate on a Notice of Conversion such portion of the Conversion Failure Payments which such Holder elects to so convert in accordance with this Section 11(a) and such conversion shall otherwise be effected in accordance with provisions of Section 5. (b) Buy-In Cure. Unless a Conversion Failure described in clause (y) of Section 11(a) hereof has occurred with respect to such a Holder, if (i) the Company fails for any reason to deliver during the Delivery Period shares of Common Stock to a Holder upon a conversion of the Series A Preferred Stock and (ii) after the applicable Delivery Period with respect to such conversion, a Holder purchases (in an open market transaction or otherwise) shares of Common Stock to make delivery upon a sale by a Holder of the shares of Common Stock (the "Sold Shares") which such Holder anticipated receiving upon such conversion (a "Buy-In"), the Company shall pay such Holder (in addition to any other remedies available to Holder) the amount by which (x) such Holder's total purchase price (including brokerage commission, if any) for the shares of Common Stock so purchased exceeds (y) the net proceeds received by such Holder from the sale of the Sold Shares. For example, if a Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to shares of Common Stock sold for $10,000, the Company will be required to pay such Holder $1,000. A Holder shall provide the Company written notification indicating any amounts payable to Holder pursuant to this Section 11. (c) Adjustment to Conversion Price. If a Holder has not received certificates for all shares of Common Stock within five (5) Business Days following the expiration of the Delivery Period with respect to a conversion of any portion of any such Holder's Series A Preferred Stock for any reason, then the Conversion Price for the affected Series A Preferred Stock shall thereafter be the lesser of (i) the Conversion Price on the Conversion Date specified in the Notice of Conversion which resulted in the Conversion Failure and (ii) the lowest Conversion Price in effect during the period beginning on, and including, such Conversion Date through and including the Cure Date. If there shall occur a Conversion Failure of the type described in clause (y) of Section 11(a), then the Conversion Price with respect to any conversion thereafter shall be the lowest Conversion Price in effect at any time during the period beginning on, and including, the date of the occurrence of such Conversion Failure through and including the Cure Date. The Conversion Price shall thereafter be subject to further adjustment for any events described in Section 5(d). Section 12. Event of Default. -16- (a) Holder's Option to Demand Prepayment. Upon the occurrence of an Event of Default (as herein defined), each Holder shall have the right to elect at any time and from time to time prior to the cure by Company of such Event of Default to have all or any portion of such Holder's then outstanding Series A Preferred Stock prepaid by the Company for an amount equal to the Holder Demand Prepayment Amount (as defined below). (i) The right of a Holder to elect prepayment shall be exercisable upon the occurrence of an Event of Default by such Holder in its sole discretion by delivery of a Demand Prepayment Notice (as defined below) in accordance with the procedures set forth in this Section 12. Notwithstanding the exercise of such right, the Holder shall be entitled to exercise all other rights and remedies available under the provisions of this Certificate of Designation and at law or in equity. (ii) A Holder shall effect each demand for prepayment under this Section 12 by giving at least two (2) Business Days prior written notice (the "Demand Prepayment Notice") of the date which such prepayment is to become effective (the "Effective Date of Demand of Prepayment"), the Series A Preferred Stock selected for prepayment and the Holder Demand Prepayment Amount to the Company at the address and facsimile number provided in the stock records of the Company, which Demand Prepayment Notice shall be deemed to have been delivered on the Business Day after the date of transmission of Holder's facsimile (with a copy sent by overnight courier to the Company) of such notice. (iii) The Holder Demand Prepayment Amount shall be paid to a Holder whose Series A Preferred Stock are being prepaid within one (1) Business Day following the Effective Date of Demand of Prepayment; provided, however, that the Company shall not be obligated to deliver any portion of the Holder Demand Prepayment Amount until one (1) Business Day following either the date on which the Series A Preferred Stock being prepaid are delivered to the office of the Company or its transfer agent, or the date on which the Holder notifies the Company or the Transfer Agent that such Series A Preferred Stock have been lost, stolen or destroyed and delivers the documentation required in accordance with Section 5(b)(i) hereof. (b) Holder Demand Prepayment Amount. The "Holder Demand Prepayment Amount" means the greater of: (a) 1.3 times the Stated Value of the Series A Preferred Stock for which demand is being made, plus all accrued and unpaid interest thereon and accrued and unpaid Conversion Failure Payments (if any) through the date of prepayment and (b) the product of (1) the highest price at which the Common Stock is traded on the date of the Event of Default (or the most recent highest closing bid price if the Common Stock is not traded on such date) divided by the Conversion Price in effect as of the date of the Event of Default, and (2) the sum of the Stated Value and all accrued and unpaid Conversion Failure Payments (if any) through the date of prepayment. (c) Events of Default. An "Event of Default" means any one of the following: (i) a Conversion Failure described in Section 11(a) hereof; -17- (ii) a Share Authorization Failure described in Section 10(b) hereof, if such Share Authorization Failure continues uncured for (x) fifteen (15) days following a Reservation Trigger Date if such increase requires solely the approval of the Company's Board of Directors and (y) sixty (60) days after the Reservation Trigger Date if such increase requires approval of the Company's shareholders; (iii) the Company fails, and such failure continues uncured for three (3) Business Days after the Company has been notified thereof in writing by a Holder, to satisfy the share reservation requirements of Section 10 hereof; (iv) the Company fails to maintain an effective registration statement as required by Section 2, Section 3 or Section 6 of the Registration Rights Agreement between the Company and the Holder(s) (the "Registration Rights Agreement") except where such failure lasts no longer than three (3) consecutive trading days and is caused solely by failure of the Securities and Exchange Commission to timely review the customary submission of or respond to the customary requests of the Company; (v) for three (3) consecutive trading days or for an aggregate of ten (10) trading days in any nine (9) month period, the Common Stock (including any of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock, and exercise of the Common Warrants) is (i) suspended from trading on any of the Nasdaq SmallCap, NMS, NYSE, AMEX or the OTC Bulletin Board, or (ii) is not qualified for trading on at least one of Nasdaq SmallCap, NMS, NYSE, AMEX or the OTC Bulletin Board; (vi) the Company fails, and such failure continues uncured for three (3) Business Days after the Company has been notified thereof in writing by a Holder, to remove any restrictive legend on any certificate for any shares of Common Stock issued to a Holder upon conversion of any Series A Preferred Stock as and when required by this Certificate of Designation and the Subscription Agreement, between the Company and the Holder(s) (the "Subscription Agreement") or the Registration Rights Agreement; (vii) the Company breaches, and such breach continues uncured for three (3) Business Days after the Company has been notified thereof in writing by a Holder, any significant covenant or other material term or condition of this Certificate of Designation, the Subscription Agreement or the Registration Rights Agreement; (viii) any representation or warranty of the Company made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Subscription Agreement and Registration Rights Agreement), shall be false or misleading in any material respect when made; (ix) the Company or any subsidiary of the Company shall make an assignment for the benefit of its creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such receiver or trustee shall otherwise be appointed; -18- (x) bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company or any subsidiary of the Company (and such proceedings shall continue unstayed for thirty (30) days); or (xi) the Company fails to file a registration statement on Form 10 (to register securities pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934) within sixty (60) days of the Initial Issuance Date (as defined in Section 5 herein), or such registration statement is not declared effective within one hundred fifty (150) days of the Initial Issuance Date. (d) Failure to Pay Damages Amount. If the Company fails to pay the Holder Demand Prepayment Amount within five (5) Business Days of its receipt of a Demand Prepayment Notice, then such Holder shall have the right, at any time and from time to time prior to the payment of the Holder Demand Prepayment Amount, to require the Company, upon written notice, to immediately convert (in accordance with the terms of Section 5) all or any portion of the Holder Demand Prepayment Amount, into shares of Common Stock at the then current Conversion Price, provided that if the Company has not delivered the full number of shares of Common Stock issuable upon such conversion within five (5) Business Days after the Company receives written notice of such conversion, the Conversion Price with respect to such Holder Demand Prepayment Amount shall thereafter be deemed to be at the lowest Conversion Price in effect during the period beginning on the date of the Event of Default through the date on which the Company delivers to the Holder the full number of freely tradable shares of Common Stock issuable upon such conversion. In the event the Company is not able to pay all amounts due and payable with respect to all Series A Preferred Stock subject to Holder Demand Prepayment Notices, the Company shall pay the Holders such amounts pro rata, based on the total amounts payable to such Holder relative to the total amounts payable to all Holders. -19- IN WITNESS WHEREOF, the Company has caused this Certificate of Designation to be signed by Christopher S. Lipp, its Secretary, Vice President and General Counsel, this 4th day of January, 2002. eUNIVERSE, INC. By: /s/ Christopher S. Lipp --------------------------------------------- Christopher S. Lipp Secretary, Vice President and General Counsel -20- EX-23 5 ex23.txt EXHIBIT 23.01 Exhibit 23.01 INDEPENDENT AUDITOR'S CONSENT We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 of eUniverse, Inc., filed with the Securities and Exchange Commission on August 30, 2000, of our report dated June 14, 2002 which appears in this Annual Report on Form 10-K for the fiscal year ended March 31, 2002. MERDINGER, FRUCHTER, ROSEN & CORSO, P.C. Certified Public Accountants New York, New York July 1, 2002 -----END PRIVACY-ENHANCED MESSAGE-----