-----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, U7N9XIRrM8z0pHSvvOKx2iuDIHX8+9IUXGbH/ebjPG2Q9eLlsQCNYUtEw8wVUPWJ 0h7o/oFFp/1sCjZM1tzpMA== 0000950130-99-005222.txt : 19990914 0000950130-99-005222.hdr.sgml : 19990914 ACCESSION NUMBER: 0000950130-99-005222 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19990913 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EUNIVERSE INC CENTRAL INDEX KEY: 0001088244 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL- COMPUTER & PRERECORDED TAPE STORES [5735] STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-86959 FILM NUMBER: 99710050 BUSINESS ADDRESS: STREET 1: 101 NORTH PLAINS INDUSTRIAL ROAD CITY: WALLINGFORD STATE: CT ZIP: 06492 BUSINESS PHONE: 2032941648 MAIL ADDRESS: STREET 1: 101 NORTH PLAINS INDUSTRIAL ROAD CITY: WALLINGFORD STATE: CT ZIP: 06492 SB-2 1 FORM SB-2 Registration No.___ - _____ ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM SB-2 FILED SEPTEMBER 10, 1999 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 eUNIVERSE, INC. (Name of small business issuer in its charter) NEVADA _______ 06-1556248 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial (I.R.S. Employer Classification Code Number) Identification No.)
101 NORTH PLAINS INDUSTRIAL ROAD, WALLINGFORD, CONNECTICUT 06492 (203) 265-6412 (Address and telephone number of principal executive offices and principal place of business) LELAND N. SILVAS PRESIDENT AND CHIEF EXECUTIVE OFFICER 101 NORTH PLAINS INDUSTRIAL ROAD WALLINGFORD, CONNECTICUT 06492 (203) 265-6412 (Name, address and telephone number of agent for service) Copies to: CHRISTOPHER G. MARTIN, ESQ. MARTIN, LOIS & GASPARRINI, LLC 1177 SUMMER STREET STAMFORD, CONNECTICUT 06905 (203) 324-4200 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: The securities being registered on this form are to be offered and sold from time to time after the effective date of the Registration Statement by the selling shareholders. -------------- If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF REGISTERED REGISTERED SHARE(1) PRICE REGISTRATION FEE(1) Common Stock, $.001 par value 4,000,000 $6.00 $24,000,000 $6,672 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
(1) Fee calculated pursuant to Rule 457(c) based on the average of the high and low sales prices of the Common Stock as reported on the OTC Bulletin Board on September 7, 1999. -------------- The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to such section 8(a), may determine. - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- 1 PROSPECTUS SEPTEMBER 10, 1999 4,000,000 SHARES EUNIVERSE, INC. COMMON STOCK ($.001 par value) This Prospectus relates to the offer and sale of up to 4,000,000 shares (the "Shares") of the common stock, $.001 par value (the "Common Stock"), of eUniverse, Inc. (the "Company") by its stockholders that converted their shares of eUniverse's Series A 6% Convertible Preferred Stock to Common Stock (the "Selling Stockholders"). The Shares will be sold from time to time in transactions effected on the OTC Electronic Bulletin Board ("OTC"), in privately negotiated transactions, or in a combination of such methods of sale. Such methods of sale may be conducted at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Our stock is currently traded on the OTC under the trading symbol EUNI. The Selling Stockholders may effect such transactions directly, or indirectly through underwriters, broker-dealers or agents acting on their behalf, and in connection with such sales, such broker-dealers or agents may receive compensation in the form of commissions, concessions, allowances or discounts from the Selling Stockholders and/or the purchasers of the Shares for whom they may act as agent or to whom they sell Shares as principal or both (which commissions, concessions, allowances or discounts might be in excess of customary amounts thereof). To the extent required, the names of any agents, broker-dealers or underwriters and applicable commissions, concessions, allowances or discounts and any other required information with respect to any particular offer of the Shares by the Selling Stockholders, will be set forth in a supplement to this Prospectus (a "Prospectus Supplement"). Any statement contained in this Prospectus will be deemed to be modified or superseded by any inconsistent statement contained in any Prospectus Supplement delivered herewith. Unless this Prospectus is accompanied by a Prospectus Supplement stating otherwise, offers and sales may be made pursuant to this Prospectus only in ordinary broker's transactions made on the OTC Electronic Bulletin Board in transactions involving ordinary and customary brokerage commissions. See "SELLING SHAREHOLDERS" and "PLAN OF DISTRIBUTION." None of the proceeds from the sale of the Shares by the Selling Stockholders will be received by eUniverse, Inc. eUniverse has agreed to bear all expenses of registration of the Shares under federal or state securities laws. The Selling Stockholders and any underwriters, dealers or agents which participate in the distribution of the Shares may be deemed to be "underwriters" within the meaning of the Securities Act, and any commission received by them and any profit realized on the resale of the Shares purchased by them may be deemed to constitute underwriting commissions, concessions, allowances or discounts under the Securities Act. See "PLAN OF DISTRIBUTION." - -------------------------------------------------------------------------------- THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR THE ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 3 TABLE OF CONTENTS
SECTION PAGE - ------- ---- SUMMARY.......................................................... 5 RISK FACTORS..................................................... 7 USE OF PROCEEDS.................................................. 15 DIVIDEND POLICY.................................................. 15 CAPITALIZATION................................................... 15 SELECTED FINANCIAL DATA.......................................... 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................ 18 BUSINESS......................................................... 24 MANAGEMENT....................................................... 38 PRINCIPAL SHAREHOLDERS........................................... 44 SELLING SHAREHOLDERS............................................. 45 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 46 PLAN OF DISTRIBUTION............................................. 47 DESCRIPTION OF CAPITAL STOCK..................................... 47 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................. 49 SHARES ELIGIBLE FOR FUTURE SALE.................................. 50 LEGAL MATTERS.................................................... 51 EXPERTS.......................................................... 52 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................. 52 SOURCES OF ADDITIONAL INFORMATION................................ 52 INDEX TO FINANCIAL STATEMENTS.................................... 53
------------------------------------ 4 You should rely only on the information contained in this Prospectus. We have not authorized any other person to provide you with different information. This Prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this Prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date. SUMMARY THE ITEMS IN THE FOLLOWING SUMMARY ARE DESCRIBED IN MORE DETAIL LATER IN THIS PROSPECTUS. THIS SUMMARY PROVIDES AN OVERVIEW OF SELECTED INFORMATION AND DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER. THEREFORE, YOU SHOULD ALSO READ THE MORE DETAILED INFORMATION SET OUT IN THIS PROSPECTUS, THE FINANCIAL STATEMENTS AND THE OTHER INFORMATION INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL REFERENCES IN THIS PROSPECTUS TO "eUniverse," "WE," "US" OR "OUR" ARE TO EUNIVERSE, INC. AND ALL OF ITS SUBSIDIARIES, UNLESS THE CONTEXT REQUIRES OTHERWISE. eUniverse, Inc. ("eUniverse" or the "Company") operates a network of entertainment-related Web sites focused on music, film and interactive entertainment. eUniverse's Web properties include CD Universe, an online retailer of music products and accessories; Video Universe, a pioneering online retailer of video cassettes, DVDs and laser discs; and Games Universe, an online retailer of single- and multiplayer games, with links to eUniverse subsidiaries -- Case's Ladder, which offers online ranking and tournament offerings for people who play games on the Internet; Gamer's Alliance, which owns a network of online gaming editorial Web sites; and The Big Network, which provides multiplayer classic games (e.g., chess, checkers, backgammon, spades). ---- The Big Network, Inc. also provides a suite of multiplayer Java-based parlor games and a unique library of proprietary community-building software technologies, named LivePlace. LivePlace combines group browsing, chat, instant messaging and a host of other advanced features to introduce social interaction to Web browsing and shopping experience. Additions to the eUniverse's games will include other classic board and card games (e.g., Battleship, Hearts) and other online ---- strategy, role-playing or action games. We do not offer and do not intend to offer online gambling or other activities associated with gambling. eUniverse's Web sites collectively attract an average of over 60 million monthly page views. eUniverse's revenues have grown rapidly, reaching over $9.2 million for the fiscal year ending March 31, 1999. eUniverse is a Nevada corporation with principal executive offices at 101 North Plains Industrial Road, Wallingford, Connecticut 06492, telephone number (203) 265-6412. Historically, we primarily have generated revenue from merchandise sales. We have implemented a program to generate advertising revenue through paid third-party advertising on eUniverse's Web sites. We also intend to diversify our retail offerings to include a greater selection of products, such as online downloads of content, clothing, sports items and accessories. Music Entertainment The online store (www.cduniverse.com) of eUniverse's wholly owned ------------------ subsidiary, CD Universe, Inc. ("CD Universe"), currently offers Internet customers a selection of over 240,000 individual CD titles as well as proprietary content and features. Recently, a Japanese version of the CD Universe Web site was established that markets and sells CDs and related products in Japan. Filmed Entertainment 5 eUniverse's Video Universe online store (www.videouniverse.com) offers --------------------- Internet users a selection of over 40,000 movie titles in videocassette, DVD and laser disc formats. Interactive Entertainment eUniverse's Games Universe site (www.gamesuniverse.com) sells interactive ----------------------- games and links users to eUniverse's online interactive gaming sites that include Case's Ladder (www.casesladder.com), an online portal to a variety of --------------------- games that provides competitive rankings for online game players and allows game players to compete against one another in a variety of tournaments and leagues, Gamer's Alliance (www.gagames.net), one of the premier sites on the Web devoted ----------------- to interactive PC games, and The Big Network (www.bignetwork.com), a site offering classic board and card games. Expansion eUniverse intends to continue to leverage its online retailing expertise into other e-commerce areas by expanding its current product offerings through acquisitions of content-oriented Web sites with significant traffic and attractive demographics that cater to specific communities of interest in the music, video and games businesses. Concurrently with its acquisition strategy, eUniverse is actively adding to and improving upon the existing content and functionality of its Web sites. 6 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY. OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE HARMED BY ANY OF THE FOLLOWING RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THE FOLLOWING RISKS, AND YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT. RISKS RELATED TO OUR BUSINESS WE HAVE A LIMITED OPERATING HISTORY. As the Company was founded in February 1999, we have a limited operating history upon which an evaluation of the Company and its prospects can be based. The Company has never made a profit in any fiscal quarter. Our prospects for financial success must be considered in light of the risks, expenses and difficulties frequently encountered by companies in new, unproven and rapidly evolving markets, such as the Internet market. To address these risks, the Company 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. There can be no assurance that the Company will be successful in addressing such risks. If the Company is not successful in further developing and expanding its music, video and interactive entertainment business, including sales of advertising on its Web sites and development of related business opportunities, its ability to achieve profitability may not be realized. MAINTENANCE OF STRATEGIC PARTNERSHIPS; SUFFICIENCY OF NETWORK INFRASTRUCTURE. Although the Company's ability to generate additional revenue from Internet commerce may depend on increased site traffic, purchases and advertising that the Company expects to generate through strategic partnerships, there can be no assurance that its existing relationships will be maintained through their initial terms or that additional third-party partnerships will be available to the Company on acceptable commercial terms or at all. The inability to enter into new, and to maintain any one or more of its existing, strategic partnerships could result in decreased traffic to our web sites and have a material adverse effect on the Company's business, results of operations and financial condition. 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 such partnerships. NO ASSURANCES ON EXPANSION OF WEB PRESENCE. Although the Company's growth strategy includes plans for expansion into international markets, there can be no assurance that the Company will be able to successfully market, sell and distribute its products in international markets due to a variety of legal, contractual and practical considerations. In addition, there are risks inherent in doing business on a global level, such as unexpected changes in regulatory requirements, export restrictions, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, difficulties in protecting intellectual property rights, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates and potentially adverse tax consequences which could adversely impact the Company's prospects for successful international operations. If such factors have a material adverse impact on the Company's ability to develop international operations, its business, results of operations and financial condition may likewise be adversely affected. NO ASSURANCES ON ACQUISITION OF OTHER EXISTING WEB SITES. The Company's growth and future profitability may depend in part upon its ability to identify companies 7 that are suitable acquisition candidates, to acquire those companies upon appropriate terms and to effectively integrate and expand their operations within its own infrastructure. There can be no assurance that the Company will be able to identify additional candidates that it deems suitable for acquisition or that the Company will be able 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 the Company's capital resources could be used for these acquisitions. Accordingly, the Company may require additional debt or equity financing for future acquisitions, which may not be available on terms favorable to the Company, if at all. Moreover, the Company may not be able to successfully integrate an acquired business into the Company's business or to operate an acquired business profitably. There can be no assurance that the Company will be able to integrate and expand the operations of acquired companies, without excessive costs, delays or other adverse developments. RAPIDLY CHANGING TECHNOLOGY. To remain competitive, the Company must continue to enhance and improve the responsiveness, functionality and features of its websites 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 the Company's 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 products and services, develop new products, services and technology that address the needs of its customers, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. If 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, it would be materially adversely affected by the resulting decrease in traffic and revenues. TRADEMARKS AND PROPRIETARY RIGHTS; UNLICENSED ARRANGEMENTS. The Company 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 the Company will be adequate to prevent misappropriation or infringement of its proprietary property. The Company does not have any of its trademarks or service marks registered with the United States Patent and Trademark Office. While the Company is currently applying for registration of a number of its trademarks, there are no assurances that we will successfully prosecute our applications for these trademarks. See "BUSINESS--Domain Names, Patents, and Trademarks." WE DEPEND ON KEY MEMBERS OF OUR MANAGEMENT TEAM. We depend on the continued service of our executive officers and key technical and marketing personnel, including, in particular, Brad D. Greenspan, our Chairman, and Leland N. Silvas, our President and Chief Executive Officer, Charles Beilman, our Chief Operating Officer, William R. Wagner, our Chief Financial Officer, James Haiduck, our Vice President of Sales, Stephen D. Sellers, our Vice President of Business Affairs and Business Development and John V. Hanke, our Vice President of Marketing and Site Integration. The Company has employment agreements with Messrs. Silvas, Beilman, 8 Wagner, Haiduck, Sellers and Hanke. However, such employment agreements do not assure the services of such employees. Despite employment agreements and non- competition arrangements with these members of management, the Company's employees may voluntarily terminate their employment with the Company at any time. The Company's success also depends on its ability to attract and retain additional qualified employees. Competition for qualified personnel is intense and there are a limited number of persons with knowledge of and experience in commercial application of the Internet and retail sales of music and entertainment related products. There can be no assurance that the Company will be able to attract and retain highly qualified personnel to fill critical managerial and operational positions. The loss of one or more key employees could have a material adverse effect on the Company. FLUCTUATIONS IN FUTURE QUARTERLY AND LONG-TERM OPERATING RESULTS. 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 the Company's control. Factors that may affect the Company's quarterly operating results include, without limitation, - - the Company's ability to retain existing customers, attract new customers at a steady rate and maintain customer satisfaction, - - the announcement or introduction of new or enhanced web sites, products and strategic partnerships by the Company and its competitors, - - the mix of products sold by the Company, - - seasonality of the recorded music industry (namely, the fact that sales of recorded music traditionally peak during the Christmas season), - - seasonality of advertising sales, - - Company promotions and sales programs, - - price competition or higher recorded music prices in the industry, - - the level of use of the Internet and increasing consumer acceptance of the Internet for the purchase of consumer products such as those offered by the Company, - - the Company's ability to upgrade and develop its systems and infrastructure in a timely and effective manner, - - the amount and timing of operating costs and capital expenditures relating to expansion of the Company's business, operations and infrastructure and the implementation of marketing programs, key agreements and strategic partnerships, and 9 general economic conditions and economic conditions specific to the Internet, on-line commerce, and the recorded music and prerecorded videocassette industries. ORDER FULFILLMENT AND SOURCE OF SUPPLY. The Company currently accepts orders only over the Internet. Product orders received by CD Universe are accepted, verified, batched and electronically sent on a daily basis to Valley Media, Inc., of Woodland Hills, California ("Valley Media"), the Company's primary supplier. Shipments from Valley Media and other suppliers are received at the Company's fulfillment center in Wallingford, Connecticut. Employees break down bulk shipments into the individual orders to be sent to customers. This arrangement allows the Company to offer customers a wide variety of CD and video titles while maintaining virtually no inventory. It also reduces product returns by allowing the Company to only order products for which it has received orders. The Company typically fills over 70% of its orders by the next business day, and approximately 90% of its orders within one week. The Company believes that the speed of order fulfillment is an important factor to its customers, and accordingly has a significant impact on its ability to increase revenues from retail sales. At the present time, Valley Media supplies approximately 90% of the music and video products and accessories sold by CD Universe. There can be no assurance that the Company will maintain that relationship or that it will be able to find an alternative supplier which will provide products and services on terms satisfactory to the Company should its relationship with Valley Media terminate. Therefore, an unanticipated termination of the Company's relationship with Valley Media, particularly during the fourth quarter of the calendar year in which a high percentage of recorded music and video product sales is made, could materially adversely affect the Company's results of operations for the quarter in which such termination occurred even if the Company was able to establish a relationship with an alternative supplier. To date, Valley Media has satisfied the Company's requirements on a timely basis. However, to the extent that Valley Media is unable to continue to satisfy the Company's increasing product requirements, such constraints may result in decreased revenue and have a material adverse effect on the Company's business, results of operations and financial condition. INTENSE COMPETITION. The online commerce market is new, rapidly evolving and intensely competitive, and the Company expects that competition will further intensify in the future. Barriers to entry are minimal, and current and new competitors can launch new sites at a relatively low cost. With respect to recorded music sales, the Company currently competes with numerous Internet retailers, including music retail chains, record labels, independent retailers with Web sites on the Internet and online stores retailing music and video titles such as CDnow and Amazon.com. In addition, the Company competes with traditional music retailers, as well as megastores, mass merchandisers, consumer electronics stores and music clubs. The primary competitive factors in providing music, video and other entertainment products and services via the Internet are name recognition, variety of value-added services, ease of use, price, quality of service, availability of customer support and technical expertise. 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 services. Other factors that will affect the Company's prospects for success include its ability to attract experienced and qualified personnel, particularly in the areas of management, sales and marketing, and Web site design. If the Company is unable to compete successfully in its retailing businesses, there will be a material adverse impact on its business, results of operations and 10 financial condition due to decreased revenue. In addition, the competition for advertising revenues, both on Internet web sites and in more traditional media, is intense. If the Company 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 will be materially adversely affected by such decreased revenue. Many of the Company's current and potential competitors in the area of online music, video and other entertainment retailing, such as CDNow.com and Amazon.com, have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and larger existing customer bases than the Company. These competitors may be able to respond more quickly than the Company to new or emerging technologies and changes in the economy or the marketplace affecting the products and services that the Company offers. In addition, some of the Company's competitors can be expected to devote greater resources, both human and financial, to the development, promotion and sale of music, video and other entertainment products and services. Accordingly, there can be no assurance that the Company will be able to compete successfully and achieve its objectives with respect to growth in revenue and profit. RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE The Year 2000 issue (Y2K) is the result of computer programs written using two digits rather than four to define the applicable year. Any of the Company's computer and telecommunications programs that have date sensitive software may recognize a date using "00" as the year 1900 instead of 2000. This could result in system failure or miscalculations causing disruptions in operations, including the ability to process transactions, send invoices, or engage in similar normal business activities. The Company is in the process of determining whether its systems are Y2K compliant. eUniverse is currently conducting an analysis to determine the extent to which others have Year 2000 issues. This review includes examining the systems of vendors to the Company's subsidiaries. By way of example, CD Universe's major suppliers' systems include the systems of credit card processors, telecommunications providers, product distributors and companies with whom CD Universe has marketing agreements. CD Universe's primary distributor for music products, Valley Media, has indicated that it has begun its remediation efforts and expects to be in compliance before the Year 2000. CD Universe is currently unable to predict the extent to which the Year 2000 issue will affect Valley's suppliers, to the extent to which Valley would be vulnerable to its suppliers' failure to resolve any Year 2000 issues on a timely basis. The failure of a major supplier subject to the Year 2000 issue to convert its systems on a timely basis or a conversion that is incompatible with CD Universe's systems could have a material adverse effect on CD Universe to the extent that its customers are unable to receive the purchased products. In addition, most of the purchases from CD Universe's online store are made with credit cards, and our operations may be materially adversely affected to the extent customers are unable to use their credit cards due to Year 2000 issues that are not rectified by their credit card providers. See "BUSINESS--YEAR 2000 READINESS DISCLOSURE." eUniverse intends to actively work with and encourage its suppliers to minimize the risks of business disruptions resulting from Year 2000 issues and develop contingency plans where necessary. Such plans may include using alternative suppliers and establishing contingent supply arrangements. 11 RISKS RELATED TO THE INTERNET INDUSTRY OUR FUTURE RESULTS DEPEND ON CONTINUED GROWTH IN THE USE OF THE INTERNET. Our market, users of the global computer network known as the Internet, is new and rapidly evolving. Our business could suffer if Internet usage does not continue to grow. Internet usage may be inhibited for a number of reasons, including: - inadequate network infrastructure; - security concerns; - inconsistent quality of service; - lack of availability of cost-effective and high-speed service; and - changes in government regulation of the Internet. If Internet usage grows, the Internet infrastructure might not be able to support the demands placed on it by this growth or its performance and reliability may decline. In addition, future outages and other interruptions occurring throughout the Internet could lead to decreased use of our network of Web sites and would therefore harm our business. WE COULD BE SUED FOR INFORMATION RETRIEVED FROM THE INTERNET. Due to the fact that material may be downloaded from web sites and may be subsequently distributed to others, there is a potential that claims will be made against the Company pursuant to such legal theories as defamation, negligence, copyright or trademark infringement or other theories based on the nature and content of such material. Such claims have been brought, and sometimes successfully pressed, against on-line services in the past. In addition, we could be exposed to liability with respect to the material that may be accessible through our products and web sites, including claims asserting that, by providing hypertext links to web sites operated by third parties, we are liable for wrongful actions by those third parties through such web sites. Although the Company carries general liability insurance, such insurance may not cover potential claims of this type, or the level of coverage may not be adequate to fully protect the Company against all liability that may be imposed. Any costs or imposition of liability or legal defense expenses that are not covered by insurance or in excess of insurance coverage could reduce our working capital and have a material adverse effect on the Company's business, results of operations and financial condition. Also, the legal effectiveness of our terms and conditions of use is uncertain. We currently are not aware of any claims that can be expected to have a material adverse impact on our financial condition or our ability to conduct our business. GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS AND RISKS TO DOING BUSINESS ON THE INTERNET. There are currently few laws or regulations that specifically regulate communications or commerce on the Internet. However, laws and regulations may be adopted in the future that address issues such as user privacy, pricing, taxation and the characteristics and quality of products and services. For example, the Communications Decency Act of 1996 prohibits obscene and other unlawful information and content from being transmitted over the Internet. Several other nations have taken actions to restrict the free flow of material deemed to be objectionable on the Internet. On October 21, 1998, President Clinton signed the Internet Tax Freedom Act placing a three year moratorium, beginning October 1, 1998 through October 21, 2001, on Internet access taxes, multiple taxes on electronic commerce, and discriminatory taxes on electronic commerce. In addition, local telephone carriers have argued 12 before the Federal Communications Commission ("FCC") that Internet service providers and online service providers should be required to pay fees for access to local telephone networks in a manner similar to long distance telephone carriers. Although the FCC has informally stated that it has no intention of assessing per-minute charges on Internet traffic or changing the way consumers obtain and pay for access to the Internet, if the efforts of the local telephone carriers are successful, costs for Internet access and usage could increase sharply. Moreover, it may take years to determine the extent to which existing laws relating to issues such as property ownership, libel, taxation and personal privacy are applicable to the Internet. Any new laws or regulations relating to access to or use of the Internet could harm our business. REGULATION COULD REDUCE THE VALUE OF OUR DOMAIN NAMES. We own the Internet domain names "euniverse.com," "cduniverse.com", "videouniverse.com", "gamesuniverse.com", "casesladder.com" and "gagames.com" as well as numerous other domain names in the United States. National and international Internet regulatory bodies generally regulate the registration of domain names. The regulation of domain names in the United States and in other countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we might not acquire or maintain the "euniverse.com," "cduniverse.com", "videouniverse.com", "gamesuniverse.com", "casesladder.com", "gagames.com" or comparable domain names in all the countries in which we conduct business, which could harm our business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear and still evolving. Therefore, we might be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights. If this occurred, our business could suffer. THE INTERNET INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE. Rapid technological developments, evolving industry standards and user demands, and frequent new product introductions and enhancements characterize the market for Internet products and services. These market characteristics are exacerbated by the emerging nature of the market and the fact that many companies are expected to introduce new Internet products and services in the near future. Our future success will depend on our ability to continually improve our content offerings and services. In addition, the widespread adoption of developing multimedia- enabling technologies could require fundamental and costly changes in our technology and could fundamentally affect the nature, viability and measurability of Internet-based advertising, which could harm our business. ONLINE SECURITY RISKS. The Company accepts credit cards, personal checks or money orders as payment for customer orders. The CD Universe web site enables customers to store their credit card information in a personal account, thereby avoiding the need to re-enter this information when making future purchases. Customers are offered several shipping options, including overnight delivery. The Company confirms each order by e-mail communication to the customer promptly after the order is placed, and subsequently confirms shipment of the order by e- mail. In addition, the CD Universe web site includes a feature which enables customers to check on the status of their order. Use of the Internet by consumers is at an early stage of development, and market acceptance of the Internet as a medium for commerce is still by no means certain. The Company's future success will depend on its ability to significantly increase revenues, which will require the development and widespread acceptance of the Internet as a medium for commerce, particularly as a channel of retail distribution. The Internet may not prove to be a viable commercial marketplace because of inadequate development of the 13 necessary infrastructure, such as reliable network backbones, or complementary services, such as high-speed modems and security procedures for financial transactions. The viability of the Internet may prove uncertain due to delays in the development and adoption of new standards and protocols to handle increased levels of Internet activity or due to increased government regulation. If use of the Internet for the purposes envisioned by the Company does not continue to grow, or if the necessary Internet infrastructure is not further developed and maintained, the Company's business, results of operations and financial condition could be materially adversely affected due to decrease or loss of traffic. Despite the Company's implementation of network security measures, its infrastructure is potentially vulnerable to computer break-ins and similar disruptive problems caused by individuals with a variety of objectives. Consumer concern over Internet security has been, and could continue to be, an impediment to the expansion of commercial activities that require consumers to transmit their credit card information and other personal information over the Internet. In addition, computer viruses, break-ins or other security problems could lead to misappropriation of proprietary information and interruptions, delays or cessation in service to the Company's customers. Until more comprehensive and reliable security technologies are developed and implemented, the security and privacy concerns of existing and potential customers may inhibit the growth of the Internet as a merchandising medium. RISKS RELATED TO THIS OFFERING OUR STOCK PRICE COULD BE VOLATILE. Our Common Stock is currently traded on the OTC Bulletin Board. We cannot predict the extent to which investor interest in our Company will develop in the trading market or how liquid any trading market might become. The stock market has experienced extreme price and volume fluctuations and the market prices of securities of technology companies, particularly Internet-related companies, have been highly volatile. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. Such litigation could result in substantial costs and a diversion of our management's attention and resources. OUR STOCK OWNERSHIP WILL BE CONCENTRATED IN A SMALL NUMBER OF PEOPLE. As of September 8, 1999, the present directors, executive officers, greater than 5% shareholders and their affiliates beneficially owned approximately 66% of our outstanding Common Stock. As of September 8, 1999, Brad D. Greenspan beneficially owned approximately 45% of our outstanding Common Stock. As a result of his beneficial ownership, Mr. Greenspan, acting alone or with others, will be able to control all matters requiring stockholder approval, including the election of directors and approval of significant transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control of the Company. See "PRINCIPAL SHAREHOLDERS." SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD IMPACT OUR STOCK PRICE. As of August 31, 1999, approximately 13,806,000 shares of our Common Stock are restricted shares that may be sold only in the event that such shares are registered, or exempted from registration, under the Securities Act. The remaining approximately 1,034,000 shares are freely tradable. Sales of a large number of shares could hurt the market price for our Common Stock. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "SHARES ELIGIBLE FOR FUTURE SALE." None of our directors, officers or greater than 5% shareholders has any 14 restrictions on selling any of our securities held by him or her, other than as provided under applicable securities laws. In addition, the former shareholders of Case's Ladder and The Big Network can require us to register its shares of our Common Stock for public sale if we register any of our equity securities (with some exceptions, such as if we register securities issuable under our stock awards plan). See "SHARES ELIGIBLE FOR FUTURE SALE." THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES AND ADDRESS, AMONG OTHER THINGS, THE COMPANY'S BUSINESS STRATEGY, USE OF PROCEEDS, PROJECTED CAPITAL EXPENDITURES, LIQUIDITY, POSSIBLE BUSINESS RELATIONSHIPS, AND POSSIBLE EFFECTS OF CHANGES IN GOVERNMENT REGULATION. THESE STATEMENTS MAY BE FOUND UNDER "SUMMARY," "RISK FACTORS," "USE OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "BUSINESS" AS WELL AS IN THE PROSPECTUS GENERALLY. THESE STATEMENTS RELATE TO OUR FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "EXPECTS," "ANTICIPATES," "INTENDS," "PLANS," AND SIMILAR EXPRESSIONS. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE FACTORS DISCUSSED ABOVE AND SET FORTH IN THIS PROSPECTUS GENERALLY. USE OF PROCEEDS The Company will not receive any portion of the proceeds from the sale of shares of Common Stock by the Selling Stockholders under this Prospectus. DIVIDEND POLICY We have not in the past paid any dividends on our equity securities andanticipate that we will retain any future earnings for use in the expansion and operation of our business. We do not anticipate paying any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, working capital requirements and other factors the Board of Directors deems relevant. CAPITALIZATION The following table sets forth (1) the actual capitalization of the Company as of June 30, 1999, (2) the pro forma changes in capitalization of the Company after giving effect to the conversion of the outstanding Series A Convertible Preferred into an aggregate of 1,890,725 shares of Common Stock, and (3) the pro forma capitalization. See "USE OF PROCEEDS." This table should be read in conjunction with the Financial Statements and the notes thereto and the other financial information included elsewhere in this Prospectus.
Pro forma Pro forma 6/30/99 Adjustments As Adjusted --------------------------------------------------------- Shareholder's Equity Common Stock, $.001 par value, 250,000,000 authorized, 14,837,723 issued and outstanding; 16,632,747 issued and outstanding as adjusted............... 14,837 1,891 16,633 Preferred Stock, $.10 par value, 50,000,000 authorized, 1,795,024 issued and outstanding; none issued and outstanding as adjusted..................... 179,502 (179,502) - Additional paid-in-capital.................................. 21,708,592 177,611 21,886,298 Fair value of warrants issued............................... 1,214,567 1,214,567 Fair value of stock options issued.......................... 350,000 350,000 Offering cost............................................... - (57,000) (57,000) Accumulated deficit......................................... (1,692,344) (1,692,344) --------------------------------------------------------- Total Shareholder's Equity 21,775,154 (57,000) 21,718,154 --------------------------------------------------------- --------------------------------------------------------- Total Capitalization 21,775,154 (57,000) 21,718,154 =========================================================
15 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements appearing elsewhere in this Prospectus. The following selected financial data are derived from the audited financial statements of CD Universe presented as of March 31, 1999 and 1998 and the Company's unaudited financial information presented as of June 30, 1999. The Company completed mergers with Entertainment Universe, Inc., Case's Ladder, Inc. and Gamer's Alliance, Inc. subsequent to March 31, 1999. The effect of these mergers have been accounted for using purchase method accounting during the period ended June 30, 1999. In our opinion, these unaudited financial statements have been prepared on the same basis as our audited financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position for these periods. The historical results are not necessarily indicative of results to be expected for any future period. 16 eUNIVERSE, INC. -------------- Statements of Operations
Three Months Ended Year Ended ------------------------------- --------------------------------- June 30, June 30, March 31, March 31, 1999 1998 1999 1998 ------------- ------------- ------------- -------------- REVENUE................................................. $ 2,034,955 $ 2,118,186 $ 8,851,713 $ 5,685,211 COST OF GOODS SOLD...................................... 1,659,558 1,802,615 7,550,289 4,898,302 ----------- ----------- ----------- ----------- GROSS PROFIT............................................ 375,397 315,571 1,301,424 786,909 OPERATING EXPENSES: Marketing and sales................................ 444,206 244,605 1,182,529 623,382 Product development................................ 168,018 92,066 332,534 147,973 General and administrative......................... 630,149 49,851 189,930 110,965 Merger and acquisition related..................... 62,241 - - - Amortization of goodwill and other intangibles................................. 307,641 292 1,170 1,170 Stock-based compensation........................... 237,500 - - - ----------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES................................ 1,849,755 386,814 1,706,163 883,490 ----------- ----------- ----------- ----------- OPERATING LOSS............. 1,474,358 (71,243) (404,739) (96,581) =========== =========== =========== =========== NONOPERATING INCOME (EXPENSE) Interest and dividend income......................... 7,049 108 - - Interest expense..................................... (85,801) - (2,424) - Other................................................ - - - (16,231) Income taxes......................................... - - - - ----------- ----------- ----------- ----------- NET INCOME (LOSS)......... $ 1,553,110 $ (71,135) $ (407,163) $ (112,812) =========== =========== =========== =========== Basic income (loss) per common share.................... $ (0.13) N/A N/A N/A =========== =========== =========== =========== Basic weighted average common shares outstanding........................................... 12,221,900 N/A N/A N/A ----------- ----------- ----------- -----------
17 eUNIVERSE, INC. --------------- Balance Sheet Data
June 30, March 31, March 31, 1999 1999 1998 ------------ ------------ ------------ Unaudited Cash and cash equivalents......... $ 4,194,109 $ 11,335 $ 267,214 Working capital (deficit)......... 3,550,515 (783,204) (309,864) Total assets...................... 22,882,213 558,346 533,164 Total shareholders' equity........ 21,775,155 (518,976) (111,812)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and the accompanying notes which appear elsewhere in this Prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this Prospectus, particularly in "Risk Factors." RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 1999 VS. 1998 Net Sales - ---------- Net sales include the selling price of music, video, games and other products sold by the Company, net of returns, as well as outbound shipping and handling charges. Net sales also include membership revenues and advertising revenues. For the quarter ended June 30, 1999, revenues declined slightly by 4% as a result of increased competition in the online music retailing markets and a shutdown in one of the company's larger partners whose customers had previously contributed approximately 5% of net sales. QUARTER ENDED JUNE 30, ------------------ 1999 1998 % CHANGE -------- -------- --------- (in Thousands) Net sales.............. $2,035 $2,118 (4)% Gross Profit - ------------- Gross profit is calculated as net sales less the cost of sales, which consists of the cost of merchandise sold to customers and inbound and outbound shipping costs. For the quarter ended June 30, 1999, gross profit increased as a percentage of net sales and in absolute dollars over the same periods in 1998, reflecting a change in the mix of revenues. Gross margin percentages increased over the prior period as the company took measures to increase pricing on standard catalog items to be closer to competitors' prices and as a result of lower shipping costs. 18 QUARTER ENDED JUNE 30, ----------------- 1999 1998 % CHANGE -------- ------- --------- (in Thousands) Gross Profit........... $ 375 $ 316 19% Gross Margin........... 18.4% 14.9% The Company over time intends to expand its operations by promoting new or complementary products or sales formats and by expanding the breadth and depth of its product or service offerings. Gross margins attributable to new business areas may be lower than those associated with the Company's existing business activities. However, the Company over time will reflect the full period effect of its acquisitions of Cases Ladder and Gamers Alliance that benefit from higher margins on their sales of advertising. Sales and Marketing - ------------------- Marketing and sales expenses consist primarily of fulfillment costs, advertising, public relations and promotional expenditures, and all related payroll and related expenses for personnel engaged in marketing, selling and fulfillment activities. Fulfillment costs include the cost of operating and staffing the distribution and customer service center. QUARTER ENDED JUNE 30, ----------------- 1999 1998 % CHANGE -------- -------- -------- (in Thousands) Sales and Marketing.......... $ 444 $ 245 81% Percentage of sales.......... 21.8% 11.5% Marketing and sales expenses increased during the quarter ended June 30, 1999 due to several factors including increases in the Company's advertising and promotional expenditures, increases in payroll and related costs associated with fulfilling customer demand, costs associated with Case's Ladder, and increases in credit card merchant fees. The Company intends to increase its branding and marketing campaigns. Increases in sales will drive increases in fulfillment costs. As a result, the Company continues to expect marketing and sales expenses to increase significantly in absolute dollars. Product Development - ------------------- Product development expenses consist of payroll and related expenses for developing and maintaining the Company's websites and supporting technology. 19 QUARTER ENDED JUNE 30, ------------------ 1999 1998 % CHANGE ------- ------- -------- (in Thousands) Product development expense $ 168 $ 92 83% Percentage of sales........ 8.2% 4.3% Product development costs increased as a result of increased payroll and related expense from personnel additions required to begin the integration of the Company's websites and redesign of the websites. The addition of Case's Ladder expenses for June 1999 also contributed to the increase. General and Administrative - -------------------------- General and administrative ("G&A") expenses consist of payroll and related expenses for executive, finance and administrative personnel, recruiting, professional fees and other general corporate expenses. QUARTER ENDED JUNE 30, ------------------ 1999 1998 % CHANGE ------- ------- -------- (in Thousands) General and administrative $ 630 $ 50 NM% Percentage of sales 31.1% 2.4% Increases in G&A costs are largely attributable to increased payroll- related and infrastructure costs associated with the Company's expansion efforts, legal and other professional fees, and recruiting costs. The company expects G&A costs to continue to increase commensurate with its expansion plans. Merger, Acquisition and Investment Related Costs, Including Amortization of - ------------------------------------------------ Intangibles and Equity in Losses of Affiliates QUARTER ENDED JUNE 30, ------------------ 1999 1998 ------- ------ (in Thousands) Merger, acquisition and investment related costs including amortization of intangibles and equity in losses of affiliates........................ $ 370 $ 0 Merger, acquisition and investment related costs ("M&A Costs") consist of amortization of goodwill and other purchased intangibles, equity in the losses of affiliates, and certain merger, acquisition and investment related charges. The Company expects M&A Costs to increase in the third quarter of 1999, because the Company will record a full quarter of amortization expense and equity in losses of affiliates relating to the acquisitions and investments made during the second quarter. It is likely that the Company will continue to expand its business through acquisitions and investments, which would cause M&A Costs to increase. 20 Stock-Based Compensation QUARTER ENDED JUNE 30, ------------------- 1999 1998 ------- ------- (in Thousands) Stock-based compensation $ 238 $ - Stock-based compensation is comprised of the portion of acquisition related consideration conditioned on the continued tenure of key employees, which must be classified as compensation expense under generally accepted accounting principles. Stock-based compensation also includes stock-based charges such option related deferred compensation recorded at the Company's initial public offering. Interest Income and Expense QUARTER ENDED JUNE 30, ------------------- 1999 1998 -------- ------- (in Thousands) Interest income...... $ 7 $ - Interest expense..... (86) ( - ) Interest income on cash increased due to higher balances resulting from the Company's financing activities, principally the April 1999 issuance of $6.5 million aggregate principal amount of 6% Convertible Preferred Stock ("Preferred"). Interest expense for the quarter ended June 30, 1999 consists primarily of interest on the Preferred. Income Taxes The Company has not generated any taxable income to date and therefore has not paid any federal income taxes since inception. Utilization of the Company's net operating loss carryforwards, which begin to expire in 2014, may be subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended. Due to uncertainties regarding realizability of the deferred tax assets, the Company has provided a valuation allowance on the deferred tax asset in an amount necessary to reduce the net deferred tax asset to zero. RESULTS OF OPERATIONS - YEAR ENDED MARCH 31, 1999 VS. 1998 Net Sales - ---------- Net sales include the selling price of music, video, games and other products sold by the Company, net of returns, as well as outbound shipping and handling charges. Net sales also include membership revenues and advertising revenues. For the year ended March 31, 1999, revenues increased by 56% as a result of increased purchases of music online and through the Company's increased marketing with its marketing partners and favorable reviews by third parties. 21 YEAR ENDED MARCH 31, ---------------- 1999 1998 % CHANGE ------ -------- --------- (in Thousands) Net sales.......... $8,852 $5,685 56% At March 31, 1999 the Company's cumulative customer accounts reached 266 thousand, compared with 128 thousand at March 31, 1998. Gross Profit - ------------- Gross profit is calculated as net sales less the cost of sales, which consists of the cost of merchandise sold to customers and inbound and outbound shipping costs. For the year ended March 31, 1999, gross profit increased as a percentage of net sales and in absolute dollars over the same periods in 1998, reflecting a change in the mix of revenues. Gross margin percentages increased over the prior period as the company took measures to increase pricing on standard catalog items to be closer to competitors' prices and as a result of lower shipping costs. YEAR ENDED MARCH 31, --------------- 1999 1998 % CHANGE ------- ------- ---------- (in Thousands) Gross Profit $1,301 $ 787 65% Gross Margin 14.7% 13.8% The Company over time intends to expand its operations by promoting new or complementary products or sales formats and by expanding the breadth and depth of its product or service offerings. Gross margins attributable to new business areas may be lower than those associated with the Company's existing business activities. However, the Company over time will reflect the full period effect of its acquisitions of Cases Ladder and Gamer's Alliance that benefit from higher margins on their sales of advertising. Sales and Marketing - ------------------- Marketing and sales expenses consist primarily of fulfillment costs, advertising, public relations and promotional expenditures, and all related payroll and related expenses for personnel engaged in marketing, selling and fulfillment activities. Fulfillment costs include the cost of operating and staffing the distribution and customer service center. YEAR ENDED MARCH 31, ---------------- 1999 1998 % CHANGE -------- ------- --------- (in Thousands) Sales and Marketing $1,183 $ 623 90% Percentage of sales 13.3% 10.9% 22 Marketing and sales expenses increased during the year ended March 31, 1999 due to several factors including increases in the Company's advertising and promotional expenditures, increases in payroll and related costs associated with fulfilling customer demand, costs associated with new product offerings, the opening of new distribution centers, and increases in credit card merchant fees resulting from higher sales. The Company intends to increase its branding and marketing campaigns. Increases in sales will drive increases in fulfillment costs. As a result, the Company continues to expect marketing and sales expenses to increase significantly in absolute dollars. Product Development - ------------------- Product development expenses consist of payroll and related expenses for developing and maintaining the Company's websites and supporting technology. YEAR ENDED MARCH 31, --------------- 1999 1998 % CHANGE ------- ------- --------- (in Thousands) Product development expense $ 333 $ 148 125% Percentage of sales 3.8% 2.6% General and Administrative - -------------------------- General and administrative ("G&A") expenses consist of payroll and related expenses for executive, finance and administrative personnel, recruiting, professional fees and other general corporate expenses. YEAR ENDED MARCH 31, --------------- --------- 1999 1998 % CHANGE ------ ------- --------- (in Thousands) General and administrative $ 190 $ 111 71% Percentage of sales 2.1% 2.0% Increases in G&A costs are largely attributable to increased payroll- related and infrastructure costs associated with the Company's expansion efforts, legal and other professional fees, and recruiting costs. The company expects G&A costs to continue to increase commensurate with its expansion plans. Income Taxes The Company has not generated any taxable income to date and therefore has not paid any federal income taxes since inception. Utilization of the Company's net operating loss carryforwards, which begin to expire in 2011, may be subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended. Due to uncertainties regarding realizability of the deferred tax assets, the Company has provided a valuation allowance on the deferred tax asset in an amount necessary to reduce the net deferred tax asset to zero. 23 LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999 the Company's principal sources of liquidity consisted of $4.0 million of cash compared to $11 thousand of cash at March 31, 1999. Net cash used in operating activities was $1.05 million and $109 thousand for the three-month periods ended June 30, 1999 and 1998, respectively. Net operating cash flows were primarily attributable to quarterly net losses, decreases in accounts payable and in increases in prepaid expenses and other, partially offset by non-cash charges for depreciation and amortization and merger and acquisition related costs. Net cash used in investing activities was $2.1 million and $17.4 thousand for the three-month periods ended June 30, 1999 and 1998, respectively, and consisted of purchases of fixed assets, and cash paid for acquisitions and cash payments and receipts to and from officers and employees. At June 30, 1999, amounts outstanding from employees relate to agreements made in conjunction with the acquisitions of Cases Ladder and Gamers Alliance. Cash available for investment purposes increased substantially in 1999 as a result of the issuance of the Preferred. Net cash provided by financing activities of $7.3 million for the three- month period ended June 30, 1999 resulted from proceeds relating to the issuance of the Preferred, net of financing costs, and proceeds from issuance of capital stock. As of June 30, 1999, the Company's principal commitments consisted of obligations outstanding under its Preferred (including interest payments), obligations in connection with the acquisition of fixed assets and leases, and commitments for advertising and promotional arrangements. Failure to achieve favorable financing for asset acquisitions could negatively impact the Company's cash flows. Geographic expansion and continued acquisitions and investments will also require future capital expenditures. The Company believes that current cash balances will be sufficient to meet its anticipated cash needs for at least the next 6 months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. If current cash that may be generated from operations are insufficient to satisfy the Company's liquidity requirements, the Company may seek to sell additional equity or to obtain a line of credit. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's stockholders. In addition, the company will, from time to time, consider the acquisition of or investment in complementary businesses, products, services and technologies, which might impact the Company's liquidity requirements or cause the Company to issue additional equity. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. 24 PRO FORMA FINANCIAL INFORMATION Subsequent to June 30, 1999, the latest balance sheet date presented in this registration statement, the registrant will complete the acquisition of The Big Network, Inc. Additionally, during the three month period ended June 30, 1999, the registrant completed the reverse acquisition of Motorcycle Centers of America, Inc. by Entertainment Universe, Inc., the acquisition of CD Universe, Inc. (the "Predecessor"), the acquisition of Cases Ladder, Inc. and the acquisition of Gamer's Alliance, Inc. The details of the acquisitions are presented in the notes to the June 30, 1999 financial statements presented elsewhere in this registration statement. The pro forma balance sheet reflects the historical consolidated balance sheet of the registrant and the balance sheet of The Big Network, Inc. as of June 30, 1999. Pro forma adjustments have been made to give effect to the acquisition of The Big Network, Inc. as if it had occurred on June 30, 1999. The pro forma income statement for the three month period ended June 30, 1999 reflects the historical consolidated income statement of the registrant and the income statement of The Big Network, Inc. Pro forma adjustments have been made to give effect to the acquisitions as if they had occurred as of the beginning of the period. The pro forma income statement for the twelve month period ended March 31, 1999 reflects the historical income statements for CD Universe, Inc.(the predecessor) for the year ended March 31, 1999 and the historical income statements for Cases Ladder, Inc., Gamers Alliance, Inc. and The Big Network, Inc. for the year ended December 31, 1998. There is no significant activity for Entertainment Universe, Inc., as it came into existence in February, 1999. The historical income statement of Motorcycle Centers of America, Inc. has not been presented. Entertainment Universe, Inc. and its predecessor, CD Universe, Inc. are considered to be the accounting acquirer in a recapitalization. Motorcycle Centers of America, Inc. is treated as the legal acquirer and as such, its historical operating results are not presented with those of the registrant. Pro forma adjustments have been made to give effect to the above transactions as if they had occurred at the beginning of the twelve month period presented. eUNIVERSE PROFORMA BALANCE SHEET JUNE 30, 1999
THE BIG PRO FORMA ADJUSTMENTS CONSOLIDATED NETWORK, INC. TO REFLECT ACQUISITION BALANCE BALANCE BALANCE OF THE BIG NETWORK, INC SHEET SHEET SHEET AS OF JUNE 30, 1999 JUNE 30,1999 JUNE 30, 1999 JUNE 30, 1999 DR CR PRO FORMA --------------- ------------- ---------- --------- -------------- ASSETS CASH $ 4,194,109 $ 118,800 $ 4,312,909 RECEIVABLES 193,096 6,900 199,996 INVENTORY 41,451 41,451 DUE FROM EMPLOYEES 153,200 153,200 OTHER CURRENT ASSETS 75,717 514 76,231 --------------- ------------- -------------- TOTAL CURRENT ASSETS 4,657,573 126,214 4,783,787 --------------- ------------- -------------- PROPERTY AND EQUIPMENT, NET 329,346 58,941 388,287 GOODWILL, NET OF AMORTIZATION 17,384,180 1 10,939,104 28,323,284 OTHER INTANGIBLES, NET OF AMORTIZATION 164,030 2,105 166,135 --------------- ------------- -------------- TOTAL OTHER ASSETS 17,877,556 61,046 28,877,706 --------------- ------------- -------------- TOTAL ASSETS $ 22,535,129 $ 187,260 $ 33,661,493 =============== ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY ACCOUNTS PAYABLE $ 872,284 $ 49,330 $ 921,614 ACCRUED EXPENSES 234,774 27,353 262,127 NOTES PAYABLE - SHAREHOLDERS 13,500 13,500 CAPITAL LEASE PAYABLE 8,585 8,585 --------------- ------------- -------------- TOTAL CURRENT LIABILITIES 1,107,058 98,768 1,205,826 --------------- ------------- -------------- LONG TERM CAPITAL LEASE PAYABLE 2,596 2,596 --------------- ------------- -------------- TOTAL LIABILITIES 1,107,058 101,364 1,208,422 --------------- ------------- -------------- PREFERRED STOCK, $.10 par value; 40,000,000 shares authorized, 1,795,024 shares issued and outstanding 179,502 360,502 1 360,502 179,502 COMMON STOCK, $.001 par value; 250,000,000 shares authorized, 16,637,723 shares issued and outstanding (pro forma) 14,838 2,675 1 2,675 1 1,800 16,638 ADDITIONAL PAID IN CAPITAL 22,923,159 721,447 1 721,447 1 11,023,200 33,946,359 ACCUMULATED DEFICIT (1,689,428) (998,728) 1 998,728 (1,689,428) --------------- ------------- -------------- TOTAL STOCKHOLDERS' EQUITY 21,428,071 85,896 32,453,071 --------------- ------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,535,129 $ 187,260 $ 33,661,493
eUNIVERSE PROFORMA STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999
INCOME STATEMENT INCOME CONSOLIDATED FOR PRO FORMA ADJUSTMENTS STATEMENT INCOME STATEMENT THE BIG NETWORK TO REFLECT ACQUISITIONS FOR THE FOR THE INC FOR THE QUARTER QUARTER ENDED QUARTER ENDED QUARTER ENDED ENDED JUNE 30, 1999 JUNE 30, 1999 JUNE 30, 1999 JUNE 30, 1999 DR CR PRO FORMA ---------------- ---------------- --------- --------- ------------- REVENUE $ 2,034,955 $ 8,891 2 50,148 $ 2,237,458 3 143,464 COST OF SALES 1,652,505 2,725 3 20,143 1,675,373 ---------------- ---------------- ------------- GROSS PROFIT 382,450 6,166 562,085 ---------------- ---------------- ------------- MARKETING AND SALES 451,259 7,306 458,565 PRODUCT DEVELOPMENT 168,018 2,000 170,018 GENERAL AND ADMINISTRATIVE 630,149 243,400 2 54,410 1,074,041 3 146,082 MERGER AND ACQUISITION RELATED 62,241 62,241 AMORTIZATION OF GOODWILL AND OTHER 304,725 2 24,660 718,725 3 115,862 4 273,478 STOCK BASED COMPENSATION 237,500 237,500 ---------------- ---------------- ------------- TOTAL 1,853,892 252,706 2,721,090 ---------------- ---------------- ------------- LOSS FROM OPERATIONS (1,471,442) (246,540) (2,159,005) INTEREST INCOME AND OTHER 7,049 1,113 8,162 INTEREST EXPENSE (85,801) (3,022) (88,823) ---------------- ---------------- ------------- LOSS BEFORE INCOME TAXES (1,550,194) (248,449) (2,239,666) INCOME TAX EXPENSE (BENEFIT) - ---------------- ---------------- ------------- NET LOSS $ (1,550,194) $ (248,449) $ (2,239,666) ================ ================ ============= Basic Loss Per Share Historical $ (.15) Proforma $ (.14) Weighted Average Shares Outstanding Historical 12,400,115 Proforma 16,501,535
eUNIVERSE PROFORMA STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS
MOTORCYCLE CENTERS OF CASES ENTERTAINMENT THE BIG NETWORK, AMERICA C D UNIVERSE LADDER UNIVERSE INC. (YEAR END (YEAR END (YEAR END (PERIOD END (YEAR END 12/31/98) 3/31/99) 12/31/98) 3/31/99) 12/31/98) COMBINED -------------- -------------- --------- ----------------------------------- ------------ REVENUE $ - $ 8,851,713 $ 378,345 $ - 83,883 $ 9,313,941 COST OF SALES - 8,264,306 33,660 - 56,375 8,354,341 -------------- -------------- --------- ----------------------------------- ------------ GROSS PROFIT - 587,407 344,685 - 27,508 959,600 -------------- -------------- --------- ----------------------------------- ------------ GENERAL AND ADMINISTRATIVE EXPENSES - 995,584 360,019 90 741,265 2,096,958 AMORTIZATION 5 -------------- -------------- --------- ----------------------------------- ------------ TOTAL - 995,584 360,019 90 741,265 2,096,958 -------------- -------------- --------- ----------------------------------- ------------ LOSS FROM OPERATIONS - (408,177) (15,334) (90) (713,757) (1,137,358) OTHER INCOME (EXPENSE) - 1,013 - - (22,308) (21,295) -------------- -------------- --------- ----------------------------------- ------------ LOSS BEFORE INCOME TAXES - (407,164) (15,334) (90) (736,065) (1,158,653) INCOME TAX EXPENSE (BENEFIT) - - (1,372) - (1,372) -------------- -------------- --------- ----------------------------------- ------------ NET LOSS $ - $ (407,164) $ (13,962) $ (90) (736,065) $ (1,157,281)
eUNIVERSE PROFORMA STATEMENTS OF OPERATIONS FOR 12 MONTHS
CASES ENTERTAINMENT CD UNIVERSE LADDER UNIVERSE (YEAR END (YEAR END (PERIOD END 3/31/1999) 12/31/1998) 3/31/1999) -------------------- ------------------ ----------------------- REVENUE $ 8,851,713 $ 378,345 $ - COST OF SALES 8,264,306 33,660 - -------------------- ------------------ ----------------------- GROSS PROFIT 587,407 344,685 - -------------------- ------------------ ----------------------- GENERAL AND ADMINISTRATIVE EXPENSES 995,584 360,019 90 AMORTIZATION -------------------- ------------------ ----------------------- TOTAL 995,584 360,019 90 -------------------- ------------------ ----------------------- LOSS FROM OPERATIONS (408,177) (15,334) (90) OTHER INCOME (EXPENSE) 1,013 - - -------------------- ------------------ ----------------------- LOSS BEFORE INCOME TAXES (407,164) (15,334) (90) INCOME TAX EXPENSE (BENEFIT) - (1,372) - -------------------- ------------------ ----------------------- NET LOSS $ (407,164) $ (13,962) $ (90) ==================== ================== ======================= THE BIG NETWORK, INC. (YEAR END COMBINED 12/31/1998) ---------------------- ---------------- REVENUE 83,883 $ 9,313,941 COST OF SALES 56,375 8,354,341 ---------------------- ---------------- GROSS PROFIT 27,508 959,600 ---------------------- ---------------- GENERAL AND ADMINISTRATIVE EXPENSES 741,265 2,096,958 AMORTIZATION ---------------------- ---------------- TOTAL 741,265 2,096,958 ---------------------- ---------------- LOSS FROM OPERATIONS (713,757) (1,137,358) OTHER INCOME (EXPENSE) (22,308) (21,295) ---------------------- ---------------- LOSS BEFORE INCOME TAXES (736,065) (1,158,653) INCOME TAX EXPENSE (BENEFIT) (1,372) ---------------------- ---------------- NET LOSS (736,065) $ (1,157,281) ====================== ================
Notes to pro forma financial statements Balance Sheet, June 30, 1999 1) To reflect the acquisition of The Big Network, Inc. as if it occurred on June 30, 1999. This acquisition has not yet been consummated. The anticipated date of close is September 13, 1999. The acquisition, to be accounted for as a purchase, will be achieved through the issuance of 1,800,000 shares of the Company's common stock in exchange for all of the issued and outstanding shares of common and preferred stock held by Big Network's shareholders. Big Network will thus become a wholly owned subsidiary. The total acquisition price is $11,025,000, resulting in goodwill of $10,939,104, calculated as follows:
Acquisition price $11,025,000 Net assets acquired 85,896 ----------- Goodwill $10,939,104
Income Statement, Three months ended June 30, 1999 2) To record the activity of Gamers Alliance, Inc for the period from April 1 through June 30, 1999, the date of the acquisition. 3) To record the activity of Cases Ladder, Inc. for the period from April 1 through May 31, 1999, the date of acquisition. 4) To reflect amortization of goodwill for the three month period. Income Statement, Twelve months ended March 31, 1999 5) To reflect amortization of goodwill as if the acquisitions had been consummated at the beginning of the twelve month period. BUSINESS GENERAL DEVELOPMENT OF BUSINESS Prior to April 1999, eUniverse, Inc. was known as Motorcycle Centers of America, Inc. Motorcycle Centers was a Nevada corporation with no significant operations and had not had operations since 1995. In March 1999, Motorcycle Centers entered into a letter of intent to acquire Entertainment Universe, Inc. ("EUI") in a reverse acquisition. Entertainment Universe, Inc. ("EUI") --- --- was founded in February 1999 by Brad D. Greenspan for the purpose of developing and acquiring entertainment related internet businesses. On April 14, 1999, EUI sold 1,795,024 shares of Series A Convertible Preferred Stock in a private offering under Regulation D of the Securities Act of 1933 (the "Securities ---------- Act"), raising $6,462,086, before offering costs were deducted. The Company - --- used $1,915,000 of these proceeds (plus 2,425,000 shares of Common Stock) to acquire CD Universe, Inc. ("CD Universe"). CD Universe is a Connecticut ------------ corporation in the business of selling audio CDs and videotapes over the Internet. Simultaneously, EUI was acquired by Motorcycle Centers of America, Inc. ("MCA"), a Nevada corporation with limited business transactions and deriving no --- current revenue, whose shares were publicly traded on the OTC Bulletin Board in a reverse acquisition. MCA became the surviving entity. As EUI had no operations prior to its acquisition of CD Universe, CD Universe is considered to be the predecessor entity and their historical financial statements have been included in this registration statement. In connection with that reorganization, the holders of the EUI Series A Convertible Preferred Stock exchanged their shares, on a one-to-one basis, for shares of MCA convertible preferred stock which has equivalent rights and preferences. Likewise, in connection with the reorganization, the holders of EUI Common Stock exchanged their shares, on a one-to-one basis, for shares of MCA Common Stock. Concurrently, EUI distributed its asset, the capital stock of CD Universe, Inc., to its sole shareholder, MCA. Next, MCA, the parent entity of that reorganization, changed its name to eUniverse, Inc. As used herein, the term "Reorganization" refers to the -------------- reorganization between EUI and MCA. The following chart summarizes our current corporate organizational structure:
---------------------------- eUniverse, Inc. ---------------------------- ----------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- Entertainment CD Universe, Inc. Case's Ladder, Inc. Gamer's Alliance, Inc. Universe, Inc. ----------------------------------------------------------------------------------------------------
DESCRIPTION OF THE BUSINESS The Company is building a network of entertainment-related sites with broad consumer appeal. These sites provide the Company with a variety of merchandising opportunities and can be cross-promoted to increase the overall audience for the Company's properties. The Company is leveraging the Web traffic across its sites to generate incremental e-commerce and advertising revenue. Additionally, the Company plans to build an affiliate network of third-party entertainment and retail Web sites which would license the LivePlace community-building software that the Company is in the process of acquiring. The Company believes that its plans to superimpose LivePlace on these affiliate sites will generate additional traffic and e-commerce sales for the Company's network. The Company's network of sites is primarily targeted to Generation X and Generation Y consumers. Generation X consists of 45 million computer literate consumers between the ages of 21 and 35 with $125 billion in purchasing power. Generation Y consists of approximately 60 million consumers between the ages of 10 and 24 who are the first generation to grow up using the Internet as a primary medium for information, entertainment, communication and shopping. Generation Y is growing 19.5% faster than the overall U.S. population and accounts for more than $250 billion of annual disposable income. Jupiter Communications projects that e-commerce sales to Generation Y consumers will grow from $600 million in 1998 to $3.8 billion in 2002. 25 The Company's current emphasis is on acquiring businesses in the field of entertainment, primarily games (including board, card, computer, arcade and console video games), music and movies, with the following key characteristics such as: (1) strategic content, management or technology, (2) product offerings compatible with the Generation X and Y demographics of the Company's sites and (3) the ability to leverage the Company's strategic advantages such as order fulfillment, hardware capacity and general overhead. The Company's strategy is based on the acquisition and/or development of web-based businesses in several sectors of the entertainment industry, and utilizing their synergies to generate cross traffic and increased revenues. This strategy includes the integration of a worldwide distribution of web-based entertainment programming. The Company is presently exploring expansion into Internet-based entertainment in a form that is similar to television and radio programming. Its long-term strategic plans are intended to take advantage of a world-wide distribution network comprised of the installed base of personal computers and televisions, making use of existing and emerging technologies to deliver this targeted programming. At the present time, the Company is engaged in the retail sale of music and video products and accessories, including audio CDs, videotapes and DVDs via the Internet; and the maintenance and operation of interactive games sites. We have been in the music and video sales business since April 1997, and the interactive games business since early 1998. The Company has never made a profit in any fiscal quarter. Music The Company's CD Universe online store (www.cduniverse.com) currently offers customers a selection of over 240,000 individual CD titles as well as proprietary content and features. The CD Universe Web site currently has over 290,000 registered users, attracts almost 1,000,000 unique visitors and processes over 20,000 orders each month. With acclaimed customer service, CD Universe's online music store has gained recognition in publications such as The New York Times, USA Today, Billboard and PC World, and has been named the best online music store by several electronic commerce ranking services. A recent consumer survey released by BizRate, an independent commerce ranking service, rated CD Universe as the number one CD store on the Internet. Furthermore, Briefing.com, a leading provider of live market commentary on the Internet, voted CD Universe as the best music retailer on the Internet. The CD Universe online store is designed to be informative, and to allow customers to discover, learn about and purchase CDs, videos and other music and video-related products. The store is designed to be intuitive and easy to use and to enable customers to complete the ordering process with a minimum amount of effort. Customers enter the CD Universe store through its Web site, cduniverse.com, and in addition to ordering music and video products, can conduct searches, browse among top sellers and other featured titles, read reviews, listen to music samples, register for a personalized newsletter, participate in promotions and check order status. The CD Universe web site provides a search engine that enables customers to navigate the store to find CDs or other products of interest. Customers can search for CDs based on artist, album title, song title, record label or musical genre. Upon clicking on an album title, the site visitor is provided with information about the artist and the specific album, a list of tracks on the album, sound samples and a list of reviews. 26 The Company believes that effective use of content encourages purchases by customers who may be browsing the site without a specific title in mind. The CD Universe web site provides sound samples, information about specific artists, albums and types of music, ratings, articles on music topics and other information. To help customers browse and discover CDs, the web site has eight music spaces organized by genre. These include rock, jazz, R & B, classical, country, Christian, world music and miscellaneous. The main page of each space features links to more specific genre pages which have a list of new releases as well as alphabetical listings of the artists and albums available within that genre. In addition to these regular online store content features, CD Universe's Web site offers several other features to encourage customers to learn about and discover CDs that might be of interest to the customer. The web site's CD University feature provides links to genre-specific areas where customers are provided with information about specific musical offerings and biographies of featured musicians in that genre. CD University currently offers links for classical, jazz and blues and is in the process of adding more musical genres to this area. In addition, the CD Universe web site has a feature called RockOnTV, provided by RockOnTV.com, where customers can read a listing of music and musician-related programs available on TV during that week. Once a CD has been selected, customers are prompted to click on the price to add products to their virtual shopping carts. Customers can add and remove products from their shopping carts as they browse, prior to finalizing their purchase. The shopping cart page displays each item that has been placed in the cart, including title, price and availability. To execute orders, customers can choose from a secure or standard purchasing mode depending on the capabilities of the customer's Web browser. After choosing a purchasing mode, the customer is prompted to enter his or her name and password or to create an account on CD Universe's Web site that can be used to make repeat purchases. The Company plans to enhance its position as a premier online music destination by providing digital music distribution and proprietary content on its CD Universe site. Using the Internet as a distribution medium in conjunction with audio compression and delivery technologies, the Company plans to enable a growing number of artists to distribute and to promote their music broadly and to enable customers to conveniently access an expanding music catalog. In recent years, with the proliferation of multimedia PCs, consumers have increasingly used their computers to play music. The recent introduction of compression formats such as MP3 has led to the widespread use of the Internet for the transmission of music. The Company believes that its established customer base of over two million registered members gives it a significant competitive advantage over other companies entering the online distribution market. This customer base allows the Company to attract artists who are interested in broadly distributing and promoting their music. The Company currently creates its own proprietary content for the CD Universe site, including the Big Bang newsletter, a personalized newsletter for customers, and CD University, a content-driven area that provides information about specific music genres. Through a sales partnership with Custom Revolutions, a provider of custom compilations over the Internet, the Company offers customers the ability to create their own personalized CDs carrying the CD Universe brand from a selection of over 175,000 songs. Filmed Entertainment 27 The Company's Video Universe online store (www.videouniverse.com) offers customers a selection of over 40,000 movie titles in videocassette, DVD and laser disc formats. The Video Universe Web site has recently been expanded to include DVD titles with the acquisition of MegaDVD.com (www.megadvd.com). MegaDVD.com, a pioneer in the online retailing of DVDs and accessories, was founded in June 1997. MegaDVD.com has been featured in publications such as Billboard magazine, the Hollywood Reporter and Stereo Review. MegaDVD.com has a loyal customer base of 3,000 registered users. The acquisition of MegaDVD.com has provided the Company with additional management resources and expertise necessary to effectively promote its online video store. It is estimated that annual retail sales of videos and DVDs in the United States will increase from $9.1 billion in 1998 to $12.8 billion in 2002. Domestic retail sales of DVD titles are expected to grow from $286 million in 1998 to $4.1 billion in 2003. The addition of MegaDVD.com has expanded the Company's customer base for video products, strengthened the Company's management and renewed emphasis on its online video offerings. The online store operates in conjunction with the CD Universe store and allows customers the ability to purchase products from either site using a common shopping cart. Interactive Entertainment Case's Ladder Case's Ladder is an online gaming portal which provides competitive rankings for online gamers and allows gamers to compete against one another in a variety of tournaments and leagues. Approximately 1.1 million users are registered with Case's Ladder interactive entertainment communities on the Internet. Case's Ladder primarily derives revenues from membership fees and advertising. Approximately 75% of registered users on the Case's Ladder Web site are between the ages of 18 and 50, with the majority of those visitors having an annual income over $50,000. In addition, 46% of Case's Ladder's users have purchased products or services over the Internet. The Company continues to leverage Case's Ladder's audience to expand eUniverse's customer base and to diversify its retail offerings into new business areas such as computer games. Gamer's Alliance Launched in 1996, Gamer's Alliance is a network of interactive entertainment community sites on the Internet with over 1.2 million unique monthly visitors, according to Double Click's July 1999 Report, and 20 impressions per month. Gamer's Alliance has aggregated a collection of leading sites covering several platforms, game genres and topics. The Gamer's Alliance Network spans over fifty (50) sites, including GA-Source, GA-Sports, GA- Strategy, GA-RPG and Dreamcast.net, owned and operated by the Company. GA-Source is an interactive game site on the Web that incorporates daily gaming news, interviews, game previews and product reviews. GA-Sports is a Web-community site focused on PC sports games. Other Gamer's Alliance properties include: - -Dreamcast.net, a site dedicated to the Sega Dreamcast console platform; 28 - -GA-Strategy, a site dedicated to PC strategy games. - -GA-RPG, a hub site focused on daily RPG gaming news. The acquisition of Gamer's Alliance provides the Company with a valuable source of proprietary content that can be offered to Case's Ladder's 1.1 million registered users. The Gamer's Alliance content development team consists of gaming enthusiasts from around the world. This content development approach is highly effective in attracting a viewership of avid gamers. Furthermore, the Gamer's Alliance network of sites seeks to encourage customer loyalty by allowing visitors to become actively involved in content creation through forums and chat services. The Big Network The Big Network site provides a full suite of classic board and card games, including spades, checkers, chess, backgammon, reversi and morph, allowing thousands of simultaneous players to meet, chat and play parlor games in a friendly setting. The site's gaming system is based on a sophisticated Java client-server architecture designed to support very large numbers of users. The Big Network currently hosts over 210,000 registered members and generates almost three million advertising impressions per month. The Big Network operates an entertainment and community site at http://www.bignetwork.com. The site offers multiplayer classic games (e.g., - ------------------------- ---- chess, checkers, spades) as well as other forms of entertainment and information to its members and users. The Big Network has also developed LivePlace, a Java applet that provides users with an overview of activity around them on the site, and allows them to follow public conversation and send private messages to other users. LivePlace also uses proprietary technology to map users to their web location and to control the browser window to allow for co-navigation of the web. A map view allows users to see where other users are, all across the eUniverse site and its associated network. Users can move instantly go to any other location within the network. The Company's Big Network site includes Play4Prizes, a game show channel where players can win cash and prizes. Play4Prizes' games are sponsored by advertisers and used as a promotional vehicle for the advertisers' products and services. Play4Prizes caters to a predominantly female audience. In addition, the Big Network publishes the Daily Post, a collection of eight daily e-mail newsletters providing news, facts and trivia on a variety of topics such as cinema, sports, star gazing, cooking recipes, jokes and holidays. The Big Network reaches over 85,000 people daily through its Daily Post e-mail newsletters. The Company plans to continue to leverage the audience of its newly acquired interactive entertainment sites by pursuing e-commerce and merchandising opportunities in the interactive entertainment arena. These opportunities include online publishing of game titles, online retailing of interactive entertainment products and the exclusive online distribution of titles developed by smaller game developers. Community-Building Technologies With the acquisition of the Big Network, Inc., we acquired LiveSuite, a modular suite of multi-user, Web-based community-building software with common technology architecture. This software is currently undergoing final development prior to its release. The core module of LiveSuite, LivePlace, takes the form of a client- 29 side pop-up Java applet that allows users to chat, send instant messages, set up friends lists and co-browse a site. LiveSuite modules work together using a shared technology core to provide virtual presence, instant messaging, co- browsing, online sales assistance and game-playing through a common user interface. LivePlace is designed to map onto existing Web sites quickly and easily. Its components can be deployed individually or as an integrated solution that combines entertainment, community and commerce through a common user interface. The Company plans to build an affiliate network of third-party entertainment and retail Web sites that would license the Company's LivePlace community-building software once acquired by the Company. The Company believes the implementation of LivePlace on these affiliate sites will create a virtual presence for the Company on these sites, allowing the Company to generate additional traffic and e-commerce sales for the Company's network. The Company believes that its strategic assets include customer loyalty, proprietary content and user-friendly technology, and that such assets will enable it to grow Web site traffic, retain customers, expand revenue opportunities and execute strategic acquisitions. The Company also plans to develop strategic relationships with traditional media partners that will enable it to build awareness of its sites and e-commerce services and increase traffic to its sites. DOMAIN NAMES, PATENTS AND TRADEMARKS The Domain names of the Company's Web sites constitute important intellectual property for the Company. Domain names registered to the Company include the following: euniverse.com gasource.net cduniverse.com ga-source.com nhl2k.com videouniverse.com ga-source.net sanitybycain.com gamesuniverse.com ga-strategy.com ta-k.com gagames.com highheatbaseball.com voodoo3.net megadvd.com messiahpress.com wrestling-games.com casesladder.com metalgear.net experience3d.com aoe2.net myth2.com frontofficefootball.com cavenews.com ionrpg.com frontofficefootball.net dknation.com ga-sports.com frontofficefootball.org ga-rpg.com coursedepot.com 3dracing.net gasource.com grandprix2.com rallychamp.com. Big network.com highheatbaseball.com afflicted.net Play4prizes.com maddencentral.com ctimes.net Liveplace.com simracingnews.net indy3d.net Livestore.com the-fastlane.com prey.net Livesuite.com nflfever.com war3.com goldenbearsden.net Live-store.com eqrealms.com nfscheats.com Shop-Live.com acrealms.com nfs4.com Shop-Live.net mygamelobby.com wcw-meyhem.com Big-network.com gp500.net Gamelets.com online-alchemy.com At the present time, the Company does not own any patents. The Company is in the process of filing trademark registrations for "LiveSuite" and "LivePlace", and service mark registrations for "eUniverse", "Games Universe", "CD Universe", "Video Universe", "Play4Prizes" and "Gamer's Alliance" with the US Patent and Trademark Office. The Company 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. OPERATIONS AND TECHNOLOGY eUniverse maintains a technology center at each of its main business units: CD Universe, Cases Ladder, Gamer's Alliance and Big Network. 30 CD Universe - ----------- CD Universe has developed proprietary technologies and systems that provide for reliable and scalable online retailing in a secure and easy-to-use format. Using a combination of proprietary solutions and commercially available, licensed technologies, the Company has deployed systems for online content dissemination, online transaction processing, customer service, market analysis and electronic data interchange. CD Universe uses Microsoft SQL Server 7.0 as its database management technology. Web pages are served by Microsoft's Internet Information Server and use Microsoft's Active Server Page technology. The web pages themselves are designed, programmed, tested, implemented, and maintained by on-staff designers and programmers. The system is flexible enough to allow new product lines to be integrated. Computer games were added in August 1999. A "server farm" of redundant web servers was brought on-line in August 1999 to provide extremely high site availability to our customers. The site is monitored by an outside company that provides 24x7 alerts to on-call technicians in the event that the site is not operating correctly. CD Universe's on-site data center is connected via a point to point T1 line to its ISP Internet Media Corporation. This service is provided under a two-year contract. CD Universe uses Secure Socket Layers (SSL) for secure electronic transactions over the Internet and uses proprietary EDI interfaces and private networks to ensure the security of customer order information and credit card transactions shared with its vendors and credit card processor. Fulfillment CD Universe has developed proprietary software to mange its onsite fulfillment operation. This software allows CD Universe to order product from multiple vendors, receive product into its warehouse, pick and pack individual customer orders, and electronically manifest the product for shipping. This system allows the company to aggregate product from multiple vendors into a single shipment to its customers. Partially filled shipments can be held for a customer-selectable number of days to reduce the number of shipments needed to fill a single order, thus saving the customer shipping charges. Customer Service CD Universe has developed proprietary software for use by its in-house customer service department to access real time order information. Case's Ladder - ------------- Case's Ladder utilizes multiple servers running the RedHat Linux operating system, MySQL database backend, the Apache Web server, Perl programming language, and various other open-source packages. Proprietary software developed in-house allows staff to easily manage the over one hundred and fifty gaming leagues we operate, handling over 1.2 million members and 3,500 online tournaments each month. In addition, a proprietary technical support system allows staff members to have real-time access to queries with full logging of requests ensuring top of the line customer service. Servers are co-located with Exodus Communications, Inc. under a yearly contract. Utilizing a 3Mb connection with up to 10Mb burst capabilities; Case's Ladder is tied into a private nationwide ATM backbone that feeds into every major Internet backbone in the United States. High performance hosting, custom applications, and the proven software packages listed above have given Case's Ladder the ability to have its services available to the public with reliability above 99%. 31 Gamer's Alliance - ---------------- Gamer's Alliance utilizes Linux operating system distribution Red Hat 6.0 to power the majority of its PC web servers. NT Server 4.0 is used for web applications requiring a Windows based operating system. A new backup system is currently being implemented to protect mission critical data from hardware and software failure, hackers, and other unpredictable circumstances. Bandwidth is rented from Valuenet Inc. Gamer's Alliance has internally developed several web based applications that increase the efficiency of administrating severs and updating web sites. Among these programs is a database driven content system for Linux and NT which allow web site content to be stored into databases, such as mySQL and Microsoft Access, and then be dynamically recalled based upon specific user preferences. This allows users to customize certain GA web sites to only display news, previews, reviews, interviews, etc that meet certain criteria such as type of content or date added. These user preferences are then stored into cookies for later viewing sessions. Big Network - ----------- BigNetwork.com is built on several servers running the Sun Solaris operating system and an Oracle database. The servers are co-located at Exodus in Santa Clara, CA. Exodus provides unlimited bandwidth and redundant power and network backbone connectivity as well as advanced fire suppression and other emergency provisions. Connectivity cost is approximately $4,500 per month. Key hardware is a Sun Enterprise Server 450, a Sparc 20, and several Intel Pentium II class machines, also running Solaris. The BigNetwork multiplayer gaming system and the BigNetwork LivePlace instant messaging system are built on a highly scalable proprietary Java client-server system. The system is capable of supporting thousands of simultaneous users using relatively small amounts of server-side CPU and bandwidth per user. Because the server is written in Java, it is portable and can run on any machine capable of supporting a Java VM including Solaris on Sun or Intel hardware and Windows NT. YEAR 2000 READINESS DISCLOSURE All mission critical third party applications at all divisions and subsidiaries have been independently tested (operating systems, web servers, database systems, programming languages) and are currently Year 2000 compliant or require free patches to correct. All internally developed software at all divisions is believed to be Year 2000 compliant. YEAR 2000 RISKS There can be no assurance Year 2000 issues will not cause a material adverse effect on the operating results or financial condition of the Company. The Company believes, however, that its most reasonably likely worst-case scenario would relate to problems with the systems of third parties rather than with the Company's internal systems, including disruption of product delivery from wholesalers, inability to charge purchases to credit cards, temporary power outages, delayed transportation of products by third parties, and lost or delayed customer purchases due to non-compliant personal computers. The Company is limited in its efforts to address the Y2K issue as it relates to third parties and is relying solely on the assurances of these third parties as to their Year 2000 preparedness. See "RISK FACTORS -- RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE." 32 Contingency Plan The Company intends to use existing non-Year 2000 specific contingency plans to address any situations that it believes would arise if the Company or third parties fail to be Year 2000 compliant. There is a risk that that existing contingency plans would be inadequate to deal with serious and sustained Year 2000 adverse affects. Year 2000 Costs The Company has not expended or committed any significant amount of money resources on Year 2000 compliance. The Company does not expect to expend any significant amount of money or resources on Year 2000 compliance in the future. SALES AND MARKETING At the present time, the Company receives and processes over 20,000 orders in a typical month, with an average order size of about $35 exclusive of shipping charges. To date, the Company has been able to increase site traffic and sales with little outbound marketing efforts. The Company makes use of strategic partnerships and proprietary content to attract and retain traffic on its Web sites. CD Universe's "Partner Program" increases its market presence by allowing "partner" Web sites ("eUniverse Partners") to offer CDs to their audience for which CD Universe provides fulfillment. The eUniverse Partner site provides a hyperlink to the CD Universe web site that leads the consumer to more information about a specific artist or title. This hyperlink automatically connects the customer to the CD Universe online store where the eUniverse Partner's customer may place an order to purchase a CD. In this manner, the eUniverse Partner can offer enhanced services and product recommendations, while avoiding ordering and fulfillment costs. eUniverse Partners receive a commission of 7% to 15% on sales of the Company's products that originate from the eUniverse Partner's Web site. The Company makes use of strategic partnerships and proprietary content to attract and retain traffic on its network of Web sites. The Company's CD Universe, for example, has built a network of over 8,000 eUniverse partner websites through its "partners program". These CD Universe partner websites increase the Company's market presence by offering the Company's music products to their audience in exchange for a commission on sales. The Company recently announced a strategic partnership with LinkShare Corporation ("LinkShare") to dramatically expand the scope of its partner program. As part of the partnership, LinkShare will introduce the Company's online retailing sites to its vast network of over 65,000 partner sites. LinkShare operates an expansive network on the Internet servicing clients such as Dell Computers, Cyberian Outpost, Borders, 1-800-FLOWERS, Virtual Vineyards, Omaha Steaks and others. The Company also plans to develop strategic partnerships with traditional media partners that will enable it to build greater awareness of its sites and expand traffic and e-commerce activity on its network. In August, 1999, eUniverse signed an agreement with Mpath Interactive, Inc., providing for the sale and provision of advertisements by Mpath for all of the Company sites. The Agreement calls for MPath to make guaranteed payments of $70,000 per month to the Company. This figure will increase if the Company generates increased traffic. The initial term of the advertising agreement is two 33 years, although the Company can cancel it at any time after nine months from its signing. The Company has done very little outbound marketing in FY'00(through the close of Q1 FY'00 on June 30, 1999). During this period CD Universe undertook a limited email campaign with Xoom.com and TalkCity.com with a total expenditure of $50,000. This program was completed and was not renewed. Case's Ladder spent $3,000 in June, 1999 on advertising and has no current advertising programs in place. Similarly, Gamer's Alliance has no advertising programs in place. The Big Network, in the months preceding its acquisition, spent no cash on advertising but engaged in ad swaps with a nominal value of approximately $20,000 per month based on the posted rate card advertising rates. The Company is planning a PR and advertising push surrounding the relaunch of its site in October/November 1999. The Company is in the process of signing a contract with an Internet consumer public relations company and is creating new branding and promotional materials to support a media campaign. That campaign is likely to include a launch event, direct mail, direct email, online sponsorships, print, and radio. The projected budget for this campaign has not been finalized. EMPLOYEES In addition to the officers who are referred to by management below, the company currently employs 51 full-time associates and up to 16 part-time staffers. Of the company's 51 full-time associates, 21 are in marketing, 22 are in programming and operations, and 8 are in administration. The part-time staffers work in the packing and customer service areas. FACILITIES The Company currently leases a 19,500 sq. ft. office, warehouse and order fulfillment center in Wallingford, Connecticut (the "Wallingford Facility") at a -------------------- monthly rent of $9,750. The Company's lease with respect to this facility expires in March 2002 and the Company has the right and option to extend the lease for an additional five year term. The Company believes that the Wallingford Facility will be adequate to meet its office space and order fulfillment needs for the foreseeable future. The Company leases approximately 500 sq. feet of office space, through its Gamer's Alliance, Inc. subsidiary, on a month-to-month basis in Bridgeton, Missouri at a monthly rent of $475. Additionally, the Company leases a 2,300 sq. ft. office space in San Francisco, California for its technological research and development, business development and sales and marketing divisions (the "San Francisco Facility"). The terms of the agreement provide for monthly payments of $5,350, 5,500 and 5,650 until June 30, 2000, 2001 and 2002, respectively. The Company believes that the San Francisco Facility will be adequate to meet the Company's research and development, business development and sales and marketing needs. The following table summarizes our current properties: LOCATION SIZE (SQ. FT.) MONTHLY RENT Wallingford, Connecticut 13,500 $9,750 Bridgeton, Missouri 500 $ 475 San Fransisco, California 2,300 $5,300 34 THE COMPANY'S STRATEGY AND PLANS The Company plans to implement the following strategies in its efforts to become a leading provider of content, commerce and community services on the Internet: Expand Existing Online Retail Business into Other E-Commerce Activities. The Company plans to use its technology and fulfillment expertise and expand into other e-commerce activities, such as the Company's recent expansion into games. In addition, the Company plans to use information obtained through customer tracking technology and user customization of certain services on its Web sites to provide its customers with targeted complementary e-commerce offerings. Acquire Complementary Entertainment-Related Web Sites. The Company plans to acquire music, movie, and interactive entertainment- related Web sites that are complementary to its existing network. These sites will have several of the following key characteristics such as: (1) strategic content, management or technology, (2) product offerings compatible with the Generation X and Y demographics of the Company's sites and (3) the ability to leverage the Company's strategic advantages such as order fulfillment, hardware capacity and general overhead. The Company plans to acquire Web sites with significant traffic and add its retail capabilities and fulfillment expertise to sell additional products to the acquired site's audience. The Company believes that it can leverage its core technology expertise, existing Web site traffic, management experience, fulfillment, systems and warehousing capabilities to continue to grow through strategic acquisitions. Provide Original, Compelling and Targeted Sites. The Company's Web sites focus on commerce, community and interactivity and address what the Company believes are among the most popular areas of interest on the Internet including music, film and interactive entertainment. These entertainment-related Web sites offer the Company an opportunity to deliver premium advertising and e-commerce services to an attractive demographic of Generation X and Generation Y consumers. The Company plans to enhance its online stores by adding additional editorial content, increasing the time its customers spend on its Web sites as well as the likelihood and frequency of subsequent visits and purchases. Examples of the Company's editorial content include reviews, biographies of entertainers, news, photos and other editorial programming. The Company plans to license compelling third-party editorial content in addition to its internally developed content in order to enhance the overall user experience on the Company's Web sites. Leverage Community-Building Technologies to Extend Reach to Other Entertainment and Retail Sites. The Company plans to license its LiveSuite community-building software to a partner network of third-party entertainment and retail Web sites. LiveSuite's Java-based user interface creates a virtual presence for the Company on user's desktops when they are visiting a licensee's site. The Company plans to leverage this network of LiveSuite licensor sites to drive traffic to its network of music, filmed entertainment and interactive entertainment sites. Diversify Revenue Streams Across Advertising, E-Commerce and Direct Marketing. The Company plans to leverage its user base to generate revenues from multiple 35 revenue streams. The Company believes that the traffic flow generated on its Web sites provides an attractive platform for measurable, targeted, cost-effective and interactive advertising on the Internet. The Company plans to use both in-house and third party representatives to sell its advertising inventory and promotional opportunities. The Company also plans to provide differentiated solutions to advertisers, helping them exploit the capabilities of the Internet as an advertising medium. In addition, the Company plans to expand its e-commerce initiatives through the introduction and promotion of interactive entertainment software, customized CDs, collectable products and other entertainment-related merchandise on its retail sites. See "BUSINESS--Sales and Marketing." Increase Market Penetration Through Strategic Partnerships. The Company intends to increase market penetration through strategic partnerships that expand awareness of the Company's network of Web sites. The Company plans to develop strategic relationships with traditional media partners to build awareness of its sites and expand traffic and e-commerce activity on its network. The combination of fulfillment expertise, visitor-tracking technology, flexible software and customer preference information make the Company an attractive partner for Web-based businesses. Expand Web Presence. The Company's Web sites have been able to successfully increase traffic, and thereby increase sales. The Company plans to continue to pursue cost- effective ways to increase traffic at its Web sites and has discussions underway with strategic partners to dramatically increase traffic at its Web sites. The Company plans to expand its international presence, and CD Universe has recently introduced a localized version of the CD Universe site for the Japanese market, marketed directly to Japanese consumers through a partnership with US-style.com. In addition, the Company continues to develop proprietary content to attract and retain traffic. The Company plans to offer new products, services and incentives to attract and retain traffic and to increase the size of and profit margins on online purchases. Provide Innovative and Easy-to-Use Web Sites. The Company plans to make its customer experience informative, efficient and intuitive by constantly improving its store format and features. For example, the Company's CD Universe store incorporates "point and click" options, supported by technical enhancements including easy-to-use search capabilities (by artist, album, title, song title or record label), personalized music suggestions, order tracking and confirmation. The CD Universe store also promotes music learning and discovery by enabling visitors to create customized versions of CDs and its Big Bang newsletter. Visitors are prompted to register and choose from a checklist of options and musical preferences that allow the registrant to select the genre or genres he or she is interested in as well as the content he or she desires to receive (i.e., press releases, charts, reviews, tour info and CD Universe news). These features are designed to make shopping at the store entertaining and informative and encourage purchases and repeat visits. RECENT AND PROPOSED TRANSACTIONS ACQUISITION OF CASE'S LADDER, INC. The Company entered into a Stock Purchase Agreement dated April 21, 1999, for the purchase of all of the outstanding shares of the Common Stock of Case's Ladder, Inc. (the "Case's Ladder Agreement"). This transaction closed on May ----------------------- 31, 1999. The other parties to the agreement are Case's Ladder, Inc. and its shareholders--Frank Westall (Chief Executive Officer and Chairman of Case's Ladder) and Chip Hilts (Chief Operating Officer and Chief Financial Officer of Case's 36 Ladder). The purchase price for the Case's Ladder shares is a total of 700,000 shares of restricted Common Stock of the Company that will be issued to the shareholders of Case's Ladder. The Case's Ladder Agreement also provides that Frank Westall, Edward Hilts and Jeremy Rusnak will be employed by the Company subsequent to the closing, that they will be granted options to purchase 600,000 shares of the Company's Common Stock, in the aggregate, at a price of $10 per share, and that the stock options will vest in quarterly installments over a period of 36 months. The Case's Ladder web site serves primarily as an online game portal, providing competitive rankings for online gamers in a number of online games and allowing gamers to compete against one another in a variety of tournaments and leagues. The Case's Ladder web site currently has over 1.1 million registered users. Approximately 75% of registered users on the Case's Ladder web site are between the ages of 18 and 50 with the majority of those visitors having an annual income over $50,000. Case's Ladder currently derives revenue only from membership fees and advertising. The Company believes that this acquisition of new users with favorable demographics will allow it to expand the customer base for its existing products, and to diversify its product offerings into areas such as computer games. ACQUISITION OF GAMER'S ALLIANCE, INC. As of July 1, 1999, the Company acquired all of the outstanding shares of Gamer's Alliance, Inc., a Missouri corporation based in Bridgeton, Missouri. Gamer's Alliance has been online since January 1997, and operates a network of gaming-related sites on the Internet. On a monthly basis, Gamer's Alliance receives generates over 750,000 unique visitors and over 10 million banner impressions. It maintains a network of more than 50 web sites, including GA-games, GA-Source (a gaming news site which provides game previews, product reviews and interviews), and GA-Sports (a network of news on computer sports gaming). The Company acquired the Gamer's Alliance stock partly in cash and partly with 78,125 shares of the Company's Common Stock. The Company will make a contingent payment to the sellers of additional shares of the Company's Common Stock over a period of five calendar quarters, contingent upon Gamer's Alliance achieving specified milestones with respect to revenue, the number of unique site visitors, and other matters. Subsequent to the closing, three (3) members of management of Gamer's Alliance -- Adam Goldenberg (President), Matthew Rowell, and Anthony Wyss -- will work for the Company pursuant to employment agreements. ACQUISITION OF THE BIG NETWORK, INC. On July 30, 1999, the Company entered into an Agreement and Plan of Reorganization and Stock Exchange Agreements with the shareholders holding 61% of the outstanding capital stock of The Big Network, Inc. ("BNI") to acquire a majority of the outstanding shares in exchange for shares of the Company (collectively, the "Big Network Agreement"). The closing of the BNI acquisition was completed as of August 31, 1999. The Big Network site provides a full suite of classic board and card games, including spades, checkers, chess, backgammon, reversi and morph, allowing thousands of simultaneous players to meet, chat and play parlor games in a friendly setting. The site's gaming system is based on a sophisticated Java client-server architecture designed to support very large numbers of users. Big Network currently hosts over 210,000 registered members and generates almost three 37 million advertising impressions per month. Subsequent to the closing, Stephen Sellers and John Hanke will become Vice Presidents of the Company. LEGAL PROCEEDINGS The Company is not a party to any pending legal proceedings that in the opinion of management of the Company would have a material adverse effect on the Company's results of operations or consolidated financial condition. MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the name, age and position with respect to the executive officers and directors of eUniverse as of September 1, 1999. NAME AGE POSITION ---- --- -------- Brad D. Greenspan(1) 26 Chairman of the Board of Directors Leland N. Silvas(1) 44 President, Chief Executive Officer and Director Charles Beilman 39 Chief Operating Officer, Chief Technical Officer and Director William R. Wagner 51 Vice President, Chief Financial Officer and Secretary James Haiduck 36 Vice President, Sales John V. Hanke Vice President, Marketing Stephen D. Sellers 39 Vice President, Business Affairs Gordon Landies(1) 43 Director - ------------------------- (1) Member of the Compensation Committee. Brad D. Greenspan, Chairman of the Board of Directors of the Company since February, 1999, at founding of Entertainment Universe, Inc. Prior thereto, Mr. Greenspan founded and served as the President of Palisades Capital, Inc., a private Beverly Hills merchant bank. Mr. Greenspan received a BA degree in political science/business from UCLA in 1996. 38 Leland N. Silvas, President and Chief Executive Officer of the Company since April 1999. Mr. Silvas is a major member of Label-add, LLC, a Connecticut-based advertising and direct marketing company, and was employed there until being recruited to eUniverse, Inc. in 1999. Mr. Silvas was President and Chief Operating Officer of McPhersons global housewares division from 1994-1998. From 1992 to 1994, Mr. Silvas was a board member for Partners In Computing, a New York City-based software solutions company. He currently sits on the advisory board to the Adept Group, a computer consulting company based in New York City, and is a board member of ADV MARKETING and 1-800-adagency. Charles Beilman, Chief Operating Officer and Chief Technical Officer of the Company since April 1999. Mr. Beilman founded CD Universe in November 1995 and was its sole shareholder and Chief Executive Officer until the sale of CD Universe to the Company in April 1999. Since 1985, Mr. Beilman has served as President and Director of Trak Systems, Inc., which supplies proprietary inventory control computer systems to retail music stores throughout the United States and Canada. William R. Wagner, Vice President, Chief Financial Officer and Secretary of the Company since April 1999. Prior to joining the Company, Mr. Wagner was Chief Financial Officer of Heritage Marketing and Incentives, Inc., a Massachusetts- based marketing incentives company. From 1995 to 1997, he was Chief Financial Officer of ServiceSoft Corporation, a Massachusetts Internet software company, and from 1990 to 1994, he was Chief Financial Officer of General Scanning, Inc., a pioneer in laser technology and systems. James Haiduck, Vice President of Sales since August 1999. Prior to joining eUniverse, Jim Haiduck was Vice President of OEM Sales for The Learning Company, a division of Mattel. His 13 years of sales experience in the technology/software industry covered the OEM, retail, corporate, and direct channels. Having established relationships with nearly every Tier one OEM including HP, Compaq, IBM, Canon, and Gateway, Mr. Haiduck was responsible for more than $200 million in licensing revenue over the last 10 years. Stephen D. Sellers, Vice President Business Affairs and Business Development since September 1999. Prior to joining eUniverse with the acquisition of the Big Network, Mr. Sellers was CEO and co-founder of The Big Network. Previous to that, he was co-founder and CEO of Archetype Interactive where he assembled a diverse team of creative talent to create Meridian 59, the first graphical internet multiplayer game. After the acquisition of Archetype by the 3DO Company, he worked as head of Internet Business Development. He has advised startup businesses in a variety of technology markets. He holds an MBA from the University of California, Berkley and a BA from Stanford University. John V. Hanke, Vice President of Marketing and Site Integration since September 1999. Prior to joining eUniverse with the acquisition of The Big Network, Mr. Hanke was co-founder, President and COO of The Big Network. Mr. Hanke has extensive experience in the design and development of internet projects. He was the product manager and producer for Meridian 59 at Archetype Interactive and served as Director of Internet Marketing at 3DO, after its acquisition of Archetype, where he supervised internet product development and was responsible for innovations in the pricing and marketing of 3DO's internet products. He holds an MBA from the University of California, Berkley and a BA from the University of Texas, Austin. 39 Gordon Landies, Director since August 1999. Mr. Landies is currently General Manager of the Home and Entertainment group of Mattel Interactive and has been in consumer software for 16 years, spending 10 years at Software Toolworks, Mindscape, and the Learning Company, which was acquired by Mattel. Most of Mr. Landies' career has been in sales and business development where he helped drive sales growth and build product categories such as National Geographic, Printshop, and Chessmaster. BOARD OF DIRECTORS AND BOARD COMMITTEES Our Board of Directors is comprised of four (4) directors. Our bylaws provide that we may have up to a maximum of nine (9) directors. Directors are elected by the shareholders at each annual meeting or at special meetings of shareholders and serve until their successors are duly elected and qualified. All executive officers are elected by, and serve at the discretion of, the Board of Directors. The Compensation Committee consists of Messrs. Greenspan and Silvas. The Compensation Committee administers the Company's 1999 Stock Awards Plan and reviews and recommends to the Board of Directors the compensation and benefits of the employees of eUniverse. 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 the Company's Board of Directors or Compensation Committee. AGREEMENT CONCERNING ELECTION OF DIRECTORS In connection with the purchase by E. P. Opportunity Fund, LLC ("E. P.") of preferred stock issued by EUI, an agreement dated April 6, 1999 was entered into between E. P., EUI and Brad D. Greenspan (the "E. P. Letter Agreement") which, in effect, gave E. P. the right to select one of the Directors of EUI during such period as it owns shares of EUI preferred stock. On April 16, 1999, in connection with the Reorganization, the E. P. Letter Agreement was assigned by EUI to the Company, which assumed the obligations of EUI thereunder. As a result, as long as it owns Preferred Stock, E. P. has the right to appoint a member of the Board of Directors of the Company. In connection with the acquisition of The Big Network, Inc. ("Big Network"), an agreement dated July 30, 1999 was entered into between Brad D. Greenspan, Charles Beilman, Stephen Sellers and John Hanke which, in effect, gives Messrs. Sellers and Hanke the right to select one of the Directors of the Company during the period that either Mr. Sellers or Mr. Hanke or both are employed by the Company. 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. Other Directors receive, upon becoming a 40 Director, options for 75,000 shares of Common Stock, which also vest immediately, for each year of service as a Director. See "MANAGEMENT--1999 Stock Awards Plan" on page 43. For each board meeting they attend, these other directors will be reimbursed for their expenses incurred in connection with the meeting. EXECUTIVE COMPENSATION At the end of its most recent fiscal year, the Company's President and Chief Executive Officer and other officers had not yet been employed and compensation had not yet been paid. On April 6, 1999, the Company entered into employment agreements with Leland Silvas, Chief Executive Officer and President, and William R. Wagner, Vice President, Chief Financial Officer and Secretary. The contract with Mr. Silvas is for an initial term expiring April 30, 2000 and automatically renews for additional one-year periods unless terminated on three months notice. The Silvas contract stipulates an annual base salary of $200,000 to be reviewed annually with a bonus opportunity of up to 50% of base salary upon achievement of goals as determined by the Compensation Committee of the Board of Directors. Mr. Silvas is entitled to options to purchase 825,000 shares of Common Stock at an exercise of $3.00 per share, which options become exercisable from time to time as set forth in the contract. The contract with Mr. Wagner is for an indefinite term, subject to termination on three months notice, and stipulates an annual salary of $125,000 and options to purchase 100,000 shares of Common Stock at an exercise price of $3.00 per share. On June 15, 1999 Mr. Wagner was granted options to purchase 50,000 shares of Common Stock at an exercise price of $9.50 under the Stock Option Plan. The Company entered into an employment contract with Mr. Beilman, effective April 14, 1999, for an initial period of three years, subject to termination on ten days notice, and stipulates an annual compensation of $135,000. On June 15, 1999 Mr. Beilman was granted options to purchase 75,000 shares of Common Stock at an exercise price of $9.50 under the Stock Option Plan. Effective August 1, 1999, the Company entered into a contract with James Haiduck, Vice President of Sales. The contract with Mr. Haiduck is for an initial term of one year and stipulates an annual salary of $108,000 and options to purchase 200,000 shares of Common Stock at an exercise price of $9.50 per share. In conjunction with the acquisition of Big Network, the Company entered into employment agreements with Mr. Hanke and Mr. Sellers, Vice President of Marketing and Vice President of Business Development. Both contracts are for an initial term of 12 months, or until such time as the shares received by them in the acquisition are able to be sold on the public exchange, and stipulates annual salaries of $96,000 and individual options to purchase 300,000 shares at an exercise price of $8.25. At the end of its most recent fiscal year, the Company's President and Chief Executive Officer and other officers had not yet been employed and compensation had not yet been paid. On April 6, 1999, the Company entered into employment agreements with Leland Silvas, Chief Executive Officer and President, and William R. Wagner, Vice President, Chief Financial Officer and Secretary. The contract with Mr. Silvas is for an initial term expiring April 30, 2000 and automatically renews for additional one-year periods unless terminated on three months notice by either party. The Silvas contract stipulates an annual base salary of $200,000 to be reviewed annually with a bonus opportunity of up to 50% of base salary upon achievement of goals as determined by the Compensation Committee of the Board of 41 Directors. Mr. Silvas is entitled to options to purchase 825,000 shares of Common Stock at an exercise of $3.00 per share, which options become exercisable at quarterly times as set forth in the agreement. The contract with Mr. Wagner is for an indefinite term, subject to termination on three months notice by either party, and stipulates an annual salary of $125,000 and options to purchase 100,000 shares of Common Stock at an exercise price of $3.00 per share. The Company entered into an employment contract with Mr. Beilman, which became effective April 14, 1999 for an initial period of three years, subject to termination on ten days notice, and stipulates an annual compensation of $135,000. The table below summarizes the compensation earned for services to be rendered to eUniverse in all capacities for the fiscal year ending December 31, 1999. These executives are referred to as the Named Executive Officers elsewhere in this Prospectus.
Annual compensation Long Term compensation -------------------------------------------------------- Awards Payouts - ----------------------------------------------------------------------------------------------------------------------------- Name and Principal Fiscal Salary Bonus Other Annual Restricted Securities LTIP All Other Position Year ($) ($) Compensation Stock Award Underlying Payouts Compen- ($) ($) Options ($) sation # ($) - ----------------------------------------------------------------------------------------------------------------------------- Brad D. Greenspan, 2000 - 50,000 - - - - Chairman of the Board Leland Silvas, 2000 200,000 /(1)/ 6,307/(2)/ - 191,333/(3)/ - - President, Chief Executive Officer and Director Charles Beilman, 2000 135,000 /(1)/ - - - - - Vice President Special Projects and Director 1999 77,250 - 91,711 - - - - William R. Wagner, 2000 125,000 /(1)/ - - 16,666/(3)/ - - Chief Financial Officer James Haiduck, 2000 108,000 /(1)/ - - - - - Vice President Sales Stephen D. Sellers, 2000 96,000 /(1)/ - - - - - Vice President Business Development John V. Hanke, 2000 96,000 /(1)/ - - - - - Vice President Marketing
Note 1: Incentive compensation awards and payments shall be defined by the Board of Directors. Note 2: Mr. Silvas was issued 200,000 shares in conjunction with his employment with eUniverse. These have been valued at $.315, the value of the initial capitalization of Entertainment Universe. Note 3: Option shares are represented as those options that are excercisable within 60 days. 42 The following table summarizes the option grants to the Named Executive Officers in the current fiscal year:
Individual grants Potential realizable value at assumed annual rates of stock price appreciation for option term ---------------------------------------------------------------------------------- Name and Principal Number of Percent of Exercise Expiration 5% 10% Position securities total base price Date underlying options $/share options granted to employees in fiscal year - ------------------------------------------------------------------------------------------------------- Brad D. Greenspan, 400,000 14.0% $ 9.50 6/15/09 $ 2,720,000 $ 6,560,000 Chairman of the Board of Directors Leland Silvas, 825,000 28.8% $ 3.00 4/22/09 $10,972,500 $18,892,500 President, Chief Executive Officer and Director Charles Beilman, 75,000 2.6% $ 9.50 6/15/09 $ 510,000 $ 1,230,000 Vice President Special Projects, Chief Technical Officer and Director William R. Wagner, 150,000 5.2% $ 3.00 6/15/09 $ 1,670,000 $ 3,110,000 Vice President, to Chief Financial $ 9.50 Officer and Secretary James Haiduck, 200,000 7.0% $ 9.50 8/01/09 $ 1,360,000 $ 3,280,000 Vice President Sales Stephen D. Sellers, 300,000 10.5% $ 8.25 9/01/09 $ 2,415,000 $ 5,295,000 Vice President, Business Affairs and Business Development John V. Hanke, 300,000 10.5% $ 8.25 9/01/09 $ 2,415,000 $ 5,295,000 Vice President Marketing and Site Integration
1999 STOCK AWARDS PLAN On June 14, 1999, the Board of Directors adopted the eUniverse 1999 Stock Awards Plan (the "Plan") and will submit the Plan for approval by the shareholders at the next meeting of shareholders. The purpose of the Plan is to provide stock- based 43 incentive compensation to the Company's employees, officers, directors and consultants. Between June 15 and June 30, 1999, awards of 24,830 shares of restricted stock and stock options to purchase 2,860,000 shares of Common Stock were made to all employees employed as of May 31, 1999, all outside directors, all officers and three consultants. The Plan allows for the discretionary grant of restricted stock, non-qualified stock options, incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and other stock-based awards. Only employees, directors, officers and consultants may receive discretionary awards under the Plan. The Plan is administered by the Compensation Committee of the Company's Board of Directors. The Compensation Committee will make the determination with respect to the discretionary awards under the Plan, including which eligible individuals are to receive awards under the Plan and the specific terms, vesting conditions (if any) and number of shares of stock to which each award relates. The Compensation Committee may grant awards with different terms and conditions. The Compensation Committee can also accelerate the vesting of outstanding awards and can reprice any option at any time. At the time options are granted, the Compensation Committee will set the price at which options can be exercised to purchase shares of Common Stock. Option holders will not have any rights as shareholders until and to the extent they have exercised their options. The exercise price for options may either be paid in cash or check or, at the discretion of the Compensation Committee, by tendering shares having a value equal to the exercise price. The number of shares of Common Stock covered by awards will be adjusted in the event of any stock split, merger, recapitalization or similar corporate event. The Board of Directors may terminate or amend the Plan at any time, except that the Board may not, without the approval of our shareholders, increase the maximum number of shares for which options may be granted under the Plan or expand the class of individuals eligible to participate in the Plan. PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of our Common Stock by the following individuals or groups: (a) each person who is known by eUniverse to own beneficially more than 5% of our Common Stock, (b) each Director and Director nominee of eUniverse, (c) each Named Executive Officer of eUniverse, and(d) all executive officers and Directors of eUniverse as a group.
Name of Beneficial Shares Percentage Owner Beneficially Beneficially Owned/(1)/ Owned/(2)/ Brad D. Greenspan 7,841,000 45.0% Charles Beilman 2,425,000 13.9% Joseph Abrams 1,581,594/(3)/ 9.1% Leland N. Silvas 425,001/(4)/ 2.4% William R. Wagner 16,666/(5)/ *1% James Haiduck 9,000/(6)/ *1%
* (less than) 44 John V. Hanke 242,820 1.4% Stephen D. Sellers 297,180 1.7% Gordon E. Landies 204,087/(7)/ 1.4% Directors and 11,460,754 66.1% Executive Officers as a Group
- -------------------------------------------------------------------------------- * (less than) /(1)/ Unless otherwise noted, all of the shares shown are held by individuals or entities possessing sole voting and investment power with respect to such 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 such person or group. The address of each individual or group listed in the table is 101 North Plains Industrial Road, Wallingford, Connecticut 06492. /(2)/ The "Percentage Beneficially Owned" is calculated by dividing the "Number of Shares Beneficially Owned" by the total outstanding shares of Common Stock including shares beneficially owned by the person with respect to whom the percentage is calculated. /(3)/ Includes shares beneficially owned by Mr. Abrams as Trustee under the following trusts: (1) 881,594 shares held by the Joseph W. & Patricia G. Abrams Living Trust Under Trust Agreement dated March 16, 1994, (2) 350,000 shares held by Matthew R. Abrams Irrevocable Trust Under Trust Agreement dated December 19, 1991, and (3) 350,000 shares held by Sarah E. Abrams Irrevocable Trust Under Trust Agreement dated December 19, 1991. /(4)/ Includes 225,001 shares represented by options exercisable within 60 days. /(5)/ Consists entirely of shares represented by options exercisable within 60 days. /(6)/ Includes 6,000 convertible preferred shares. /(7)/ Includes 6,000 convertible preferred shares and 75,000 options exercisable within 60 days, and 102,201 shares of Common Stock beneficially owned by Mr. Landies as co-trustee under the Barbara Landies Living Trust 8/27/96. SELLING SHAREHOLDERS The Selling Stockholders listed below may, pursuant to this Prospectus, from time to time offer and sell the number of shares of Common Stock into which their respective Preferred Stock may be converted. The number of shares of Common Stock into which such Preferred Stock is initially convertible (the "Conversion Shares") is listed below.
Selling Stockholder and position with Shares of Conversion % of Company Preferred Stock Shares Total LBI Group, Inc. 555,556 588,889 30.9% Side Cape Holdings, Ltd. 365,740 387,684 20.4% EP Opportunity Fund, LLC 235,000 249,100 13.1% Gregory F. Whitten and Ruth Ann Whitten 75,000 79,500 4.2%
45 Lawrence Equity Group, LLC 56,250 59,625 3.1% Nottinghill Resources, Ltd. 50,000 53,000 2.8% RPM Asset Management 50,000 53,000 2.8% Bernice Brauser 37,500 39,750 2.1% Stanford Miller 25,000 26,500 1.4% EIK Investors, Inc. 25,000 26,500 1.4% Robert Murphy 25,000 26,500 1.4% Patrick E. Murphy 25,000 26,500 1.4% Walter Bilofsky 24,000 25,440 1.3% Mark Mitola 15,000 15,900 0.8% EP Opportunity Fund International, Ltd. 15,000 15,900 0.8% Baer Family Charitable Remainder Trust 12,500 13,250 0.7% KB Electronics, Inc. 12,500 13,250 0.7% John A. Friedmann 12,500 13,250 0.7% Jeffrey Benton 12,500 13,250 0.7% James N. Oliphant 12,500 13,250 0.7% Robert Brooks 12,500 13,250 0.7% Michael Nichols 12,500 13,250 0.7% Joseph Creen, Jr. 12,500 13,250 0.7% JRA Enterprises 12,500 13,250 0.7% George Gitschel 12,200 12,932 0.7% The Cooper Family Trust 11,250 11,925 0.6% Wayne C. Johnson 7,500 7,950 0.4% Paul S. Freyer 7,500 7,950 0.4% Jeffrey S. Cooper and Patricia G. Cobb 6,250 6,625 0.3% Joan Vogelsang 6,278 6,655 0.3% Gordon Landies, Director 6,000 6,360 0.3% Paul Jakab 6,000 6,360 0.3% James Haiduck, Vice President Sales 6,000 6,360 0.3% Ed Roffman 6,000 6,360 0.3% Cory Bihr and Mary Bihr 6,000 6,360 0.3% David R. Fulton 5,000 5,300 0.3% Frank Michalik 5,000 5,300 0.3% James A. Carruthers 5,000 5,300 0.3% Eric Singer 5,000 5,300 0.3% Edward L. Bernstein 2,500 2,650 0.1%
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On April 14, 1999, the Company acquired all of the capital stock of CD Universe, Inc. for a total consideration of $1,915,000 in cash plus 2,425,000 shares of Common Stock. The rights to acquire CD Universe, Inc. were originally held by Palisades Capital, Inc. ("Palisades"), a private merchant bank owned and operated by Brad D. Greenspan. On February 11, 1999 Palisades assigned its rights to acquire CD Universe, Inc. to EUI for consideration of 8,061,000 shares of common stock of EUI which were issued to Mr. Greenspan. See "PRINCIPAL SHAREHOLDERS." In connection with the Reorganization, those shares of EUI common stock were exchanged for an equivalent number of shares of the Company's common stock. 46 PLAN OF DISTRIBUTION The Common Stock may be sold from time to time by the Selling Stockholders, or by pledgees, donees, transferees or other successors in interest. Such sales may be made on one or more exchanges or in the over-the-counter market, or otherwise at prices and at terms then prevailing or at prices related to the then current market price, or in negotiated transactions. The shares may be sold by one or more of the following: (a) a block trade in which the broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by the broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) an exchange distribution in accordance with the rules of such exchange, and (d) orders brokerage transactions and transactions in which the broker solicits purchasers. From time to time the Selling Stockholders may engage in short sales, short sales versus the box, puts and calls and other transactions in securities of the issuer or derivatives thereof, and may sell and deliver the shares in connection therewith. In affecting sales, brokers or dealers engaged by the Selling Stockholders may arrange for other brokers or dealers to participate. Brokers or dealers will receive commissions or discounts from Selling Stockholders in amounts to be negotiated immediately prior to the sale. The Selling Stockholders and agents who execute orders on their behalf may be deemed to be underwriters as that term is defined in Section 2(11) of the Act and a portion of any proceeds of sales and discounts, commissions or other compensation may be deemed to be underwriting compensation for purposes of the Act. In the event the Selling Stockholders engage an underwriter in connection with the sale of the Shares, to the extent required, a Prospectus Supplement will be distributed, which will set forth the number of Shares being offered and the terms of the offering, including the names of the underwriters, any discounts, commissions and other items constituting compensation to underwriters, dealers or agents, the public offering price with any discounts, commissions or concessions allowed or reallowed or paid by underwriters to dealers. DESCRIPTION OF CAPITAL STOCK We have authorized capital stock consisting of 250,000,000 shares of Common Stock, $0.001 par value per share, and 50,000,000 shares of preferred stock, $0.10 par value per share (the "Preferred Stock"). The following description of eUniverse's capital stock is not intended to be complete. For a complete description of our capital stock, you should read our Articles of Incorporation, Amended and Restated Bylaws, and the Registration Rights Agreement that are included as exhibits to our Form 10 filed with the Securities and Exchange Commission on June 14, 1999, of which is incorporated by reference in this Prospectus. COMMON STOCK As of August 31, 1999, there were 14,832,723 shares of Common Stock outstanding, which were held of record by approximately 147 shareholders. Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the shareholders. Subject to preferences that may be applicable to the holders of outstanding shares of Preferred Stock, if any, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally 47 available therefor. In the event of liquidation, dissolution or winding up of the Company, and subject to the prior distribution rights of the holders of outstanding shares of Preferred Stock, if any, the holders of shares of Common Stock shall be entitled to receive pro rata all of the remaining assets of the Company available for distribution to its shareholders. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. PREFERRED STOCK On April 14, 1999, EUI sold 1,795,024 shares of its Series A 6% Convertible Preferred Stock in a private offering pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D adopted under the Securities Act. The EUI Preferred Stock was sold to a group of approximately 40 purchasers, including Lehman Brothers, Eisenberg Partners and principals of Gerard Klauer Mattison & Co., Inc., all of whom were accredited investors as defined in Rule 501 of Regulation D. The aggregate offering price for the Preferred Stock was $6,598,122. In connection with the Reorganization, the holders of the EUI Preferred Stock exchanged their shares, on a one-to-one basis, for shares of the Company's Preferred Stock having equivalent rights and preferences, as set forth in the Designation of Preferred Stock of Motorcycle Centers of America, Inc. dated April 7, 1999 (the "Designation of Preferred Stock"). Holders of the Company's Preferred Stock have the right to convert all or any portion of such stock into shares of the Company's common stock at any time after October 15, 1999 until all shares of Preferred Stock have been converted, at a one-to-one ratio, unless the market price of the Common Stock is below $3.60 during various periods prior to the date of conversion, as set forth in the Designation of Preferred Stock, in which case the conversion ratio would be greater than one-to-one. The Company's Preferred Stock does not bear dividends, and the holders of such stock are not entitled to receive any dividends thereon. In the event of the liquidation or dissolution of the Company, the holders of the Preferred Stock will be entitled to receive, prior in preference to any distribution to the holders of the Common Stock and any other class of stock which has been designated as junior in rank to the Preferred Stock, an amount per share equal to the original issue price of the Preferred Stock ($3.60) plus interest thereon at a rate of 6% per annum from the date of issuance. The holders of Preferred Stock are entitled to cast the number of votes per share on each matter submitted to the Company's holders of Common Stock that equals the number of votes that could be cast on the shares of Common Stock that could have been converted immediately prior to the taking of the vote. Votes of the Preferred Stock holders shall be cast together with those cast by the holders of common stock and not as a separate class except as otherwise provided in the Designation of Preferred Stock on matters directly affecting the rights of the holders of Preferred Stock. 48 TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our Common Stock is Corporate Stock Transfer, Inc. with its address at 370 17th Street, Suite 2350, Denver, Colorado 80202, and its telephone number at this location is (303) 595-3300. LISTING Our Common Stock is currently traded on the OTC Electronic Bulletin Board under the trading symbol "EUNI". We intend to apply to list our Common Stock on the Nasdaq Small Cap Market under the trading symbol "EUNI". MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS SHAREHOLDERS AND DIVIDENDS As of August 31, 1999, there were 14,832,723 shares of Common Stock outstanding, which were held by approximately 147 shareholders of record. To date, the Company has paid no cash dividends and has no intention to pay cash dividends on its Common Stock in the foreseeable future. MARKET INFORMATION Our Common Stock is traded on the OTC Electronic Bulletin Board under the symbol EUNI. Prior to April 22, 1999, when the Company changed its name to eUniverse, Inc., the common stock of the Company was traded under the symbol MCAM. Between April 14, 1999 and April 22, 1999 the common stock of the Company was traded under the symbol MCAMD. The chart below sets forth the range of reported high and low bid quotations for the Common Stock for each full quarterly period from April 1, 1998 and for the months of April and May 1999. The source of the quotations is Prophet Financial Systems. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The closing price for the common stock of the Company on June 30, 1999 was $9.25. 49
RANGE OF HIGH AND LOW BID QUARTERLY PERIOD ENDING QUOTATIONS June 30, 1999 (EUNI) $1.875 - 14.00 March 31, 1999 (MCAM) $ 0.25 - 0.90 /1/ December 31, 1998 (MCAM) $0.031 - 1.25 /1/ September 30, 1998 (MCAM) $ 0.25 - 0.225 /1/ June 30, 1998 (NBCO) $ 2.50 - 4.75 /1/ March 30, 1998 (NBCO) $ 3.25 - 4.50 /1/ December 31, 1997 (NBCO) $ 3.25 - 4.00 /1/
/1/ Quotes do not reflect a 20 for 1 reverse split of the Company's common stock effective March 31, 1999. SHARES ELIGIBLE FOR FUTURE SALE On August 31, 1999, approximately 13,806,000 shares of the Common Stock (approximately 93% of the shares outstanding) are restricted shares that may be sold only in the event such shares are registered pursuant to the Securities Act or are sold pursuant to an exemption thereunder, including Rule 144, which permits the resale of limited amounts of restricted securities after a 12-month initial holding period. Subject to the volume limitations of Rule 144, approximately 10,050,000 of such restricted shares will become available for resale on April 14, 2000, an additional 509,000 shares will become available on April 1, 2000, an additional 2,425,000 shares will become available on April 14, 2000, an additional 700,000 shares will become available on May 31, 2000 and an additional 78,125 will become available on June 30, 2000. See "PRINCIPAL SHAREHOLDER." There are 1,795,024 shares of Preferred Stock outstanding which, commencing on October 14, 1999, are convertible into shares of Common Stock at a one-to-one ratio unless the market price of the Common Stock is less than $3.60 during certain periods prior to conversion. Under the Registration Rights Agreement, the Company has granted the holders of Preferred Stock registration rights so that they may sell their shares of Common Stock received upon conversion under a registration pursuant to the Securities Act. The shares of Common Stock received upon conversion may be sold on the market pursuant to Rule 144 without registration under the Securities Act commencing 12 months after conversion and subject to the volume limitations of Rule 144. See "DESCRIPTION OF CAPITAL STOCK--Registration Rights." The Company has granted options to employees and one advisor to purchase an aggregate of up to 2,860,000 shares of Common Stock at exercise prices ranging from $3.00 to $11.40. Options representing 391,667 of such shares are vested and exercisable. Thereafter, the remaining options vest in equal amounts each calendar quarter over the next two (2) years. Warrants to purchase an additional 731,865 shares of Common Stock at exercise prices ranging from $2.75 to $10.00 have been issued to various entities in exchange for financing and public relations services. Warrants and options representing 400,000 of such shares are vested and exercisable. Up to 1,800,000 restricted shares of Common Stock may be issued in connection with our acquisition of The Big Network, which may be sold only in the event such shares are registered, or exempted from registration, under the Securities Act. 50 As a result of the contractual restrictions described below and the provisions of Rule 144, the restricted securities will be available for sale in the public market on the date which is one year from the date of the effectiveness of the registration statement of which this Prospectus forms a part, subject to the volume limitations and other conditions of Rule 144. The shares could be available for resale immediately upon the expiration of such 180-day period in the event of a favorable interpretation by the Securities and Exchange Commission of certain provisions of Rule 144. RULE 144. In general, under Rule 144 as currently in effect a person who has beneficially owned shares of our Common Stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: -1% of the number of shares of Common Stock then outstanding, or -the average weekly trading volume of the Common Stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. RULE 144(K). Under Rule 144(k), a person who is not deemed to have been an affiliate of eUniverse at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years including the holding period of any prior owner except an affiliate, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. REGISTRATION RIGHTS. Under the Registration Rights Agreement of Entertainment Universe Inc. dated April 1999 which was assigned to and assumed by the Company pursuant to the Assignment and Assumption Agreement by and between Entertainment Universe, Inc. and Motorcycle Centers of America, Inc., dated as of April 14, 1999 (the "Registration Rights Agreement"), we have agreed to use our best efforts to have this registration statement effective by November 1999, and to maintain the effectiveness of the shelf registration statement until all restricted securities covered by the shelf registration statement have been sold. We will provide to each holder of Preferred Shares copies of this Prospectus. The Case's Ladder Agreement provides that the selling shareholders will have the right to participate in any registered offering of the Common Stock and to sell their shares of Common Stock in the Company's offering of its shares to the public to the extent that any of the Company's directors and/or officers have such registration rights and sale privileges. The Big Network Agreement provides that the selling shareholders will have the right to participate in any registered offering of the Common Stock and to sell their shares of the Common Stock in the Company's offering of its shares to the public to the extent that any of the Company's directors and/or officers have such registration rights and sale privileges. After any such registration, any shares registered would become freely tradable without restriction under the Securities Act. Such seller would then not have any obligation or other restrictions on resale with respect to our Common Stock, other than applicable securities laws. STOCK OPTIONS. As of June 30, 1999, options to purchase 2,860,000 shares of Common Stock were issued and outstanding and 5,000,000 shares were reserved for future issuance under our 1999 Stock Awards Plan. Common Stock issued upon exercise of outstanding vested options or issued under the Company's 1999 Stock Awards Plan, other than Common Stock issued to affiliates of eUniverse, is available for immediate resale in the open market. LEGAL MATTERS 51 The validity of the Common Stock offered hereby will be passed upon for eUniverse, Inc. by Martin, Lois & Gasparrini, LLC, Stamford, Connecticut. EXPERTS The financial statements and schedules of the Company appearing in this Prospectus and registration statement have been audited by Merdinger, Fruchter, Rosen and Corso, LLP, Cordovano and Harvey, PC, Jonathon P. Reuben, CPA and Donald S. Brodeur Accountants, independent public accountants, as indicated in their reports, and are included herein in reliance upon such report given on the authority of such firm as experts in accounting and auditing. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The SEC allows us to "incorporate by reference" the information we file with it, which means we can satisfy our legal obligations to disclose important information contained in those documents by referring you to them. The information included in the following documents is incorporated by reference and is considered to be a part of this Prospectus. More recent information that we file with the SEC automatically updates and supersedes any inconsistent information contained in prior filings. On June 14, 1999, we filed our Form 10 with the Commission, which is currently undergoing amendment. We also incorporate by reference all documents subsequently filed by us pursuant to the Securities Exchange Act of 1934, until the offering of the Common Stock under this Prospectus is completed. We will provide, upon request, without charge to each person, including any person having a control relationship with that person, to whom a Prospectus is delivered, a copy of any or all of the information that has been incorporated by reference in this Prospectus but not delivered with this Prospectus. If you would like to obtain this information from us, please direct your request, either in writing or by telephone to eUniverse, Inc., 101 North Plains Industrial Road, Wallingford, Connecticut 06492, (203) 265-6412. SOURCES OF ADDITIONAL INFORMATION eUniverse has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 with respect to this Common Stock offered by this Prospectus. This Prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules which are parts of the registration statement. For further information with respect to the Company and its Common Stock, see the Registration Statement and the exhibits and schedules thereto. Whenever we make reference in this Prospectus to any of our agreements or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the registration statement for copies of the actual agreement or other document. You can read our Commission filings, including this registration statement, through a Web browser over the Internet at the Commission's Web site at URL:http://www.sec.gov. You may also read and copy any document we file with - ---------------------- the Commission at its public reference facilities in Washington, D.C., New York, NY, and Chicago, IL at 450 Fifth Street, Washington, D.C. 20549, 7 World Trade Center, Suite 1300, New York, NY 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, respectively. You may also obtain 52 copies of the documents at prescribed rates by writing to the Public Reference Section of the Commission at 450 Fifth Street, Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference facilities. eUniverse is subject to the information and periodic reporting requirements of the Securities and Exchange Act and, accordingly, files periodic reports, proxy statements and other information with the Commission. Such periodic reports, proxy statements and other information will be available for inspection and copying at the Commission's public reference room, and the Web site of the Commission referenced to above. Insofar as indemnification for liabilities raising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the, foregoing provisions, or otherwise, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. There are no changes in or disagreements with accountants on accounting or disclosure issues. INDEX TO FINANCIAL STATEMENTS 53
eUNIVERSE, INC. Balance Sheets ASSETS June 30, March 31, 1999 1999 ----------- ---------- CURRENT ASSETS Cash and Cash Equivalents....................................... $ 4,194,109 $ 11,335 Accounts receivable, net of allowances for doubtful accounts of $19,175 and $0, respectively............ 193,096 92,938 Inventory...................................................... 41,451 22,647 Due from Officers.............................................. - 157,569 Due from employees............................................. 153,200 - Prepaid expenses and other current assets...................... 75,717 9,629 ----------- ---------- Total Current Assets.......................... 4,657,573 294,118 FURNITURE AND EQUIPMENT, less accumulated depreciation of $109,818 and $83,052, respectively.............. 329,346 225,718 GOODWILL, net of amortization of $307,192 and $2,000 , respectively............................................ 17,784,733 38,000 OTHER INTANGIBLES, net of amortization of $2,789 and $340 , respectively.............................................. 110,561 510 ----------- ---------- TOTAL ASSETS......................................... $22,882,213 $ 558,346 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable................................................ $ 872,284 $ 828,718 Accrued liabilities............................................. 219,494 113,604 Due to affiliates............................................... 15,280 30,000 Due to officer.................................................. - 105,000 ----------- ---------- Total Current Liabilities............................ 1,107,058 1,077,322 ----------- ---------- SHAREHOLDERS' EQUITY (DEFICIT) Preferred stock, $ 10 par value; 40,000,000 shares authorized; 1,795,024 and -0- shares issued and outstanding, respectively..................................... 179,502 - Common stock, $ 001 par value; 250,000,000 shares authorized; 14,837,723 and 2,148,098 shares issued and outstanding, respectively................................. 14,838 1,000 Additional paid-in capital...................................... 23,273,159 - Deferred offering costs......................................... - - Retained deficit................................................ (1,692,344) (519,976) ----------- ---------- Total Shareholders' Equity........................... 21,775,155 (518,976) ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $22,882,213 $ 558,346 =========== ==========
See accompanying notes to the financial statements
eUNIVERSE, INC Statements of Operations Three Months Ended ------------------------------- June 30, June 30, 1999 1998 -------------- -------------- REVENUE...................................................... $ 2,034,955 $2,118,186 COST OF GOODS SOLD........................................... 1,659,558 1,802,615 -------------- -------------- GROSS PROFIT................................................. 375,397 315,571 OPERATING EXPENSES: Marketing and sales......................................... 444,206 244,605 Product development......................................... 168,018 92,066 General and administrative.................................. 630,149 49,851 Merger and acquisition related.............................. 62,241 - Amortization of goodwill and other intangibles.............. 307,641 292 Stock-based compensation.................................... 237,500 - -------------- -------------- TOTAL OPERATING EXPENSES..................................... 1,849,755 386,814 -------------- -------------- OPERATING LOSS............................................... (1,474,358) (71,243) ============== ============== NONOPERATING INCOME (EXPENSE) Interest and dividend income................................ 7,049 108 Interest expense............................................ (85,801) - -------------- -------------- INCOME (LOSS) BEFORE INCOME TAXES............................ (1,553,110) (71,135) INCOME TAXES................................................. - - -------------- -------------- NET INCOME (LOSS)............................................ $(1,553,110) $ (71,135) ============== ============== Basic income (loss) per common share......................... $ (0.13) N/A ============== ============== Basic weighted average common shares outstanding............. 12,221,900 N/A ============== ==============
See accompanying notes to the financial statements eUNIVERSE, INC. Statements of Cash flows
Three Months Ended ----------------------------------- June 30, June 30, 1999 1998 ---------------- ----------------- OPERATING ACTIVITIES Net income (loss) $(1,553,110) $ (71,135) Transactions not requiring cash: Depreciation 19,354 11,538 Amortization 307,641 292 Common stock issued for services 247,500 - Changes in current assets (185,050) 7,590 Changes in current liabilities 164,736 (56,925) ---------------- ----------------- NET CASH (USED IN) OPERATING ACTIVITIES (998,929) (108,640) INVESTING ACTIVITIES Acquisitions (1,915,000) - Cash thruogh acquisitions 37,214 - Purchases of fixed assets (68,118) (17,400) Repayment of advances from officers (105,000) - Receipt of advances to officers 157,769 - Advances made to Employees (153,200) - ---------------- ----------------- NET CASH PROVIDED BY INVSETING ACTIVITIES (2,046,335) (17,400) ---------------- ----------------- FINANCING ACTIVITIES Proceeds from issuance of preferred stock 5,875,204 - Proceeds from issuance of common stock 1,402,835 - Payment to repurchase common stock (20,000) - Repayment of loan from affiliates (30,000) ---------------- ----------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 7,228,039 - ---------------- ----------------- CHANGE IN CASH AND CASH EQUIVALENTS 4,182,775 (126,041) Cash and cash equivalents, beginning of period 11,335 267,213 ---------------- ----------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,194,109 $ 141,172 ================ ================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Noncash investing and financing transactions: Stock issued in connection with acquisitions: CD Universe $ 7,329,480 $ - Cases Ladder 7,350,000 Gamers Alliance 1,000,000 MegaDVD 52,500
See accompanying notes to the financial statements eUniverse, Inc. Notes to Financial Statements June 30, 1999 1) Organization and Line of Business - ------------------------------------ eUniverse, Inc. ("the Company") is a Nevada Corporation engaged in developing, acquiring, and operating a network of web sites providing entertainment - oriented products and services. At present the Company is engaged in sales of audio CDs, videotapes, and digital videodisks ("DVDs") over the Internet, and providing online computer gaming. The financial statements being presented include the accounts of eUniverse, Inc. and its wholly owned subsidiaries. These subsidiaries are Entertainment Universe, Inc. acquired on April 14, 1999, CD Universe, Inc. acquired on April 14, 1999, Cases Ladder, Inc. acquired May 31, 1999, and Gamer's Alliance, Inc. acquired June 30, 1999. All significant inter company transactions and balances have been eliminated. 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. Business Developments - ---------------------- The Company was founded in February 1999 and incorporated as Entertainment Universe, Inc. ("EUI"). 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 12,904,000 shares of MCA's $.001 par value restricted common stock. EUI shareholders also exchanged all of its preferred shares for 1,832,812 shares of MCA's Series A 6% Convertible Preferred Stock. As a result, EUI (the accounting acquirer) became a wholly owned subsidiary of MCA (the legal acquirer). The former shareholders of EUI own approximately 91.6 percent of MCA. Subsequent to this, MCA changed its name to eUniverse, Inc. Comparative Periods - ------------------- Since EUI, the accounting acquirer, has no operating history, financial statements are presented using CD Universe's historical data, as EUI's predecessor. 2) Business Combinations and Investments - ---------------------------------------- During the quarter ended June 30th 1999, the Company completed three significant acquisitions: CD Universe, Inc., Cases Ladder, Inc., and Gamers Alliance, Inc. All three acquisitions were recorded using the purchase method of accounting under the provisions of APB Opinion No. 16. On April 14, 1999, the Company completed its acquisition of CD Universe, Inc., a company engaged primarily in selling compact audio disks, video disks, and video tapes to retail purchasers over the internet. According to the terms of this acquisition, the Company acquired all of the capital stock of CD Universe, Inc. for a total consideration of $1,915,000 in cash plus 2,425,000 shares of common stock of the company valued at $3.00 per share (market price on acquisition date). This acquisition was recorded as follows: Cash $1,915,000 Stock 7,275,000 Excess liabilities over assets acquired 518,976 Acquisition related services 54,840 ---------- Goodwill recorded $9,763,816 On May 31, 1999, the Company completed its Acquisition of Cases Ladder, Inc., a company primarily engaged in providing online computer gaming with competitive rankings, tournaments and leagues among its more than 1.1 million registered members. The purchase price of this acquisition was 700,000 shares of the Company's common stock, valued at $10.00 per share (market price on acquisition date), issued in exchange for all the issued and outstanding shares of Cases Ladder, Inc. This acquisition was recorded as follows: Stock $7,000,000 Excess assets over liabilities acquired ( 48,295) Acquisition related services 350,000 ----------- Goodwill recorded $7,301,705 On June 30, 1999, the Company completed its purchase of Gamers' Alliance, Inc. Gamers' Alliance operates and maintains one of the largest networks of computer gaming related sites on the Internet with more than 50 gaming related wed sites. The purchase price of this acquisition was 78,125 shares of the Company `s common stock, valued at $12.80 per share (market price on acquisition date), issued in exchange for all the issued and outstanding shares of Gamers' Alliance, Inc. Pursuant to the term of the agreement, the purchase price may increase to 175,781 shares of common stock based on achievement of earnings performance targets through June 30, 2000. This acquisition was recorded as follows: Stock $1,000,000 Excess assets over liabilities acquired ( 13,595) ----------- Goodwill recorded $ 986,405 Total goodwill recorded through the acquisitions is $18,051,926 and is being amortized on a straight-line basis over ten years. 3) Other Non-Cash Financial Activities - -------------------------------------- In addition to the acquisitions described above (Note 2), the following non-cash transactions were recorded in the quarter ended 6/30/99: Acquisition of megaDVD website through issuance of 4,605 shares of common stock priced at $11.40 per share. Issuance of 339,000 share of common stock valued at $.50 per share for various consulting services. Issuance of 25,000 shares of common stock valued at $9.50 per share to key employees of CD Universe in compensation for their involvement in company activities. Issuance of warrants to purchase a total of 671,835 share of common stock of the company as part compensation to its exclusive placement agent, Gerard klauer Mattison & Co., Inc. (GKM"). 400,000 of these warrants have the exercise price of $2.75 per share and became exercisable on April 14, 1999 and expire on April 14, 2004. The remaining 271,835 have an exercise price of $2.81 per share will become exercisable on April 14, 2000 and expire on April 14, 2004. These warrants have been recorded in the financial statement valued at $1,214,567. 4) Due from Employees - --------------------- Due from employees consists of three 6% interest-bearing notes in the amounts of $85,000, $25,000, and $40,000 due from two former vice presidents of Cases Ladder, Inc. and former principal of Green Willow (Mega DVD). All three individuals are currently employees of eUniverse, Inc. 5) Fixed Assets - ---------------
Fixed assets, at cost, consist of the following June 30, 1999 March 31, 1999 Furniture and fixture $ 34,097 $ 29,069 Computers and equipment 361,701 238,622 Purchased Software 3,366 1,079 Leasehold Improvements 40,000 40,000 ------------------------------------------- 439,164 308,770 Less accumulated depreciation and amortization 109,818 83,052 Fixed assets, Net $ 329,346 $ 225,718 ===========================================
6) Other Intangibles - -------------------- Other Intangibles primarily consists of purchase price of web sites acquired:
June 30, 1999 March 31, 1999 Domain Name-eUniverse.Com $ 60,000 $ - MegaDVD.com 52,500 Other 850 850 ----------------------------------------- 168,190 850 Less accumulated amortization 4,160 340 Other Intangible, Net $ 164,030 $ 510 =========================================
In addition to the above websites (eUniverse.com and MegaDVD.com) which were purchased from third parties, the company owns and operates a number of websites acquired through acquisition of it subsidiaries and accounts for them as part of its goodwill. The above websites are being amortized on a straight-line basis over the period of ten years. 7) Stock based compensation plan - -------------------------------- Under the Company's 1999 Stock Award Plan, stock options may be granted to officers, directors, employees and consultants. For the quarter ended June 30, 1999 the plan's activities were as follows: Stock Options:
Number of Shares Exercise Price -------------------- ------------------------- Outstanding at 3-31-1999 - - Granted 2,860,000 $3.00 - 11.00 Exercised - Forfeited - -------------------- ------------------------- Outstanding at 6-30-1999 2,860,000 $3.00 - 11.00 -------------------- ------------------------- Options exercisable at 6-30-1999 191,667 $3.00 - 11.00 -------------------- ------------------------- Warrants: Number of Shares Exercise Price -------------------- ------------------------- Outstanding at 3-31-1999 - - Granted 671,865 $2.75 - 2.81 Exercised -
Forfeited - -------------------- ------------------------- Outstanding at 6-30-1999 671,865 $2.75 - 2.81 -------------------- ------------------------- Options exercisable at 6-30-1999 400,000 $2.75 -------------------- -------------------------
The Company uses intrinsic value method (APB Opinion 25) to account for its stock options granted to officers, directors, and employees and non-employees. Under this method, compensation expense is recorded over the vesting period based on the difference between the exercise price and quoted market price on the date the options are granted. Since the company has granted all its stock options at an exercise price equal to or above the quoted market value on the measurement date, no compensation expense related to issuance of stock option has been recorded. Had the Company chosen the fair value method of accounting for transactions involving stock option issuance (SFAS No. 123), the Company would have recorded an additional $263,911 in compensation cost for the quarter ended June 30, 1999 as presented by the pro forma statement below: Quarter Ended June 30, 1999 ------------- Net loss as reported $(1,553,110) ------------ Pro forma net loss $(1,817,021) ------------ Net loss per common share $ (0.13) ------------ Pro forma loss per share $ (0.15) ------------ The weighted average of stock options issued during the quarter ended June 30, 1999 was $7.62. The Black-Scholes option-pricing model with a risk free interest rate of 4.5% and an annualized volatility of 81% was used to estimate the fair value of the stock options issued. 8) Preferred Stock - ------------------ On April 14, 1999 EUI sold 1,832,812 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 $6,598,122. Holders of the company's have the right to convert such stocks into shares of the Company's common stock at any time after October 15, 1999 at a one-to-one ratio unless market price of the company's common stock is below $3.60, in which case, the conversion ratio would be adjusted accordingly. 9) Subsequent event - ------------------- On August 6, 1999, the Company reached definitive agreement to purchase Big Network, Inc. Big Network is an online entertainment hub with more than 200,000 members. It has created a proprietary, massively scalable interaction engine that provides multi user games to thousands of simultaneous users. The purchase price of Big Network is 1,800,000 shares of the Company's common stock in exchange for all issued and outstanding shares of Big Network, Inc. MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- Index to Financial Statements
Page ---- Independent auditors' report................................................................... F-2 Balance sheets, March 31, 1999 and December 31, 1998........................................... F-3 Statements of operations, for the three months ended March 31, 1999, and the years ended December 31, 1998 and 1997................................................ F-4 Statement of shareholders' equity (deficit), for the period from January 1, 1997 through March 31, 1999.................................................................... F-5 Statements of operations, for the three months ended March 31, 1999, and the years ended December 31, 1998 and 1997................................................ F-6 Summary of significant accounting policies..................................................... F-8 Notes to financial statements.................................................................. F-10
F-1 Cordovano and Harvey, P.C. Certified Public Accountants - -------------------------------------------------------------------------------- 201 Steele Street Suite 300 Denver, Colorado 80206 (303) 329-0220 Phone (303) 316-7493 Fax - -------------------------------------------------------------------------------- To the Board of Directors and Shareholders Motorcycle Centers of America, Inc. INDEPENDENT AUDITORS' REPORT We have audited the balance sheets of Motorcycle Centers of America, Inc. as of March 31, 1999 and December 31, 1998, and the related statements of operations, shareholders' equity (deficit) and cash flows for the three months ended March 31, 1999 and for the years ended December 31, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Motorcycle Centers of America, Inc. as of March 31, 1999 and December 31, 1998, and the results of its operations and its cash flows for the three months ended March 31, 1999 and for the years ended December 31, 1998 and 1997, in conformity with generally accepted accounting principles. As discussed to Note J to the financial statements, on April 9, 1999, the Company entered into an Agreement and Plan of Reorganization with Entertainment Universe, Inc. (EUI). As a result of the reorganization, EUI became a wholly owned subsidiary of the Company and the former shareholders of EUI own approximately 91.6 percent of the Company. Cordovano and Harvey, P.C. June 3, 1999 F-2 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- Balance Sheets
March 31, December 31, 1999 1998 ------------ --------------- ASSETS CURRENT ASSETS Cash and cash equivalents....................................................... $ 101,568 $ 887 Marketable securities (Note C).................................................. - 8,000 ------------ --------------- TOTAL CURRENT ASSETS 101,568 8,887 FURNITURE AND EQUIPMENT, less accumulated depreciation of $2,792 and $2,667 and respectively (Note D)........................................................... 708 833 ------------ --------------- $ 102,276 $ 9,720 ============ =============== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable................................................................ $ - $ 1,497 Accrued liabilities............................................................. 7,000 7,000 Due to officer (Note B)......................................................... 66,3000 46,437 ------------ --------------- TOTAL CURRENT LIABILITIES 73,300 54,934 ------------ --------------- COMMITMENT AND CONTINGENCY (Note G).................................................. - - SHAREHOLDERS' EQUITY (DEFICIT) (Note F) Preferred stock, $.10 par value; 40,000,000 shares authorized; -0- and -0- shares issued and outstanding, respectively...................... - - Common stock, $.001 par value; 250,000,000 shares authorized; 2,148,098 and 70,098 shares issued and outstanding, respectively................................................ 2,148 70 Additional paid-in capital...................................................... 171,796 103,814 Deferred offering costs......................................................... (5,734) (5,734) Retained deficit................................................................ (139,234) (143,364) ------------ --------------- TOTAL SHAREHOLDERS EQUITY (DEFICIT) 28,976 (45,214) ------------ --------------- $ 102,276 $ 9,720 ============ ===============
See accompanying summary of significant accounting policies and notes to the financial statements. F-3 MOTORCYCLE CENTERS OF AMERICA, INC. Statements of Operations
Three Months Ended March 31, Years ended December 31, ------------------------------ 1999 1998 1997 ------------ ------------ ------------ COSTS AND EXPENSES Occupancy........................................................... $ 1,398 $ 5,256 $ 7,542 Consulting, related parties (Note B)................................ 70,060 - - Consulting.......................................................... 2,936 - 9,000 Legal and accounting................................................ - 16,495 5,350 Stock transfer fees................................................. 50 2,180 1,593 Brokerage charges................................................... 3,721 - 1,213 Office.............................................................. 2,158 6,991 1,419 Depreciation........................................................ 125 722 833 Earnest money paid in failed merger (Note H).................................................. - 10,000 - Other............................................................... 25 3,959 89 ------------ ------------ ------------ OPERATING LOSS (80,473) (45,603) (27,039) ------------ ------------ ------------ NONOPERATING INCOME (EXPENSE) Interest and dividend income....................................... 530 150 63 Interest expense - - (87) Trading gains and (losses), net (Note C)............................ 84,073 (57,440) 19,337 ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 4,130 (102,893) (7,726) INCOME TAXES (Note E)................................................... - - - ------------ ------------ ------------ NET INCOME (LOSS) $ 4,130 $ (102,893) $ (7,726) ============ ============ ============ Basic income (loss) per common share.................................... $ 0.04 $ (1.47) $ (0.53) ============ ============ ============ Basic weighted average common shares outstanding.................................................. 94,854 69,833 14,607 ============ ============ ============
See accompanying summary of significant accounting policies and notes to the financial statements. F-4 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- Statement of Shareholders' Equity (Deficit) January 1, 1997 through March 31, 1999
Preferred Stock Common Stock ------------------------ ---------------------------- Shares Par Value Shares Par Value Shares ------ --------- --------- --------- ------ Balance, January 1, 1997............................ - $ - 5,405 * $ 5 2 * Treasury stock contributed by officer (Notes B & F).................................... - - - - 3 * Sale of treasury stock (Note F)..................... - - - - (5) * Sale of common stock................................ - - 47,500 * 48 - Net loss............................................ - - - - - ------ --------- --------- --------- ------ BALANCE, DECEMBER 31, 1997 - - 52,905 53 - Sale of common stock................................ - - 18,750 19 - Repurchase common stock, subsequently cancelled........................... - - (1,557) * (2) - Deferred offering costs............................. - - - - - Net loss............................................ - - - - - ------ --------- ----------- --------- ------ BALANCE, DECEMBER 31, 1998 - - 70,098 * 70 - Common stock issued for services, at cost of services.............................. - - 78,000 * 78 - Common stock issued to former officer for services, at cost of services (Note B)................................ - - 2,000,000 * 2,000 - Net income for the three months ended March 31, 1999................................... - - - - - ------ --------- ----------- --------- ------ BALANCE, MARCH 31, 1999 - $ - $ 2,148,098 $ 2,148 - ====== ========= =========== ========= ====== Additional Deferred Treasury Stock Paid-in Offering Retained ----------------- Amount Capital Costs Deficit Total -------- ---------- --------- ---------- -------- Balance, January 1, 1997............................ $ (1,125) $ 104,037 $ - $ (32,745) $ 70,172 Treasury stock contributed by officer (Notes B & F).................................... (2,600) - - - (2,600) Sale of treasury stock (Note F)..................... 3,725 (2,362) - - 1,363 Sale of common stock................................ - 9,452 - - 9,500 Net loss............................................ - - - (7,726) (7,726) -------- ---------- --------- ---------- -------- BALANCE, DECEMBER 31, 1997 - 111,127 - (40,471) 70,709 Sale of common stock................................ - 3,731 - - 3,750 Repurchase common stock, subsequently cancelled........................... - (11,044) - - (11,046) Deferred offering costs............................. - - (5,734) - (5,734) Net loss............................................ - - - (102,893) (102,893) -------- ---------- --------- ---------- -------- BALANCE, DECEMBER 31, 1998 - 103,814 (5,734) (143,364) (45,214) Common stock issued for services, at cost of services.............................. - 29,982 - - 30,060 Common stock issued to former officer for services, at cost of services (Note B)................................ - 38,000 - - 40,000 Net income for the three months ended March 31, 1999................................... - - - 4,130 4,130 -------- ---------- --------- ---------- -------- BALANCE, MARCH 31, 1999 $ - $ 171,796 $ (5,734) $ (139,234) $ 28,976 ======== ========== ========= ========== ========
* Restated for 1 for 20 reverse splits (Note F) See accompanying summary of significant accounting policies and notes to the financial statements. F-5 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- Statements of Cash flows
Three Months Ended March 31, Years ended December 31, -------------------------- 1999 1998 1997 ----------- ----------- ----------- OPERATING ACTIVITIES Net income (loss)............................................... $ 4,131 $ (102,893) $ (7,726) Transactions not requiring cash: Depreciation.................................................. 125 723 833 Common stock issued for services.............................. 70,060 - - Unrealized (gains) losses on marketable securities, net............................................. (84,074) 57,440 (5,775) Changes in current assets and current liabilities: Purchases of marketable securities............................ - (8,000) (31,188) Proceeds from sale of marketable securities................... 92,073 561 32,313 Accounts payable and accrued expenses......................... (1,497) 7,578 (4,910) ----------- ----------- ----------- NET CASH (USED IN) OPERATING ACTIVITIES................. 80,818 (44,591) (16,453) ----------- ----------- ----------- INVESTING ACTIVITIES Repayment of advances to former officer (Note B)................ (5,137) (68,563) (23,150) Advances from former officer (Note B)........................... 25,000 115,000 48,080 ----------- ----------- ----------- NET CASH PROVIDED BY INVESTING ACTIVITIES............... 19,863 46,437 24,930 ----------- ----------- ----------- FINANCING ACTIVITIES Purchases of treasury stock..................................... - (11,046) (2,600) Proceeds from sale of treasury stock............................ - - 1,363 Payments for deferred offering costs............................ - (5,734) - Proceeds from issuance of common stock.......................... - 3,750 9,500 Principal payments on notes payable............................. - - (5,000) ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES..... - (13,030) 3,263 ----------- ----------- ----------- CHANGE IN CASH AND CASH EQUIVALENTS............................... 100,681 (11,184) 11,740 Cash and cash equivalents, beginning of period.................... 887 12,071 331 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD........................ $ 101,568 $ 887 $ 12,071 =========== =========== ===========
See accompanying summary of significant accounting policies and notes to the financial statements. F-6 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- Statements of Cash flows
Three Months Ended March 31, Years ended December 31, -------------------------- 1999 1998 1997 ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Interest............................................. $ - $ - $ 874 =========== =========== =========== Income taxes......................................... $ - $ - $ - =========== =========== =========== Noncash investing and financing transactions: Receipt of investments as payment for advances (Note B)........................................... $ - $ - $ 46,600 =========== =========== =========== Treasury stock subsequently cancelled................ $ - $ 11,046 $ - =========== =========== ===========
See accompanying summary of significant accounting policies and notes to the financial statements. F-7 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES March 31, 1999 Use of estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash equivalents For the purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Marketable securities Marketable securities consist of various equity securities and are stated at current market value. All equity securities are considered "trading" securities under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Accordingly, unrealized gains and losses on equity securities are reflected in the accompanying statements of operations. Furniture and equipment Furniture and equipment are recorded at cost and are depreciated using the straight-line method over the useful lives of the assets, beginning at the time the assets are placed into operation. Furniture and equipment are depreciated over estimated useful lives of five years and three years, respectively. Upon retirement or disposition of the furniture and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. Repairs and maintenance are charged to expense as incurred and expenditures for additions and improvements are capitalized. Income taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and tax basis of assets and liabilities for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes. F-8 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES March 31, 1999 Treasury stock The Company accounts for purchases and reissuances of treasury stock using the cost method. Under the cost method, each acquisition of treasury stock is accounted for at cost. Upon the sale or disposition, the treasury stock account is reduced for an amount equal to the number of shares sold, multiplied by the cost per share. The difference is treated as paid-in capital. Fair value of financial instruments SFAS 107, "Disclosure About Fair Value of Financial Instruments," requires certain disclosures regarding the fair value of financial instruments. The Company has determined, based on available market information and appropriate valuation methodologies, the fair value of its financial instruments approximates carrying value. The carrying amounts of cash, accounts payable, and other accrued liabilities approximate fair value due to the short-term maturity of the instruments. Earnings per common share Effective December 31, 1997, SFAS 128 "Earnings per Share" requires a dual presentation of earnings per share-basic and diluted. Basic earnings per common share has been computed based on the weighted average number of common shares outstanding. Diluted earnings per share reflects the increase in weighted average common shares outstanding that would result from the assumed exercise of outstanding stock options. Basic and diluted earnings per share were the same for all prior periods presented due to the Company's simple capital structure. Earnings per share calculations are reported on a post-split basis for all periods presented. New accounting pronouncements The Company has adopted the following new accounting pronouncements for the year ended December 31, 1998. There was no effect on the financial statements presented from the adoption of the new pronouncements. SFAS No. 130, "Reporting Comprehensive Income," requires the reporting and display of total comprehensive income and its components in a full set of general-purpose financial statements. The Company did not have comprehensive income for the periods presented; therefore, comprehensive income and net income are equal. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," is based on the "management" approach for reporting segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosure about the Company's products, the geographic areas in which it earns revenue and holds long-lived assets, and its major customers. SFAS 131 is not applicable, as the Company had no revenue-producing operations for the periods presented. SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-retirement Benefits," which requires additional disclosures about pension and other post-retirement benefit plans, but does not change the measurement or recognition of those plans. F-9 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 1999 Note A: Nature of operations - ----------------------------- Effective December 19, 1994, Motorcycle Centers of America, Inc. (MCAI) (formerly NABCO, Inc.) merged with Humanus Corporation (Humanus), which was incorporated under the laws of Colorado on February 23, 1988. Subsequent to the merger, Humanus changed its name to NABCO, Inc. NABCO was originally incorporated for the purpose of manufacturing bagels and selling them to its subfranchisor and franchisees. In August 1995, NABCO sold its bagel manufacturing operations, and on August 28, 1995, it officially terminated operations and became an inactive shell company. On January 26, 1998, the Company entered into an Agreement and Plan of Reorganization with Sandale Holdings, Limited, to acquire a motorcycle manufacturing company in China. The Plan of Reorganization was terminated on August 14, 1998 (see Note I). In connection with the Plan of Reorganization, the Company redomiciled in Nevada. On April 15, 1998, NABCO entered into a merger with MCAI whereby all of the outstanding shares of common stock in NABCO, amounting to 1,458,807 shares, were issued to MCAI in exchange for 1,458,807 shares of the $.001 par value common stock of MCAI. MCAI was the sole surviving corporation. The shares of NABCO were cancelled following the merger. As a result of the merger, the Company previously known as NABCO, Inc. became Motorcycle Centers of America, Inc. On October 4, 1998, the Company entered into an Agreement and Plan of Reorganization with DDA America, LLC to acquire all of the issued and outstanding stock of DDA America, LLC. The Plan of Reorganization was terminated on March 1, 1999 (see Note I). On April 9, 1999, the Company entered into an Agreement and Plan of Reorganization with Entertainment Universe, Inc. to acquire all of the issued and outstanding stock of Entertainment Universe, Inc. (see Note J). Note B: Related party transactions - ----------------------------------- Three months ended March 31, 1999 - --------------------------------- During the three months ended March 31, 1999, an officer advanced the Company $25,000 for working capital. The Company repaid the officer $5,137 during 1999. The remaining balance of $66,300 is included in the accompanying financial statements as due to former officer. During the three months ended March 31, 1999, the Company issued 2,000,000 shares of its $.001 par value common stock to an officer in exchange for services. (see Notes F and J). During the three months ended March 31, 1999, the Company issued 78,000 shares of its $.001 par value common stock to various shareholders in exchange for services. The transaction was valued at the cost of the services rendered of $30,060. F-10 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 1999 Note B: Related party transactions, continued - ---------------------------------------------- 1998 - ---- During the year ended December 31, 1998, an officer advanced the Company $115,000 for working capital. The Company repaid the officer $68,563 during 1998. The remaining balance of $46,437 is included in the accompanying financial statements as due to former officer. 1997 - ---- At January 1, 1997, an officer owed the Company $71,530 in advances. During 1997, the Company advanced the officer an additional $23,150, and the officer repaid the total $94,680. The advances were repaid in cash totaling $48,080 and marketable securities totaling $46,600. The Company recognized $12,938 in realized gains and $15,000 in unrealized gains from marketable securities received from the officer in 1997. Note C: Marketable securities - ------------------------------ Marketable securities consisted of the following at March 31, 1999 and December 31, 1998:
March 31, December 31, 1999 1998 ------------------- ---------------------------- Estimated Estimated Market Market Cost Value Cost Value ------ ---------- ------- --------- Equity securities........... $51,000 $ - $59,000 $ 8,000 ======= ========== ======= =========
Following is a summary of investment earnings recognized in income during the three months ended March 31, 1999 and the years ended December 31, 1998 and 1997:
March 31, December 31, ----------------------------- 1999 1998 1997 ----------- ----------- --------- Trading securities: Realized gains.................................................. $84,073 $ - $13,562 Realized losses................................................. - (6,440) - ----------- ----------- --------- Realized gains (losses), net 84,073 (6,440) 13,562 ----------- ----------- --------- Unrealized gains................................................ - - 15,000 Unrealized losses............................................... - (51,000) (9,225) ----------- ----------- --------- Unrealized gains (losses), net - (51,000) 5,775 ----------- ----------- --------- GAIN (LOSS) ON TRADING SECURITIES, NET $84,073 $(57,440) $19,337 =========== =========== =========
F-11 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 1999 Note D: Furniture and equipment - -------------------------------- Furniture and equipment consisted of the following at March 31, 1999 and December 31, 1998:
March 31, December 31, 1999 1998 ------------------ ------------------ Office furniture.............................. $ 2,500 $ 2,500 Computer equipment............................ 1,000 1,000 ------------------ ------------------ 3,500 3,500 Less: accumulated depreciation................ (2,792) (2,667) ------------------ ------------------ $ 708 $ 833 ================== ==================
Note E: Income taxes - --------------------- A reconciliation of the U.S. statutory federal income tax rate to the effective tax rate follows for the three months ended March 31, 1999 and the years ended December 31, 1998 and 1997:
March 31, December 31, ---------------------------- 1999 1998 1997 ----------- ------- ------- U.S. statutory federal rate......................... 15.00% 20.57% 15.00% State income tax rate, net of federal benefit............................ 4.25% 4.15% 4.25% Unrealized gains and losses on marketable securities, net........................ (0.00%) (2.75%) (8.21%) Net operating loss for which no tax benefit is currently available............................ (19.25%) (21.97%) (11.04%) ----------- ------- ------- -% -% -% ==========- ======= =======
The current tax benefit (expense) for the three months ended March 31, 1999 and the years ended December 31, 1998 and 1997 totaled $(795), $22,608 and $853, respectively, which have been offset by the valuation allowance. The valuation allowance offsets the net deferred tax asset for which there is no assurance of recovery. The change in the valuation allowance for the three months ended March 31, 1999 and the years ended December 31, 1998 and 1997 totaled $(795), $22,608 and $853, respectively. The net operating loss carryforward expires through the year 2019. The valuation allowance will be evaluated at the end of each year, considering positive and negative evidence about whether the deferred tax asset will be realized. At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax assets is no longer impaired and the allowance is no longer required. F-12 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 1999 Note F: Shareholders' equity - ----------------------------- Preferred stock - --------------- The Company is authorized to issue 40,000,000 preferred shares with a $.10 par value. The Board of Directors has authority to determine the relative rights and preferences of the preferred shares. Common stock - ------------ The Company is authorized to issue 250,000,000 common shares with a $.001 par value. Shareholders do not have preemptive rights to purchase additional shares and cumulative voting of common shares is not permitted. On March 29, 1999, Motorcycle Centers of America, Inc. issued 1,500,000 shares of its common stock in exchange for consulting and administrative services provided to the Company during the three months ended March 31, 1999. The transactions was recorded at the value of the services, $30,000 ($.02 per share). Effective March 31, 1999, the Company approved a 20 for one reverse split of its common stock. Therefore, the 1,500,000 common shares were converted to 75, 000 common shares following the reverse split. On March 31, 1999, the Company issued 3,000 post-split shares of its common stock in exchange for adminsitrative services provided to the Company during the three months ended March 31, 1999. The transaction was recorded at the value of the services, $60 ($.02 per share). On March 31, 1999, the Company also issued 2,000,000 post-split shares of its common stock to an officer in exchange for consulting services provided to the Company during the three months ended March 31, 1999. The transaction was recorded at the value of the services, $40,000 ($.02 per share). Treasury stock - -------------- As of January 1, 1996, the Company held 6,000 shares of treasury stock at a cost of $9,750. During 1996, the Company purchased an additional 3,000 shares at a cost of $3,375 and sold 8,000 shares for proceeds of $9,625. As a result, the Company recorded a $2,375 charge against additional paid-in capital for the excess of cost over proceeds from the sale. As of January 1, 1997, the Company held 1,000 shares of treasury stock at a cost of $1,125. During the year ended December 31, 1997, an officer repaid an advance to the Company with 1,300 shares of NABCO stock with a value of $2,600; and the Company sold 2,300 shares of treasury stock for proceeds of $1,363. As a result, the Company recorded a $2,362 charge against additional paid-in capital for the excess of cost over proceeds from the sale. As of December 31, 1997, the Company held no shares of treasury stock. Reverse common stock splits - --------------------------- Effective March 31, 1999, the Board of Directors approved a 20 for one reverse split of the Company's common stock for all shares outstanding as of March 31, 1999. Every 20 shares held by a shareholder prior to the split was replaced by one share as of April 28, 1999. On August 1, 1997, the Board of Directors approved a 20 for one reverse split of the Company's common stock for all shares outstanding as of August 1, 1997. Every 20 shares held by a shareholder prior to the split was replaced by one share as of August 11, 1997. The accompanying financial statements have been restated to give effect to these reverse splits for all periods presented. Deferred offering costs - ----------------------- The Company incurred legal fees and stock transfer fees of $4,500 and $1,234, respectively, during the year ended December 31, 1998, which were related to common shares sold under Rule 504 of Regulation D in April 1999. The total $5,734 is included in the accompanying financial statements as deferred offering costs. F-13 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 1999 Note G: Commitment and contingency - ----------------------------------- Commitment - ---------- The Company entered into an operating lease for office space during 1997, which commenced December 1, 1997 and terminated on November 30, 1998. The Company renewed the lease through December 31, 1999. Monthly rent payments during 1998 were $438 and the future minimum lease payments total $5,593 due in 1999. Contingency - ----------- As part of the sale of the Company's bagel manufacturing operations in 1995, the Company sold a building with a mortgage payable totaling $91,349. Although the building was sold, the Company remains contingently liable until the note is satisfied. Note H: Terminated plans of reorganization - ------------------------------------------- Sandale Holdings, Limited (Sandale) - ----------------------------------- On January 26, 1998, NABCO (subsequently Motorcycle Centers of America, Inc.) entered into an Agreement and Plan of Reorganization with Sandale, a Bahamian corporation. As part of the reorganization, Sandale agreed to exchange all 10,000,000 of its Ordinary A shares and common shares; for 5,000,000 (pre-split) shares of NABCO's $.001 par value restricted common stock. As a result of the reorganization, Sandale would have become a wholly owned subsidiary of NABCO and the former shareholders of Sandale would have owned approximately 77 percent of NABCO. The Agreement and Plan of Reorganization was terminated on August 14, 1998. DDA America, LLC (DDA) - ---------------------- On October 4, 1998, the Company entered into an Agreement and Plan of Reorganization with DDA, a Delaware corporation. As part of the reorganization, DDA agreed to exchange all of its common shares for 2,700,000 shares of the Company's $.001 par value restricted common stock. As a result of the reorganization, DDA would have become a wholly owned subsidiary of the Company and the former shareholders of DDA would have owned approximately 67.5 percent of the Company. The Agreement and Plan of Reorganization was terminated on March 1, 1999. Earnest money lost in the failed agreement of $10,000 was charged to expense in during the year ended December 31, 1998. Note I: Year 2000 compliance - ----------------------------- The Year 2000 issue (Y2K) is the result of computer programs written using two digits rather than four to define the applicable year. Any of the Company's computer and telecommunications programs that have date sensitive software may recognize a date using "00" as the year 1900 instead of 2000. This could result in system failure or miscalculations causing disruptions in operations, including the ability to process transactions, send invoices, or engage in similar normal business activities. The Company has determined that its equipment is Y2K compliant. F-14 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 1999 Note I: Year 2000 compliance, continued - ---------------------------------------- The Company cannot determine the extent to which the Company is vulnerable to third parties' failure to remediate their own Y2K problems. As a result, there can be no guarantee that the systems of other companies on which the Company's business relies will be timely converted, or that failure to convert by another company, or a conversion that is incompatible with the Company's systems, would have a material adverse affect on the Company. In view of the foregoing, there can be no assurance that the Y2K issue will not have a material adverse effect on the Company's business. Note J: Subsequent events - -------------------------- Agreement and Plan of Reorganization - ------------------------------------ On April 9, 1999, the Company entered into an Agreement and Plan of Reorganization with the shareholders of Entertainment Universe, Inc. (EUI), a California corporation. EUI agreed to exchange all of its common shares for 12,904,000 shares of the Company's $.001 par value restricted common stock, and all of its preferred shares for 1,832,810 shares of its Series A six percent convertible preferred stock. As part of the reorganization, the Company agreed to a 20 for 1 reverse split of its restricted common stock prior to the exchange (see Note F). This acquisition will be accounted for as a recapitalization of EUI, with the Company the legal surviving entity. Since the Company had, prior to the recapitalization, no operations, the recapitalization has been accounted for as the sale of 12,904,000 shares of the Company's restricted common stock and 1,832,810 shares of its Series A six percent convertible preferred stock for the net assets of EUI. As a result of the reorganization, EUI became a wholly owned subsidiary of the Company and the former shareholders of EUI own approximately 91.6 percent of the Company. Subscription Agreement Securities Offering - ------------------------------------------ The Company conducted an offering of its $.001 par value common stock from April 1, 1999 through April 6, 1999 pursuant to Rule 504 of Regulation D under the Securities Act of 1933, as amended. A maximum of 900,000 shares was offered pursuant to a Regulation D Subscription Agreement at a price of $1.00 per share. Following the offering termination on April 6, 1999, the Company had received subscriptions for 885,835 shares for a gross amount of $885,835. Purchase of treasury stock - -------------------------- On April 20, 1999, the Company purchased 1,845,000 shares of its outstanding common stock from its former officer for $20,000. The shares were cancelled following the purchase. F-15 CD UNIVERSE, INC. FINANCIAL STATEMENTS MARCH 31, 1999 CD UNIVERSE, INC. FINANCIAL STATEMENTS MARCH 31, 1999 INDEX ----- Independent Auditor's Report 1 Balance Sheet 2 Statement of Operations 3 Statement of Stockholder's Deficit 4 Statement of Cash Flows 5 Notes to Financial Statement 6 - 11
INDEPENDENT AUDITOR'S REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CD UNIVERSE, INC. We have audited the accompanying balance sheet of CD UNIVERSE, INC. as of March 31, 1999 and the related statements of operations, stockholder's deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CD UNIVERSE, INC. as of March 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. MERDINGER, FRUCHTER, ROSEN & CORSO, P.C. Certified Public Accountants New York, New York May 14, 1999 CD UNIVERSE, INC. BALANCE SHEET MARCH 31, 1999 ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 11,335 Accounts Receivable, net of allowance for doubtful accounts of $0 92,938 Inventory 22,647 Due from Officer 157,569 Prepaid Expenses and Other Current Assets 9,629 ---------- Total Current Assets 294,118 Property and Equipment, net of accumulated depreciation of $83,052 225,718 Organization Costs, net of accumulated amortization of $340 510 Goodwill, net of accumulated amortization of $2,000 38,000 ----------- TOTAL ASSETS $ 558,346 =========== LIABILITIES AND STOCKHOLDER'S DEFICIT CURRENT LIABILITIES Accounts Payable and Accrued Expenses $ 942,322 Notes Payable - Officer 105,000 Due to Affiliates (Note 5) 30,000 ----------- Total Current Liabilities 1,077,322 ----------- Commitments and Contingencies (Note 7) - STOCKHOLDER'S DEFICIT Common Stock - no par value; authorized 1,000 shares; 1,000 issued and outstanding 1,000 Accumulated Deficit (519,976) ----------- Total Stockholder's Deficit (518,976) ----------- TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 558,346 ===========
The accompanying notes are an integral part of the financial statements. -2- CD UNIVERSE, INC. STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1999 REVENUE $8,851,713 COST OF GOODS SOLD 7,550,289 ---------- GROSS PROFIT 1,301,424 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,709,601 ---------- LOSS FROM OPERATIONS (408,177) OTHER INCOME 1,013 ---------- NET LOSS $ (407,164) ========== NET LOSS PER COMMON SHARE Basic $ (407.16) ========== Diluted $ (407.16) ==========
The accompanying notes are an integral part of the financial statements. -3- CD UNIVERSE, INC. STATEMENT OF STOCKHOLDER'S DEFICIT FOR THE YEAR ENDED MARCH 31, 1999
Total Common Stock Accumulated Stockholder's -------------------------- Shares Amount Deficit Deficit ------------ ----------- ----------- ------------- Balance at March 31, 1998 1,000 $ $1,000 $ (112,812) $ (111,812) Net Loss for the Year Ended March 31, 1999 - - (407,164) (407,164) ------------ ----------- ----------- ------------ Balance at March 31, 1999 1,000 $ 1,000 $ (519,976) $ (518,976) ============ =========== =========== ============
The accompanying notes are an integral part of the financial statements. -4- CD UNIVERSE, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $( 407,164) Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities Depreciation and Amortization 47,322 Changes in Certain Assets and Liabilities: (Increase) in Accounts Receivable ( 92,938) Decrease in Inventory 1,230 Decrease in Prepaid Expenses and Other Current Assets 33,402 Increase in Accounts Payable and Accrued Expenses 407,741 ---------- Total Cash Used in Operating Activities ( 10,407) ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in Property and Equipment ( 113,508) ---------- Total Cash Used in Investing Activities ( 113,508) ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in Notes Payable - Officer 150,000 Repayment of Notes Payable - Officer ( 45,000) Loans from Affiliates 30,000 Repayment of Loans from Affiliates ( 110,395) Loan to Officer ( 156,569) ---------- Total Cash Provided By Financing Activities ( 131,964) ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS ( 255,879) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 267,214 ---------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 11,335 ========== CASH PAID DURING THE YEAR FOR: Interest Expense $ 286 ========== Income Taxes $ - ==========
The accompanying notes are an integral part of the financial statements. - 5 - CD UNIVERSE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Organization and Line of Business --------------------------------- CD Universe, Inc. was incorporated under the laws of the State of Connecticut on April 7, 1997. The Company was sold to new management in April 1999. The Company sells and distributes compact discs (CD's) and video recordings to retail purchasers over the internet. b) Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. c) Concentration of Credit Risk ---------------------------- The Company places its cash in what it believes to be credit-worthy financial institutions. However, cash balances exceeded FDIC insured levels at various times during the year. d) Cash and Cash Equivalents ------------------------- The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents e) Accounts Receivable ------------------- Accounts receivable consist primarily of credit card charges by customers. f) Inventory --------- Inventory consists of compact discs, videos and packaging materials. Inventory is valued at the lower of cost or market using the first- in, first-out method. g) Property and Equipment ---------------------- Property and equipment is stated at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred. Estimated useful lives are as follows: Leasehold Improvements 3 years Computer Equipment 5 years Telephone Equipment 5 years Furniture, Fixtures and Other 10 years - 6 - CD UNIVERSE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) h) Goodwill -------- Goodwill resulting from the acquisition of assets accounted for as a purchase is being amortized over 40 years using the straight-line method. i) Organization Costs ------------------ Organization costs are being amortized over 5 years using the straight-line method. j) Income Taxes ------------ Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. k) Fair Value of Financial Instruments ----------------------------------- The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the relatively short maturity of these instruments. l) Long-Lived Assets ----------------- Long-lived assets and certain identifiable intangibles to he held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the assets and long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. m) 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. n) Revenue Recognition ------------------- The Company recognizes revenue upon shipment of its products. The Company maintains a partner program whereby partners provide links on their web-sites that bring customers to the CD Universe web-site. Revenue generated from these linked sites is recognized upon shipment of the CD's. The partner receives a commission of 5% to 15% of sales of the Company's products that originate from the site, recognized as an expense concurrent with the sale. - 7 - CD UNIVERSE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) o) Earnings Per Share ------------------ During 1997, the Company adopted SFAS No. 128, "Earnings Per Share", which requires presentation of basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). The computation of basic EPS is computed by dividing income available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect. The shares used in the computation for the year ended March 31, 1999 was as follows: Basic 1,000 ===== Diluted 1,000 ===== p) Comprehensive Income -------------------- In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was issued. This statement establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As of March 31, 1999, the Company has no items that represent other comprehensive income and, therefore, has not included a schedule of comprehensive income in the financial statements. q) Impact of Year 2000 Issue ------------------------- During the year ended March 31, 1999, the Company conducted an assessment of issues related to the Year 2000 and determined that it was necessary to modify or replace portions of its software in order to ensure that its computer systems will properly utilize dates beyond December 31, 1999. The Company expects to complete any Year 2000 systems modifications and conversions by the middle of 1999. Currently, the Company does not expect that costs associated with becoming Year 2000 compliant to be material. At this time, the Company cannot determine the impact the Year 2000 will have on its key customers or suppliers. If the Company's customers or suppliers do not convert their systems to become Year 2000 compliant, the Company may be adversely impacted. The Company is addressing these risks in order to reduce the impact on the Company. r) Recent Accounting Pronouncements -------------------------------- During 1998, the FASB issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information", which changes the way public companies report information about segments. SFAS No. 131, which is based on the selected segment information quarterly and entity-wide disclosures about products and services, major customers and the material countries in which the entity holds assets and reports revenue. This statement is effective for the Company's fiscal year. The Company is in the process of evaluating the disclosure requirements under this standard. - 8 - CD UNIVERSE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) r) Recent Accounting Pronouncements (continued) -------------------------------- Additionally, during 1998, the America Institute of Certified Accountants' Executive Committee issued Statement of Position Number 98-1 (SOP 98-1), "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use". SOP 98-1 is effective for fiscal years beginning after December 15, 1998. Management believes that the Company is substantially in compliance with this pronouncement and that its implementation will not have a material effect on the Company's financial position, results of operations or cash flows. NOTE 2 - PROPERTY AND EQUIPMENT Property and equipment is summarized as follows at March 31, 1999: Leasehold Improvements $ 40,000 Computer Equipment 215,543 Telephone Equipment 24,158 Furniture, Fixtures and Other 29,069 -------- 308,770 Less: Accumulated Depreciation 83,052 -------- Property and Equipment, net $225,718 ======== Depreciation expense for the year ended March 31, 1999 was $46,152. NOTE 3 - INCOME TAXES The components of the provision for income taxes for the year ended March 31, 1999 are as follows: 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 $ - ========== -9- CD UNIVERSE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 3 - INCOME TAXES (continued) The reconciliation of the effective income tax rate to the Federal statutory rate is as follows: Federal Income Tax Rate ( 34.0)% Deferred Tax Charge (Credit) - Effect on Valuation Allowance 34.0% State Income Tax, Net of Federal Benefit - ------ Effective Income Tax Rate 0.0% ====== At March 31, 1999, the Company had net carryforward losses of approximately $520,000 that can be utilized to offset future taxable income through 2014. Utilization of these net carryforward losses is subject to the limitations of Internal Revenue Code Section 382. The full realization of the tax benefit associated with the carryforward depends predominantly upon the Company's ability to generate taxable income during the carryforward period. A valuation allowance equal to the tax benefit for deferred taxes has been established due to the uncertainty of realizing the benefit of the tax carryforward. Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company's deferred tax assets (liabilities) are as follows: Loss Carryforwards $ 176,800 Less: Valuation Allowance ( 176,800) ----------- Net Deferred Tax Assets (Liabilities) $ - =========== NOTE 4 - NOTE PAYABLE - OFFICER The Company is indebted to an officer at March 31, 1999 for $105,000. The terms indicate interest is payable at 8% with loan principal and interest payable upon demand. Subsequent to March 31, 1999, the Note was paid down to $85,000. This amount will be settled through a purchase price adjustment upon the acquisition of the Company by Entertainment Universe, Inc. NOTE 5 - RELATED PARTY TRANSACTIONS In prior years, certain of the Company's fixed asset acquisitions and certain expenses were paid for through advances by an entity controlled by the Company's president. These advances, totaling $110,395, were repaid during the year ended March 31, 1999. During the current fiscal year, the Company received advances from an entity controlled by the Company's chairman. These advances totaled $30,000 and remain outstanding at March 31, 1999. Terms of repayment and interest are being negotiated. -10- CD UNIVERSE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 6 - MAJOR VENDOR The Company purchased approximately 90% of its merchandise from one vendor. At March 31, 1999, the balance due to that vendor was approximately $600,000 which was paid in April 1999. The Company does not believe that the loss of this vendor would have a material adverse effect on the Company. NOTE 7 - COMMITMENTS AND CONTINGENCIES The Company leases office space under non-cancelable operating lease agreements that expire within the next three years. Future minimum lease payments under these non-cancelable operating leases are as follows: March 31, --------- 2000 $ 117,000 2001 117,000 2002 107,250 -------- Total $ 341,250 ========= Rent expense under the office lease for the year ending March 31, 1999 was $82,000. On October 1, 1998, the Company entered into an agreement with Charles Beilman. The agreement stipulates that Charles Beilman will serve as Chief Operating Officer and Chief Technical Officer for an annual compensation of $135,000 and the reimbursement of certain expenditures, as defined in the related agreement. This agreement becomes effective when the Company is acquired and its shares are publicly traded. Mr. Beilman's employment will continue for at least three years from the date the Company goes public. NOTE 8 - SUBSEQUENT EVENTS The Company was acquired by Entertainment Universe, Inc. in April 1999 as a wholly owned subsidiary. -11- CASES LADDER, INC. FINANCIAL STATEMENTS CONTENTS -------- PAGE ---- Independent Auditors' Report 1 Balance Sheets 2-3 Statements of Operations 4 Statement of Stockholders' Equity 5 Statements of Cash Flows 6 Notes to Financial Statements 7-12 [LETTERHEAD OF JONATHON P. REUBEN, CPA APPEARS HERE] Independent Auditors' Report Board of Directors Cases Ladder, Inc. Newbury Park, California We have audited the accompanying balance sheet of Cases Ladder, Inc. (A California corporation), December 31, 1998, and the related statements of operations, stockholders' equity (deficit), and cash flows, for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cases Ladder, Inc. as of December 31, 1998, and the results of its operations and its cash flows for the year ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Jonathon P. Reuben CPA Jonathon P. Reuben, Certified Public Accountant April 9, 1999 CASES LADDER, INC. BALANCE SHEETS December 31, March 31, 1998 1999 ----------- ----------- (Unaudited) ASSETS Current Assets Cash $ - $ 15,045 Accounts Receivable (Net of Allowance for Bad Debts of $5,675 and $19,175, respectively) 65,262 94,724 Deferred Tax Asset 2,172 - Deposits - 685 ---------- ---------- Total Current Assets 67,434 110,454 Computer Equipment and Software (Note 2) 21,752 35,150 ---------- ---------- Total Assets $ 89,186 $ 145,604 ========== ========== See accompanying notes 2 CASES LADDER,INC. BALANCE SHEETS December 31, March 31, 1998 1999 ------------ ----------- (Unaudited) LIABILITIES AND STOCKHOLDERS (DEFICIT) Current Liabilities Accounts Payable $ 19,365 $ 16,185 Accrued Payroll and Payroll Taxes - 57,472 Income Tax Payable 800 1,600 Customer Deposits 16,667 - Notes Payable - Affiliate 9,028 8,433 Notes Payable - Shareholders 55,000 61,916 ----------- ---------- Total Current Liabilities 100,860 145,606 Stockholders' (Deficit) Common Stock, No Par Value, authorized 40,000,000 shares, issued and outstanding 9,437,500 shares at December 31, 1998, and March 31, 1999 2,750 2,750 Retained (Deficit) (14,424) (2,752) ----------- ---------- Total Stockholders' (Deficit) (11,674) (2) ----------- ---------- Total Liabilities and Stockholders' (Deficit) $ 89,186 $ 145,604 =========== ========== See accompanying notes 3 CASES LADDER, INC. STATEMENTS OF OPERATIONS Year Ended Three Months December Ended 31, 1998 March 31, 1999 ---------- -------------- (Unaudited) Revenue $ 378,345 $ 309,737 General and Administrative Expenses (394,141) (295,093) ---------- ---------- Net Income (Loss) Before Provision for Corporate Income Tax (15,796) 14,644 Benefit (Provision) for Corporate Income Tax 1,372 (2,972) ---------- ---------- Net Income (Loss) $ (14,424) 11,672 ========== ========== Basic Income (Loss) Per Share (0.0015) 0.0012 ========== ========== Weighted Average Shares Outstanding 9,404,630 9,437,500 ========== ========== See accompanying notes 4 CASES LADDER, INC. STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) - --------------------------------------------------------------------------------
Retained Common Stock Earnings ------------------------ Shares Amounts (Deficit) Total ---------- ---------- ---------- ---------- Balances at January 1, 1998 - $ - $ - $ - Original Issuance of Common Stock 9,375,000 2,000 - 2,000 Sale of Common Stock 93,750 750 - 750 Net Loss - - (14,424) (14,424) ---------- ---------- ---------- ---------- Balances at December 31, 1998 9,468,750 2,750 (14,424) (11,674) Net Income for the Three Months Ended March 31, 1999 (Unaudited) - - 11,672 11,672 ---------- ---------- ---------- ---------- Balances at March 31, 1999 (Unaudited) 9,468,750 $ 2,750 $ (2,752) $ (2) ========== ========== ========== ==========
See accompanying notes 5 CASES LADDER, INC. STATEMENTS OF CASH FLOWS
Year Ended Three Months December 31, Ended 1998 March 31, 1999 ------------ -------------- (Unaudited) Cash Flows From Operating Activities: Net Income (Loss) $ (14,424) $ 11,672 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operations: Depreciation 280 1,618 Allowance for Bad Debts 5,675 13,500 Changes in Operating Assets and Liabilities: Decrease (Increase) in Assets: Accounts Receivable (70,936) (42,962) Prepaid Items and Deposits - (685) Deferred Tax Asset (2,172) 2,172 Increase (Decrease) in Liabilities: Accounts Payable and Accrued Expenses 19,826 55,648 Customer Deposits 16,667 (16,667) Income Tax Payable 800 800 ------------ -------------- Net Cash Provided (Used) by Operating Activities (44,284) 25,096 ------------ -------------- Cash Flows From Investing Activities: Equipment Acquisitions (22,032) (15,016) ------------ -------------- Net Cash Used by Investing Activities (22,032) (15,016) ------------ -------------- Cash Flows From Financing Activities: Issuance of Common Stock 2,750 - Advances from Shareholders 55,000 5,560 Payments to Affiliates (71,766) (595) Advances from Affiliates 80,332 - ------------ -------------- Net Cash Provided by Financing Activities 66,316 4,965 ------------ -------------- Net Increase (Decrease) in Cash - 15,045 Cash - Beginning of Year - - ------------ -------------- Cash - End of Year $ - $ 15,045 ============ ==============
See accompanying notes 6 CASES LADDER, INC. NOTES TO FINANCIAL STATEMENTS Note 1 - Nature of Business Cases Ladder, Inc. (the "Company") was incorporated under California State law on August 19, 1998. The Company conducts business in the Internet software and services industry. Prior to incorporating, the Company operated as a partnership and has been in business prior to 1998. Prior to incorporating, the Company deposited its receipts and disbursed its funds through a checking accounting under the name Strategic Alliance Partners, Inc. d.b.a. Cases Ladder. Strategic Alliance is an affiliate of the Company but operates a distinct and separate business from that of the Company. Strategic Alliance filed a fictitious business name statement (the "statement") with the County of Los Angeles on March 2, 1998, indicating that Strategic would be doing business as Cases Ladder. Management does not know the individual who signed and filed the fictitious business name statement. This individual was not authorized to perform such an act on behalf of the Company. Management maintains that this bank account was opened by the bank in the wrong name. Management believes that the mere use of this account would not deem it to be considered a successor of Strategic Alliance and currently no third party has made this claim. Note 2 - Summary of Significant Accounting Policies a) Cash The Company maintains all of its cash deposits at one bank. The Company's balance with this bank is insured up to $100,000 as provided by the FDIC. b) Computer Equipment and Software The cost of Computer Equipment and Software is depreciated over the estimated useful lives of the related assets. Depreciation is computed on the straight-line method for both financial and tax reporting purposes. The useful life of the computer equipment and related software is five years. c) Pervasiveness of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. 7 CASES LADDER, INC. NOTES TO FINANCIAL STATEMENTS d) Revenue Recognition Revenue from the licensing of the of the Company's software products is recognized when the respective royalties are earned. Revenue from product sales and services are recognized at the time the product is shipped or the services are performed. Customer advance payments are deferred and are recognized as revenue when the underlying income is earned. e) Earnings per Share Effective December 31, 1997, SFAS 128 "Earnings Per Share" requires a dual presentation of earnings per share-basic and dilutive. Basic earnings per common share has been computed based upon the weighted average number of common shares outstanding. Diluted earnings per share reflects the increase in weighted average common shares outstanding that would result from the assumed exercise of outstanding stock options. The computation of diluted earnings per share shall not assume conversion, exercise, or contingent issuance of securities that would have an anti- dilutive effect on earnings per share. The Company reflects only basic loss per share for both periods presented as the assumed exercise of the outstanding options would be anti- dilutive. f) Statement of Comprehensive Income The Company has adopted SFAS 130 "Comprehensive Income - Financial Statement Presentation". However, as there is no difference between net loss as reported on the statement of operations and comprehensive loss, the Statement of Comprehensive Loss has not been provided. Note 3 - Computer Equipment and Software The following is a summary of computer equipment and software as of December 31, 1998: Computer Equipment $ 21,237 Computer Softer 795 ------ 22,032 Less Accumulated Depreciation (280) ------ $ 21,752 ====== Depreciation expense charged to operations for year ended December 31, 1998, was $280. Note 4 - Income Taxes Income taxes are provided based on earnings reported for financial statement purposes pursuant to the provisions of Statement of Financial Accounting Standards No. 109 ("FASB 109"). FASB 109 uses the asset and liability method to account for income taxes which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax basis and financial reporting basis of assets and liabilities. Amounts of deferred tax assets and liabilities for the year ended December 31, 1998, is as follows: Deferred Tax Liability $ -- Deferred Tax Asset $ 2,172 8 CASES LADDER, INC. NOTES TO FINANCIAL STATEMENTS Deferred tax assets have not been reduced by any valuation allowances. The deferred tax asset results primarily from the 1998 net operating loss of $15,334 which is available to be carried forward to offset future federal and state taxable income. The loss expires in 2018. Note 5 - Notes Payable Notes payable as of December 31, 1998 consist of the following: Affiliate $ 9,028 Officers 55,000 ------ $64,028 ====== Notes payable to affiliates and officers bear interest at 12% and 10% per annum, respectively. All notes payable are unsecured, and are due upon demand. Interest charged to operations totaled $4,828. Note 6 - Stock Option Plan The Company has a performance-based stock option plan. Under the plan, the Company may grant options for up to 1.5 million shares of common stock for which no vesting contingencies exist, other than being an employee. The exercise price of each option is set at the discretion of the Board of Directors at the time of each issuance. Management believes that the exercise price of each option is equal to or greater than the market value of the respective shares granted. The Company applies APB Opinion 25 in accounting for its performance- based stock option plan. Accordingly, no compensation expense has been recognized for the plan in 1998. Had compensation costs been determined on the basis of fair value pursuant to FASB Statement No. 123, net loss and loss per share would have increased as follows: Net Loss As reported $ (13,962) -------------- Proforma $ (15,090) -------------- Basic Loss Per Share As reported $ (0.0015) -------------- Proforma $ (0.0016) -------------- For proforma purposes, the Company valued the options using the Black- Sholes option pricing model using the following assumptions: risk-free interest rate of 5.5%, dividend yield of 0%, volatility factor of the expected market price of the Company's common stock of 5% and the expected life of the options of 12 months. 9 CASES LADDER, INC. NOTES TO FINANCIAL STATEMENTS Following is a summary of the status of the plan during the year ended December 31,1998: Weighted Average Number of Exercise Shares Price ------------------------- Outstanding at 1-1-98 - $ - Granted 160,000 0.125 Exercised - - Forfeited - - ---------- --------- Outstanding at 12-31-98 160,000 0.125 ========== ========= Options exercisable at 12-31-98 - $ - ========== ========= The weighted average fair value at date of grant was $.0705 per share. Note 7- Supplemental Cash Flow Information For the purpose of the statements of cash flows, all highly liquid investments with a maturity of three months or less are considered to be cash equivalents. During the year ended December 31, 1998, the Company paid interest totaling $4,828. The Company did not pay any income taxes during 1998. 10 CASES LADDER, INC. NOTES TO FINANCIAL STATEMENTS Note 8 - Sales to Major Customers Sales to three major customers amounted to 38.9%, 16.1% and 14.5% of total sales for the year ended December 31, 1998 Note 9 - Concentrations of Credit Risk The Company extends credit to its customers, all of which are companies in the Internet software and services industry. Note 10 - Subsequent Events On April 1, 1999, the Board of Directors authorized a 5 for 4 stock split of common stock to stockholders of record on March 14, 1999. The accompanying financial statements have been restated to give effect to the indicated stock split for the periods presented. In April 1999, the Company received $55,000 in exchange for the issuance of 220,000 shares of its common stock. In June 1999, the Company issued 645,996 to a consulting who assisted in the sale of all of the outstanding stock of the Company to eUniverse, Inc. Prior to the transaction with eUniverse, the Company issued 501,645 shares of its Common Stock through the exercise of all of the outstanding options. In determining the number of shares issued, the Company used a formula that took into account the exercise price of the respective option and the price per share offered by eUniverse. The Shareholders of the Company exchanged 10,616,311 shares of the Company's stock for 700,000 restricted shares of eUniverse' common stock. 11 CASES LADDER, INC. NOTES TO FINANCIAL STATEMENTS Note 11 - Unaudited Information In the opinion of the Company's management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of the Company as of March 31, 1999 and the results of operations and cash flows for the three-month period then ended. The operating results of the Company on a quarterly basis may not be indicative of operating results for the full year. 12 PROSPECTUS SEPTEMBER 10, 1999 4,000,000 SHARES EUNIVERSE, INC. LOGO COMMON STOCK ($.001 par value) PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY. Sections 78.751 et seq. of the Nevada Revised Statutes allow a company to indemnify its officers, directors, employees, and agents from any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, except under certain circumstances. Indemnification may only occur if a determination has been made that the officer, director, employee, or agent acted in good faith and in a manner which such person believed to be in the best interests of the company. A determination may be made by the shareholders, by a majority of the directors who were not parties to the action, suit, or proceeding confirmed by opinion of independent legal counsel; or by opinion of independent legal counsel in the event a quorum of directors who were not a party to such action, suit, or proceeding does not exist. ARTICLES OF INCORPORATION Article Twelfth of the Articles of Incorporation of the Company provide as follows with respect to indemnification of Directors and Officers: "TWELFTH. INDEMNIFICATION: The corporation shall indemnify and hold harmless ------------------------ the Officers and Directors of the Corporation from any and all liabilities or claims to the fullest extent now, or hereafter from time to time, permitted pursuant to the general corporation Law of the state of Nevada." BYLAWS Article XII of the Bylaws of the Company provide as follows with respect to indemnification of Officers and Directors: "Section 1. Exculpation. No Director or Officer of the Corporation shall be ----------- liable for the acts, defaults, or omissions of any other Director or Officer, or for any loss sustained by the Corporation, unless the same has resulted from his own willful misconduct, willful neglect, or gross negligence. "Section 2. Indemnification. Each Director and Officer of the Corporation --------------- and each person who shall serve at the Corporation's request as a director or officer of another corporation in which the Corporation owns shares of capital stock or of which it is a creditor shall be indemnified by the Corporation to the fullest extent permitted from time to time by the Nevada Revised Statutes against all reasonable costs, expenses and liabilities (including reasonable attorneys' fees) actually and necessarily incurred by or imposed upon him in connection with, or resulting from any claim, action, suit, proceeding, investigation, or inquiry of whatever nature in which he may be involved as a party or otherwise by reason of his being or having been a Director or Officer of the Corporation or such director or officer of such other corporation, whether or not he continues to be a Director or Officer of the Corporation or a director or officer of such other corporation, at the time of the incurring or imposition of such costs, expenses or liabilities, except in relation to matters as to which he shall be finally adjudged in such action, suit, proceeding, II-1 investigation, or inquiry to be liable for willful misconduct, willful neglect, or gross negligence toward or on behalf of the Corporation in the performance of his duties as such Director or Officer of the Corporation or as such director or officer of such other corporation. As to whether or not a Director or Officer was liable by reason of willful misconduct, willful neglect, or gross negligence toward or on behalf of the Corporation in the performance of his duties as such Director or Officer of the Corporation or as such director or officer of such other corporation, in the absence of such final adjudication of the existence of such liability, the Board of Directors and each Director and Officer may conclusively rely upon an opinion of independent legal counsel selected by or in the manner designated by the Board of Directors. The foregoing right to indemnification shall be in addition to and not in limitation of all other rights which such person may be entitled as a matter of law, and shall inure to his legal representatives' benefit. "Section 3. Liability Insurance. The Corporation may purchase and maintain ------------------- insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation or who is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, association, or other enterprise against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not he is indemnified against such liability by this article XII." Provided the terms and conditions of the applicable provisions under Nevada law, the Company's Articles of Incorporation and Bylaws are met, officers, directors, employees, and agents of the Company may be indemnified against any cost, loss, or expense arising out of any liability under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy and is, therefore, unenforceable. We intend to enter into indemnity agreements with each of our directors and executive officers to give them additional contractual assurances regarding the scope of the indemnification described above and to provide additional procedural protections. In addition, we intend to obtain directors' and officers' insurance providing indemnification for our directors, officers and certain employees for certain liabilities. We believe that these indemnification provisions and agreements are necessary to attract and retain qualified directors and officers. The limitation of liability and indemnification provisions in our Amended and Restated Certificate of Incorporation and Bylaws may discourage shareholders from bringing a lawsuit against directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit our shareholders and us. Furthermore, a stockholder's investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees regarding which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification. II-2 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is a statement of the expenses to be incurred by the Company in connection with the registration of the securities being registered pursuant to this Registration Statement. Amount ------ Securities and Exchange Commission registration fee $6,672.00 Printing fees Legal fees and expenses Accounting fees and expenses Miscellaneous Total Except for the SEC registration fee, all expenses are estimated. ITEM 26. RECENT SALES OF UNREGISTERED STOCK Since its incorporation in February 1999, eUniverse has issued and sold unregistered securities in the amounts, at the times, and for the aggregate amounts of consideration listed as follows: 1. On February 24, 1999, as part of its compensation for acting as exclusive placement agent for the sale of the EUI Preferred Stock, Gerard Klauer Mattison & Co., Inc. ("GKM") received warrants to purchase 400,000 shares of Common Stock at an exercise price of $2.75 per share, which became exercisable on April 14, 1999 and expire April 14, 2004. GKM also received warrants to purchase an additional 271,835 shares of common stock of the Company at an exercise price of $2.81 per share, which become exercisable on April 14, 2000 and expire April 14, 2004. 2. On March 3, 1999, the Company issued 250,000 shares of Common Stock for consideration of $1.00 per share to GKM and certain of its affiliates in a private offering pursuant to Rule 506 of Regulation D. 3. On March 3, 1999, eUniverse issued to Leland N. Silvas 200,000 shares of Common Stock in consideration of his acceptance of employment by the Company as President and Chief Executive Officer. See "PRICIPAL SHAREHOLDERS." 4. On April 1, 1999, EUI issued 354,000 shares to approximately 10 persons in consideration of public relations, legal and related services provided to the Company in connection with various activities, including the Preferred Stock Offering and Merger with MCA. 5. On April 14, 1999, EUI acquired from Charles Beilman, the sole shareholder of CD Universe, Inc., one hundred percent of the capital stock of CD Universe, Inc. for a total consideration of $1,915,000 in cash plus 2,425,000 shares of Common Stock. Charles Beilman is the Chief Operating Officer, Chief Technical Officer and a Director of the Company. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." 6. On April 14, 1999, EUI sold 1,795,024 shares of its Series A 6% Convertible Preferred Stock in a private offering pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D adopted under the Securities Act. The EUI Preferred Stock was sold to a group of approximately 40 purchasers, including II-3 Lehman Brothers, Eisenberg Partners and principals of Gerard Klauer Mattison & Co., Inc., all of whom were accredited investors as defined in Rule 501 of Regulation D. The aggregate offering price for the Preferred Stock was $6,598,122. In connection with the Reorganization, the holders of the EUI Preferred Stock exchanged their shares, on a one-to-one basis, for shares of the Company's Preferred Stock having equivalent rights and preferences, as set forth in the Designation of Preferred Stock. 7. On April 14, 1999, EUI merged with and into MCA pursuant to an Agreement and Plan of Reorganization dated April 9, 1999 (the "Merger Agreement"). As contemplated in the Merger Agreement, all of the outstanding shares of EUI were acquired by MCA, and the shareholders of EUI were issued shares of MCA equal to approximately 92% of the shares of MCA outstanding after the transaction. In connection with the merger into MCA, each share of EUI Preferred Stock was exchanged for a share of preferred stock of MCA having identical rights and preferences, and MCA changed its name to eUniverse, Inc. 8. On April 14, 1999, the Company issued 1,581,594 shares of its common stock to Joseph Abrams in connection with the Merger Agreement 9. On April 14, 1999, the Company issued 8,061,000 shares of its common stock to Brad D. Greenspan in connection with the Merger Agreement. 10. On June 15, 1999, the Company issued 24,830 shares of restricted common stock to employees of CD Universe under the 1999 Stock Awards Plan. The awards vest on April 14, 2000, subject to the continued employment of such employees. Prior to April 14, 1999, MCA has issued and sold unregistered securities in the amounts, at the times, and for the aggregate amounts of consideration listed as follows: 1. In October and November, 1997, the Company sold 47,500 shares of its common stock for $9,500 under Rule 504 . 2. On April 2, 1998 the Company sold 18,750 shares of its common stock for $3,750 under Rule 504. 3. On March 15, 1999, the Company issued 78,000 shares of its common stock to various shareholders in exchange for services rendered in anticipation of the reorganization. The transaction was valued at the cost of the services rendered of $30,060. 4. On March 31, 1999, the Company issued 2,000,000 shares of its common stock to an officer in exchange for services. The transaction was valued at the cost of the services rendered of $40,000. 5. On April 6, 1999, MCA sold 897,835 shares of MCA common stock pursuant to Rule 504 of Regulation D under the Securities Act at a price of $1.00 per share to purchasers of the EUI Preferred Stock. These shares were exchanged for shares of freely tradable common stock of the Company as the result of the merger with MCA and name change to eUniverse, Inc. described above. 6. On April 20, 1999, the Company purchased 1,845,000 shares of its outstanding common stock from its former officer for $20,000. The shares were cancelled following the purchase. 7. As of June 1, 1999, the Company purchased of all of the outstanding shares of the Common Stock of Case's Ladder for a total of 700,000 shares of restricted Common Stock of the Company. The Case's Ladder Agreement also provides that three (3) principals of Case's Ladder will be employed by the Company subsequent to the closing and that they will be granted options to purchase 600,000 shares of the Company's Common Stock, in the aggregate, at a price of $10 per share. II-4 8. As of July 1, 1999, eUniverse purchased all the outstanding capital stock of Gamer's Alliance, Inc. in exchange for 78,125 shares of Common Stock valued at an aggregate price of $1,000,000. 9. As of August 31, 1999, the Company purchased all of the outstanding capital stock of The Big Network, Inc. in exchange for 1,800,000 shares of Common Stock valued at an aggregate price of $11,025,000. The foregoing sales of Common Stock and Preferred Stock were made in reliance upon the exemptions from registration set forth in Section 4(2) of the Securities Act of 1933 and/or Rule 506 of Regulation D promulgated thereunder for transactions not involving a public offering. No underwriters were engaged in connection with the foregoing sales of securities. These sales were made without general solicitation or advertising. Each purchaser was an "accredited investor" or a sophisticated investor with access to all relevant information necessary to evaluate the investment who represented to the Registrant that the shares were being acquired for investment. ITEM 27. EXHIBITS.
Exhibit - ------- Number Exhibit Title/Description - ------ ------------------------- 3.01 Articles of Incorporation of the Company./(1)/ 3.02 Amended Articles of Incorporation of the Company regarding change of name./(1)/ 3.03 Certificate of Amendment of Articles of Incorporation regarding issuance of Preferred Stock./(1)/ 3.04 Bylaws of the Company./(1)/ 3.05 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 the Company./(1)/ 5* Opinion of Martin, Lois & Gasparrini, LLC. 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)/
II-5 10.07 Entertainment Universe, Inc. Regulation D Subscription Agreement, dated as of April ___, 1999./(1)/ 10.08 Entertainment Universe, Inc. Registration Rights Agreement, dated as of April 1999./(1)/ 10.09 Assignment and Assumption Agreement by and between Entertainment Universe, Inc. and Motorcycle Centers of America, Inc., dated as of April 14, 1999./(1)/ 10.10 Stock Purchase Agreement by and among Motorcycle Centers of America, Inc. and the shareholders of Case's Ladder, Inc., dated as of April 21, 1999./(1)/ 10.11 Contract of Employment by and between Entertainment Universe, Inc. and William R. Wagner, dated March 25, 1999./(1)/ 10.12 Employment Agreement by and between eUniverse, Inc. and Leland N. Silvas, dated as of April 14, 1999./(1)/ 10.13 Letter agreement between Entertainment Universe, Inc. and E.P. Opportunity Fund, L.L.C. regarding appointment of a director of Entertainment Universe, Inc., dated April 6, 1999./(1)/ 10.14 Modification and Restatement of Lease by and between Vincenzo Verna Trustee d/b/a Harvest Associates and CD Universe, Inc. for the Company's office space in Wallingford, Connecticut, dated as of February 1, 1999./(1)/ 10.15 Agreement and Plan of Reorganization by and among eUNIVERSE, INC., a Nevada corporation, GAMER'S ALLIANCE, INC., a Missouri corporation, and Larry N. Pevnick and Robin T. Pevnick, Ten Ent., residents of St. Louis County, Missouri, Stan Goldenberg and Andrea R. Goldenberg, Ten Ent., residents of St. Louis County, Missouri dated as of the 1st of July, 1999. 10.16 Agreement and Plan of Reorganization by and Among eUniverse, Inc., The Big Network, Inc., and Stephen D. Sellers, John V. Hanke and Michael Sellers dated July 30, 1999 (effective as of August 31, 1999). 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. 10.18 Employment Agreement by and between eUniverse, Inc. and John Haiduck, dated as of June 17, 1999. 10.19 Employment Agreement by and between eUniverse, Inc. and Stephen D. Sellers, dated as of August 31, 1999. 10.20 Employment Agreement by and between eUniverse, Inc. and John V. Hanke, dated as of August 31, 1999. 10.21 eUniverse, Inc. Registration Rights Agreement dated July 30, 1999. 10.22 Office Sublease, dated July 9, 1999, by and between GOLDEN GATE UNIVERSITY, a California non-profit public benefit corporation, and THE BIG NETWORK, INC., a Delaware corporation. 10.23 Engagement Letter by and among Gerard Klauer Mattison & Co., Inc. by Entertainment Universe, Inc. and Brad Greenspan, dated February 24, 1999. 10.24 Idemnification Agreement by Entertainment Universe, Inc. and Brad Greenspan in favor of Gerard Klauer Mattison & Co., Inc. 10.25 eUniverse, Inc. 1999 Stock Awards Plan. 23.01* Consent of Martin, Lois & Gasparrini, LLC (Included in Exhibit 5)
II-6 23.02 Consent of Jonathan P. Reuben, CPA 23.03 Consent of Cordovan & Harvey, PC 23.04 Consent of Merdinger, Fruchter, Rosen & Corso, PC /(1)/Incorporated by reference to the Company's Form 10 filed on June 14, 1999 (Registration File No. 0-26355). * To be filed by amendment. ITEM 28. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the commission pursuant to Rule 424 (b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; provided, however, that paragraphs (1) (i) and (1) (ii) do not apply if the information required to be, included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the Company pursuant to Section 1.3 or Section 1, 5 (d) of the Exchange Act that are incorporated by reference in the Registration Statement. (2) For purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section I 5(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) Insofar as indemnification for liabilities raising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the, foregoing provisions, or otherwise, the II-7 Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (4) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof, (5) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of ___, State of Connecticut, on ____, 1999. eUniverse, Inc. By: _______________________________________ Leland N. Silvas President and Chief Executive Officer The undersigned officers and directors of the registrant hereby severally constitute and appoint Leland N. Silvas, William R. Wagner, Charles Beilman, and Brad D. Greenspan, and each of them, our true and lawful attorney with full power to sign for us and in our names in the capacities indicated below, any and all pre-effective and post-effective amendments to the Registration Statement on Form SB-2 filed herewith and any additional registration statements filed pursuant to Rule 462(b) to register additional shares, and generally to do all such things in our names and behalf in our capacities as officers and directors to enable the registrant to comply with the provisions of the Securities Act of 1933, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Registration Statement. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. _______________________________________ Leland Silvas President, Chief Executive Officer and Director (principal executive officer) Date:__________________________________ _______________________________________ William R. Wagner Chief Financial Officer (principal financial officer and principal accounting officer) Date:__________________________________ _______________________________________ Brad D. Greenspan Chairman of the Board of Directors Date:__________________________________ _______________________________________ Charles Beilman Chief Operating Officer and Director Date:__________________________________ II-9 _______________________________________ Gordon Landies Director Date:__________________________________ II-10 EX-10.15 2 AGREEMENT AND PLAN OF REORGANIZATION EXHIBIT 10.15 AGREEMENT AND PLAN OF REORGANIZATION Agreement and Plan of Reorganization (the "Agreement") is made as of the 1st day of July, 1999, by and among eUNIVERSE, INC., a Nevada corporation ("EUI"), GAMER'S ALLIANCE, INC., a Missouri corporation ("GA"), and Larry N. Pevnick and Robin T. Pevnick, Ten Ent., residents of St. Louis County, Missouri, Stan Goldenberg and Andrea R. Goldenberg, Ten Ent., residents of St. Louis County, Missouri (each individually, a "GA Shareholder" and collectively, the "GA Shareholders"). RECITALS: 1. The GA Shareholders are the owners of all of the issued shares of the capital stock of GA, consisting of the following shares of common stock, $1.00 par value, of GA (collectively, the "GA Shares"): GA Shareholder No. of GA Shares -------------- ---------------- Larry N. Pevnick and Robin T. Pevnick 100 shares Stan Goldenberg and Andrea R. Goldenberg 100 shares 2. EUI desires to acquire the GA Shares in exchange for certain shares of common stock, $.001 par value, of EUI (the "EUI Shares") as determined under this Agreement, and the GA Shareholders desire to convey the GA Shares to EUI in exchange for certain EUI Shares. 3. EUI, GA and the GA Shareholders have determined that it is desirable to effect a plan of reorganization (the "Reorganization") meeting the requirements of Section 368(a) of the Internal Revenue Code of 1986, as amended, as more particularly described below. AGREEMENT: In consideration of the premises and mutual covenants and agreements hereinafter contained, the parties hereby agree as follows: 1. Certain Definitions. 1.1 Certain Definitions. As used in this Agreement, the following ------------------- capitalized terms shall have the respective meanings set forth below: "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as ----- amended, and all rules and regulations issued thereunder, as amended. "EUI Disclosure Schedule" shall mean the disclosure schedule prepared and ----------------------- executed by EUI and attached hereto as Schedule 1. "Exchange Act" shall mean the Securities Exchange Act of 1934. ------------ "GA Benefit Plans" shall mean any and all employee benefit plans maintained or ---------------- contributed to by GA (including, without limitation, any "employee benefit plan", as defined in Section 3(3) of ERISA), and any material bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, retirement, vacation, severance, disability, death benefit, hospitalization, insurance or other plan, arrangement or understanding (whether or not legally binding). "GA Business" shall mean the business of creating and promoting Internet ----------- websites related to the computer software games industry, as conducted by GA. "GA Disclosure Schedule" shall mean the disclosure schedule prepared and ---------------------- executed by GA and attached hereto as Schedule 2. "GA Intellectual Property" shall mean any and all intellectual property ------------------------ (including, without limitation, domain names, patents, patent rights, patent applications, trademarks, trademark applications, trade names, copyrights, drawings, trade secrets, know-how and computer software) licensed or owned by GA or used by GA in the conduct of its business. "GA Permits" shall mean all permits, licenses and approvals of all Governmental ---------- Entities (as defined hereinafter) necessary to lawfully conduct the GA Business. "GA Personnel" shall mean all personnel employed by GA. ------------ "GA Revenue" shall mean the net revenue of GA (as determined by EUI's regular ---------- accounting firm in accordance with GAAP). "GAAP" shall mean United States generally accepted accounting principles, ---- consistently applied. "Governmental Entity" shall mean any public body or authority, including courts ------------------- of competent jurisdiction, domestic or foreign. "Impressions" shall mean all banner advertisements displayed on each new page ----------- request from websites located within the GA network. "Licenses" shall mean all licenses, registrations, franchises, qualifications, -------- provider numbers, permits and authorizations issued by any Governmental Entity to GA for the operation of the GA Business including, without limitation, those listed on Schedule 2. "New Sites" shall mean all websites either acquired or created by GA meeting the --------- minimum 2 standards of quality as defined and published by GA and as approved by EUI. "Prepaid Expenses" shall mean those actual prepaid expenses described in ---------------- reasonable detail on Schedule 2, all of which have been prepaid by GA and/or the GA Shareholders in connection with the GA Business. "Securities Act" shall mean the Securities Act of 1933. -------------- "Specified Exchange Act Filings" shall mean, with respect to EUI, (i) the Form ------------------------------ 10 filed with the Securities and Exchange Commission (the "Specified 10") and (ii) each Quarterly Report on Form 10-Q and Current Report on Form 8-K filed with the Securities and Exchange Commission since the filing of the Specified 10. "Taxes" shall mean all taxes, assessments and governmental charges imposed by ----- any federal, state, county, local or foreign government, taxing authority, subdivision or agency thereof, including interest, penalties or additions thereto. "Target No. 1" shall mean GA's attainment (as reasonably determined by EUI) of ------------ the following levels, or levels in excess thereof, for the period from April 1, 1999 through June 30, 1999: GA Revenue $130,000.00 Unique Visitors 2.7 million Impressions 30 million New Sites 12 "Target No.1 Contingent Consideration" shall mean One Hundred Fifty Thousand ------------------------------------ Dollars ($150,000.00). "Target No.2" shall mean GA's attainment (as reasonably determined by EUI) of ----------- the following levels, or levels in excess thereof, for the period from July 1, 1999 through September 30, 1999: GA Revenue $167,000.00 Unique Visitors 3 million Impressions 34.5 million New Sites 12 "Target No.2 Contingent Consideration" shall mean One Hundred Fifty Thousand ----------- Dollars ($150,000.00). "Target No.3" shall mean GA's attainment (as reasonably determined by EUI) of ----------- the following levels, or levels in excess thereof, for the period from October 1, 1999 through December 31, 1999: GA Revenue $200,000.00 Unique Visitors 3.6 million Impressions 39.5 million 3 New Sites 12 "Target No.3 Contingent Consideration" shall mean One Hundred Fifty Thousand ------------------------------------ Dollars ($150,000.00). "Target No.4" shall mean GA's attainment (as reasonably determined by EUI) of ----------- the following levels, or levels in excess thereof, for the period from January 1, 2000 through March 31, 2000: GA Revenue $240,000 Unique Visitors 4.5 million Impressions 45.5 million New Sites 12 "Target No.4 Contingent Consideration" shall mean Five Hundred Fifty Thousand ------------------------------------ Dollars ($550,000.00). "Target No.5" shall mean GA's attainment (as reasonably determined by EUI) of ----------- all of the following levels, or levels in excess thereof, for the period from April 1, 1999 through March 31, 2000: GA Revenue $737,000.00 Unique Visitors 13.3 million Impressions 149.5 million New Sites 48 "Target No.6" shall mean GA's attainment (as reasonably determined by EUI) of ----------- amounts in excess of all of the following levels for the period from July 1, 1999 through June 30, 2000: GA Revenue $1,133,750.00 Unique Visitors 20.625 million Impressions 214.375 million New Sites 60 "Target No.6 Contingent Consideration" shall mean Two Hundred Fifty Thousand ------------------------------------ Dollars ($250,000.00). "Unique Visitors" shall mean unique individuals who access GA websites during a --------------- period of one month. Unique visitors is to be derived from counting unique cookies issued to viewers (which expire at the end of every month) upon their first monthly visit to a GA website. 4 2. Plan of Reorganization. The Reorganization shall consist of the following transactions: 2.1 The closing of the transactions described in this Agreement (the "Closing") shall take place at 11:00 a.m. on June 30, 1999 (the "Closing Date") at the offices of Martin, Lois & Gasparrini, LLC, 1177 Summer Street, Stamford, CT 06905. The Closing shall be effective as of 12:01 a.m. Stamford, Connecticut time on July 1, 1999. At the Closing, GA Shareholders shall assign, transfer and deliver all of the GA Shares to EUI. 2.2 At the Closing, EUI shall issue to the GA Shareholders seventy-eight thousand one hundred twenty-five (78,125) EUI Shares (the "Initial EUI Shares"). The number of Initial EUI Shares to be issued has been determined by dividing One Million Dollars ($1,000,000.00) by $12.80 (the "Share Price") the average per share closing price of the EUI Shares (as reported on the OTC electronic bulletin board) for the five trading days immediately prior to EUI's public announcement of the Reorganization. The Initial EUI Shares and any and all Additional EUI Shares (as hereinafter defined) shall be issued to the GA Shareholders in proportion to the number of GA Shares contributed to EUI by each GA Shareholder on the Closing Date. Within thirty (30) days after the Closing, EUI shall cause GA to repay the outstanding shareholder loans listed in the GA Disclosure Schedule in the amount of $30,000. 2.3 As further contingent consideration for the GA Shares exchanged hereunder, the GA Shareholders shall have the opportunity to receive additional EUI Shares ("Additional EUI Shares"), subject to the following terms and conditions of this Subsection 2.3. The number of Additional EUI Shares (if any) to be issued shall be determined, with respect to each Target hereinafter defined, by dividing the appropriate amount of Contingent Consideration by the Share Price. (a) In the event that GA achieves any or all of the four components comprising each of Target Nos. 1, 2, 3 or 4, then, within thirty (30) days following the last day of the time period pertaining to such Target, EUI shall issue to the GA Shareholders Additional EUI Shares having a value of twenty-five percent (25%) of the Contingent Consideration for such Target for each such component achieved. By way of example, (i) if only the GA Revenue and Impressions components of Target No. 2 are achieved, Seventy Five Thousand Dollars ($75,000.00) worth of Additional EUI Shares shall be issued to the GA Shareholders on or prior to November 30, 1999; and (ii) if the GA Revenue, Unique Visitors and New Sites components of Target No. 4 are achieved, Four Hundred Twelve Thousand Five Hundred Dollars ($412,500.00) worth of Additional EUI Shares shall be issued to the GA Shareholders on or prior to April 30, 2000. (b) In the event that GA achieves all four components of Target No. 5, then, on or prior to April 30, 2000, EUI shall issue to the GA Shareholders Additional EUI Shares having a value equal to twenty-five percent (25%) of the Contingent Consideration for each component of Target Nos. 1, 2 and 3 not previously achieved. 5 (c) In the event that GA achieves all four components of Target No. 6, then, on or prior to July 30, 2000, EUI shall issue to the GA Shareholders Additional EUI Shares having a value equal to Two Hundred Fifty Thousand Dollars ($250,000.00). 2.4 At any time and from time to time during the term of this Agreement through January 1, 2001, EUI shall have the right, upon ten (10) days prior written notice to GA, to audit the books and records of GA as they relate to GA's achievement of the Targets. The GA Shareholders and GA shall (and GA shall cause the GA Personnel to) timely and fully cooperate with EUI in the performance of any audit. This audit shall be done at EUI's expense; provided, however, that it such audit reveals a variation for the figures reported by GA exceeding ten percent (10%), then the expenses of such audit shall be borne by the GA Shareholders. 3. Representations and Warranties of EUI. EUI represents and warrants to the GA Shareholders (which representations and warranties shall survive the Closing for the applicable statute of limitations) as follows: 3.1 Organization. Each of EUI and its subsidiaries is a corporation or ------------ other legal entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Each of EUI and its subsidiaries is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and/or in good standing would not in the aggregate have a material adverse effect on the business, operations or financial condition of EUI or its subsidiaries. EUI has heretofore delivered to GA and the GA Shareholders complete copies of the charter and bylaws, as currently in effect, of EUI and each of its subsidiaries. 3.2 Capitalization. -------------- (a) The authorized capital stock of EUI consists of 250,000,000 shares of common stock, $.001 par value, and 50,000,000 shares of preferred stock, $.10 par value, of which, as of June 23, 1999, there were 14,809,598 shares of common stock issued and outstanding and there were 1,832,912 shares of Series A 6% convertible preferred stock issued or outstanding. All the issued and outstanding EUI Shares are validly issued, fully paid and nonassessable and, except as set forth in Section 3.2(a) of the EUI Disclosure Schedule, free of preemptive rights. All EUI Shares which are to be issued pursuant to the Reorganization will be, when issued in accordance with the terms thereof, duly authorized, validly issued, fully paid and nonassessable and free of any preemptive rights in respect thereto. Except as set forth above, or as may be issued from time to time pursuant to the EUI Stock Awards Plan, or as disclosed in Section 3.2(a) of the EUI Disclosure Schedule, or as contemplated hereby or thereby, there are not now, and on the Closing Date there will not be, any shares of capital stock (or securities substantially equivalent to capital stock) of EUI issued or outstanding or any subscriptions, 6 options, warrants, calls, rights, convertible securities or other agreements or commitments of any character obligating EUI to issue, transfer or sell any of its securities. (b) Section 3.2(b) of the EUI Disclosure Schedule sets forth the name, jurisdiction of formation and capitalization of each subsidiary of EUI. All of the outstanding shares of capital stock, or other forms of ownership interests, of each of EUI's subsidiaries have been validly issued and are fully paid and nonassessable and, except as set forth in Section 3.2(b) of the EUI Disclosure Schedule, are owned either by EUI and/or another of its subsidiaries free and clear of all liens, charges, claims or encumbrances. 3.3 Authority Relative to this Agreement. EUI has full corporate power and ------------------------------------ authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of EUI, and no other corporate proceedings on the part of EUI are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by EUI and constitutes a valid and binding agreement of EUI, enforceable against EUI in accordance with its terms. 3.4 Consents and Approvals; No Violations. Except for applicable ------------------------------------- requirements of the Exchange Act, the Securities Act and state Blue Sky laws, no filing with, and no permit, authorization, consent or approval of, any Governmental Entity is necessary for the consummation by EUI of the transactions contemplated by this Agreement; provided that in making this representation EUI is relying on and this representation is conditioned upon the accuracy of the representations and warranties of GA and the GA Shareholders in Section 4 of this Agreement. Except as set forth in Section 3.4 of the EUI Disclosure Schedule, neither the execution and delivery of this Agreement by EUI nor the consummation by EUI of the transactions contemplated hereby nor compliance by EUI with any of the provisions hereof will (i) conflict with or result in any breach of any provision of the charter or bylaws of EUI; (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which EUI or any of its subsidiaries is a party or by which any of them or any of their properties or assets may be bound; or (iii) to the best knowledge of the officer executing this Agreement on behalf of EUI, violate any order, writ, injunction, decree, statute, treaty, rule or regulation applicable to EUI, any of its subsidiaries or any of their properties or assets, except in the case of (ii) or (iii) for violations, breaches or defaults which are not material to the business, operations or financial condition of EUI or its subsidiaries and which will not prevent or delay the consummation of the transactions contemplated hereby. 3.5 Specified Exchange Act Filings. To the best knowledge of the officer ------------------------------ executing this Agreement on behalf of EUI (as to all matters addressed in this Section 3.5), EUI has made all filings with the SEC required by federal law or the applicable rules and regulations of the SEC thereunder. EUI has delivered to GA and the GA Shareholders a copy of each of its 7 Specified Exchange Act Filings. Each Specified Exchange Act Filing, at the time filed, (i) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not false or misleading and (ii) complied as to form in all material respects with the applicable requirements of the Exchange Act and the applicable rules and regulations of the SEC thereunder. Since the filing with the SEC by EUI of its Form 10 on June 14, 1999, there has been no material adverse change in the business, assets, operations or financial condition of EUI or its subsidiaries. 4. Representations and Warranties of GA and the GA Shareholders. The GA Shareholders jointly and severally represent and warrant to EUI (which representations and warranties shall survive the Closing for the applicable statute of limitations) as follows: 4.1 Organization. GA is a corporation duly organized, validly existing and ------------ in good standing under the laws of the State of Missouri and has all requisite power and authority to own, lease and operate its properties and to carry on the GA Business as now being conducted and to perform the terms of this Agreement and the transactions contemplated herein. GA is duly qualified or registered and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not in the aggregate have a material adverse effect on the GA Business or the assets, operations or financial condition of GA. 4.2 Capitalization, Stock Ownership. ------------------------------- (a) The authorized capital stock of GA consists of 30,000 shares of common stock, $ 1.00 par value, of which, as of the date of this Agreement, 200 are issued and outstanding. All the issued and outstanding GA Shares are validly issued, fully paid and nonassessable and free of preemptive rights. As of the date of this Agreement, no GA Shares were issuable upon exercise of options, and GA had no incentive stock option plan or any nonqualified employee stock option plan. As of the date of this Agreement, no GA Shares were issuable upon exercise of warrants. Except as set forth above, there are not now, and on the Closing Date there will not be, any shares of capital stock (or securities substantially equivalent to capital stock) of GA issued or outstanding or any subscriptions, options, warrants, calls, rights, convertible securities or other agreements or commitments of any character obligating GA to issue, transfer or sell any of its securities, except as provided by this Agreement. (b) GA does not own, directly or indirectly, any capital stock or other equity securities of any corporation or have any direct or indirect equity or ownership interest in any business. There are not now, and on the Closing Date there will not be, any voting trusts or other 8 agreements or understandings to which GA is a party or is bound with respect to the voting of the capital stock of GA. There are no entities in which GA has any voting rights or equity interests. (c) The GA Shareholders are the beneficial and record owners of all of the GA Shares, free and clear of any liens, encumbrances or restrictions on transfer of any nature whatsoever other than the obligations arising under this Agreement. Except for this Agreement and the transactions contemplated hereby, none of the GA Shareholders has any legal obligation, absolute or contingent, to any person or firm to sell any of the GA Shares or enter into any agreement with respect thereto. 4.3 Authority Relative to this Agreement. GA has full corporate power and ------------------------------------ authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by GA and the GA Shareholders, and no other corporate proceedings on the part of GA are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement constitutes a valid and binding agreement of GA and the GA Shareholders, enforceable against GA and the GA Shareholders in accordance with its terms. 4.4 Consents and Approvals; No Violations. No filing with, and no permit, ------------------------------------- authorization, consent or approval of, any Governmental Entity is necessary for the consummation by GA and/or the GA Shareholders of the transactions contemplated by this Agreement. Neither GA nor any of the GA Shareholders is aware of any such requirements. Neither the execution and delivery of this Agreement by GA and/or the GA Shareholders nor the consummation by GA and/or the GA Shareholders of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the Certificate of Incorporation or bylaws of GA, (ii) result in a violation or breach of, or constitute a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which GA and/or any GA Shareholder is a party or by which GA and/or any GA Shareholder or any of their respective properties or assets may be bound, or (iii) violate any order, writ, injunction, decree, statute, treaty, rule or regulation applicable to GA and/or any GA Shareholder or any of their respective properties or assets. 4.5 Reports. ------- (a) None of the GA Reports (as defined hereinafter) contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading. Each of the balance sheets and related statements (including any related notes) included in the GA Reports presents fairly the consolidated financial position of GA as of the respective dates thereof, and present fairly the results of operations and the changes in financial position of GA for the respective periods, except, in the case of unaudited interim financial statements, for year-end audit adjustments, consisting only of normal year end adjustments. The GA Reports are in accordance with the books and records of GA, and have been prepared in accordance with GAAP, consistently applied. 9 (b) GA has delivered to EUI copies of unaudited compiled financial statements (including statements of income and a balance sheet) for GA for the four months ended April 30, 1999 (attached hereto at Section 4.5 of Schedule 2), and unaudited monthly statements of income and a balance sheet for GA for each month thereafter to and including the month ended June 30, 1999 (collectively, the "GA Reports"). 4.6 No Material Adverse Changes. Except as set forth in Section 4.6 --------------------------- of the GA Disclosure Schedule, since April 30, 1999 there has not been any: (a) material adverse change in the GA Business, or the financial condition, assets, liabilities or earnings of GA and to the best knowledge of GA, there is no fact, circumstance, event, occurrence, contingency or condition which should reasonably be expected to result in any material adverse change in the GA Business or the assets, financial or other condition, operations, liabilities or prospects of GA; (b) change in the number of shares of capital stock of GA issued or outstanding or any declaration, setting aside, or payment of any dividend or other distribution (whether in cash, securities, property or otherwise) in respect of GA's capital stock; (c) other than increases in salary or bonus of less than 5% to each employee of GA, (i) increase in the compensation payable or to become payable to any GA Personnel or (ii) any bonus, incentive compensation, service award or other like benefit, granted, made or accrued, contingently or otherwise, to the credit of any GA Personnel; (d) mortgage, pledge or subjection to any lien or encumbrance of any character whatsoever of any of the assets of GA, except the lien of current Taxes incurred but not yet due and payable; (e) sale, assignment or transfer of any assets of GA that are material, singly or in the aggregate to GA other than in the ordinary course of business; (f) waiver of any rights of substantial value to GA, whether or not in the ordinary course of business; (g) cancellation or termination by GA of any contract, agreement or other instrument to which GA is or was a party, which cancellation or termination has caused or could reasonably be expected to cause a loss of expected revenue to GA of more than $25,000; (h) liability incurred by GA except liabilities incurred in the ordinary course of business; (i) capital expenditures or the execution of any lease other than leases of personal property in the ordinary course with respect to any aspect of the GA Business or the incurring of any liability therefor; 10 (j) borrowing of money by GA or guaranteeing by GA of any indebtedness of others; (k) lending of any money by GA or otherwise pledging the credit of GA; (l) failure to conduct the business of GA in the ordinary course; (m) change in the method of accounting or accounting practice of GA from the methods and practice used to prepare the April 30, 1999 financial statements; (n) loss of services of any GA Personnel that is material to the conduct of the GA Business; (o) material cancellation by any supplier or contractor to GA; (p) cancellation by any customer or customers which have caused or could reasonably be expected to cause a loss of expected revenue to GA of more than $ 25,000; (q) extraordinary item of loss (as defined in Opinion No. 30 of the Accounting Principles Board of the American Institute of Certified Public Accountants); or (r) agreement by GA to do any of the foregoing. 4.7 Lists of Properties, Contracts, Etc. Sections 4.7(a) through 4.7(k) ------------------------------------ of the GA Disclosure Schedule contain accurate lists and summary descriptions of the following: (a) Section 4.7(a) of the GA Disclosure Schedule. Qualification. All ------------- jurisdictions in which GA is a registered foreign corporation; (b) Section 4.7(b) of the GA Disclosure Schedule. Real Property and ----------------- Leases. All leases of real property to which GA is a party (indicating in each - ------ such case, the terms of the lease) and all premises occupied by GA under rental arrangements without leases (including in each case the amount of rent and the type of occupancy (collectively, the "Leased Premises"). (c) Section 4.7(c) of the GA Disclosure Schedule. Intellectual ------------ Property. To the best knowledge of GA, all GA Intellectual Property; - -------- (d) Section 4.7(d) of the GA Disclosure Schedule. Personal Property. ----------------- Except for individual items having a fair market value of less than $5,000 (subject to a maximum fair market value of $50,000 for all such individual items in the aggregate), each item of machinery, inventory, equipment, computer hardware, motor vehicles, office furniture, fixtures and similar personal property and furnishings owned or leased by GA indicating the current depreciated book value of owned items and the terms and annual lease payments of leased items; 11 (e) Section 4.7(e) of the GA Disclosure Schedule. Insurance. All --------- policies of insurance in force with respect to GA, including, without restricting the generality of the foregoing, those covering properties, buildings, machinery, inventory, equipment, furniture, fixtures, operations and lives of, or performance of their duties by, GA Personnel, including the policy numbers, names and addresses of insurers, expiration dates, descriptions and amounts of coverage and annual premiums as of the date hereof; (f) Section 4.7(f) of the GA Disclosure Schedule. Other Contracts. --------------- All material contracts and commitments not otherwise listed in any other schedule hereto of GA (including, without limitation, confidentiality agreements, purchase orders, agreements, undertakings or commitments to any governmental or regulatory authority, agreements with salespersons, and other agreements with customers and suppliers). Section 4.7(f) also contains descriptions of each existing oral agreement or arrangement of GA (other than agreements or arrangements that do not involve, individually, more than $15,000 per year in revenue or expense). Except for oral agreements or arrangements that do not involve, individually, more than $25,000 per year in revenue or expense, and, in the aggregate, more than $100,000 per year in revenue or expense, GA has no obligations or liabilities under any oral agreements or arrangements that have not been disclosed to EUI; (g) Section 4.7(g) of the GA Disclosure Schedule. Labor Agreements. ---------------- All labor contracts, employment agreements and GA Benefit Plans with respect to GA; (h) Section 4.7(h) of the GA Disclosure Schedule. Powers of --------- Attorney. The names of all persons holding powers of attorney from GA; - -------- (i) Section 4.7(i) of the GA Disclosure Schedule. Indebtedness. All ------------ notes, debentures, bonds, letters of credit and other instruments evidencing indebtedness (including capital leases, guarantees and lines of credit) of GA; (j) Section 4.7(j) of the GA Disclosure Schedule. Bank Accounts. ------------- The name of each institution in which GA has a bank account, safe-deposit box, the number of any such account or box, and the names of all persons authorized to draw thereon or to have access thereto; and (k) Section 4.7(k) of the GA Disclosure Schedule. Credit Cards. The ------------ name of each institution with whom GA has credit cards, debit cards or similar charge accounts or lines of credit, the identifying account numbers for each such card, account or line of credit and the names of all persons authorized to use, draw upon or have access to such cards, accounts or lines of credit. (l) Copies of Documents. GA has previously delivered to EUI or ------------------- otherwise made available for EUI's inspection true and complete copies of: (i) all leases, agreements, contracts, undertakings, commitments and arrangements listed in Sections 4.7(b), 4.7(d), 4.7(f) and 4.7(g) of the GA Disclosure Schedule; 12 (ii) all agreements or written materials with respect to the GA Intellectual Property listed in Section 4.7(c) of the GA Disclosure Schedule; (iii) all policies of insurance listed in Section 4.7(e) of the GA Disclosure Schedule; (iv) all instruments evidencing a power of attorney listed in Section 4.7(h) of the GA Disclosure Schedule; and (v) all securities, notes, debentures, bonds, letters of credit and other instruments of indebtedness listed in Section 4.7(i) of the GA Disclosure Schedule. 4.8 Title to Properties. Except as otherwise disclosed in Section 4.8 of ------------------- the GA disclosure Schedule, (i) GA has good and marketable title to all of its properties and assets, real and personal, tangible and intangible; (ii) such properties and assets referred to in clause (i) of this Section are free and clear of all liens and encumbrances of any character whatsoever, except of the lien of Taxes not yet due and payable; (iii) GA has valid and enforceable leases with respect to the Leased Premises, has performed all the obligations required to be performed by it under said leases and possesses and quietly enjoys said premises under said leases, and such premises are not subject to any liens, encumbrances, easements, rights of way, building or use restrictions, exceptions, reservations or limitations that interfere with or impair the present and continued use thereof in the usual and normal conduct of the business of GA. GA has not has received notice of violation of any applicable zoning regulation, ordinance or other law, order, regulation or requirement relating to the operations of the Leased Premises, and GA knows of no such violation. GA has not received notice of any pending or threatened condemnation proceedings relating to any of the Leased Premises, and to the best knowledge of GA, there are no such pending or threatened proceedings. The tangible properties and equipment owned, operated or leased by GA are in good operating condition, ordinary wear and tear excepted, and, to the best knowledge of GA, are in conformity in all material respects with all applicable laws, ordinances, orders, regulations and other requirements (including applicable zoning, environmental, occupational safety and health laws and regulations) presently in effect or presently scheduled to take effect. GA does not own any of the buildings, plants or structures located on the Leased Premises or any other real property and is not a party to any contract, and does not hold any options, for the purchase of any real property. The tangible properties and equipment owned, operated or leased by GA and the real property leased by GA are all the tangible and real properties necessary to operate the GA Business in the manner currently operated by GA. 4.9 No Default. Except as set forth in Section 4.9 of the GA Disclosure ---------- Schedule, GA is not in default or violation (and no event has occurred which with notice or the lapse of time or both would constitute a default or violation) of any term, condition or provision of (i) its Certificate of Incorporation or its bylaws, (ii) any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which GA is a party or by it or to which any of its properties or assets may be bound or (iii) any order, writ, injunction, decree, statute, rule or regulation applicable to GA. 13 4.10 Litigation. Except as disclosed in Section 4.10 of the GA Disclosure ---------- Schedule, there is no action, suit, proceeding, tax audit, investigation or review pending or threarened with respect to GA, the GA Business, any of the assets of GA, the GA Shares, or any of the transactions contemplated hereby before any Governmental Entity, or otherwise at law or in equity, which individually or in the aggregate are reasonably likely to (i) have a material adverse effect on the assets, business, operations or financial condition of GA or (ii) prevent or impair the consummation of the transactions contemplated hereby. GA is not in default with respect to any order, writ, injunction or decree of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality which, if not cured, should reasonably be expected to (i) have a material adverse effect upon the GA Business, or the assets, operations and financial condition of GA, or (ii) prevent or impair the consummation of the transactions contemplated hereby. 4.11 Compliance with Applicable Law. GA holds all GA Permits, except for ------------------------------ such GA Permits which would not have a material adverse effect on the GA Business or the assets, operations or financial condition of GA. GA is in compliance with the terms of all GA Permits, except where the failure to so comply would not have a material adverse effect on the GA Business or the assets, operations or financial condition of GA. The GA Business is not being conducted in violation of any applicable law, ordinance, rule, regulation, decree or order of any Governmental Entity, except for violations which do not and would not have a material adverse effect on the GA Business, or the assets, operations or financial condition of GA. 4.12 Taxes. Except as set forth in Section 4.12 of the GA Disclosure ----- Schedule, GA has correctly prepared and timely filed all material federal, state, local and foreign tax returns, estimates and reports, including payroll and sales tax reports (collectively, the "Returns") required to be filed by it, and GA has duly paid, caused to be paid or made adequate provision for the payment of all Taxes required to be paid in respect of the periods covered by the Returns and has established on its books and records reserves that are adequate for payment of all Taxes anticipated to be payable in respect of all calendar periods since the periods covered by the Returns. All deficiencies and assessments asserted by federal, state, local or foreign taxing authorities have been paid, fully settled or adequately provided for in the financial statements contained in the GA Reports. Except as set forth in Section 4.12 of the GA Disclosure Schedule, there are no outstanding agreements or waivers extending the statutory period of limitation applicable to any federal or foreign income tax return of GA. GA has complied in all material respects with all applicable laws, rules and regulations relating to the payment and withholding of taxes and has timely and properly withheld from employees' wages and paid over to the proper governmental authorities all amounts required to be so withheld and paid over under applicable laws. 4.13 ERISA and GA Benefit Plans. -------------------------- (a) With respect to any and all GA Benefit Plans, GA has provided to EUI a true and correct copy of, where applicable, (i) the most recent annual report, if any, (Form 5500) filed with the IRS, (ii) each GA Benefit Plan, (iii) each trust agreement and group annuity 14 contract, if any, relating to such GA Benefit Plan and (iv) the most recent actuarial report or valuation relating to a GA Benefit Plan subject to Title IV of ERISA, if any. None of the GA Benefit Plans are multiemployer plans within the meaning of Section 3(37) of ERISA. Each of the GA Benefit Plans covered by ERISA, if any (i) has been operated in all material respects in accordance with ERISA, (ii) has not engaged in any prohibited transactions (as such term is defined in Section 406 of ERISA) and (iii) has met the minimum funding standards of Section 412 of the Code. No material Reportable Event (within the meaning of Section 4043 of ERISA) has occurred and is continuing with respect to any GA Benefit Plan. Since the enactment of ERISA, GA has not terminated any pension plan or withdrawn from any multiemployer pension plan. (b) With respect to the GA Benefit Plans, no event has occurred, and to the knowledge of GA there exists no condition or set of circumstances which are reasonably likely to occur, in connection with which GA would be subject to any liability (except liability for benefits claims and funding obligations payable in the ordinary course) under ERISA, the Code or any other applicable law. (c) Except as set forth in Section 4.13(c) of the GA Disclosure Schedule, with respect to the GA Benefit Plans, there are no funded benefit obligations for which contributions have not been made or properly accrued and there are no unfunded benefit obligations which have not been accounted for by reserves, or otherwise properly footnoted in accordance with generally accepted accounting principles, on the financial statements of GA, which obligations are reasonably likely to have a material adverse effect on the GA Business or the assets, operations or financial condition of GA. (d) Except as set forth in Section 4.13(d) of the GA Disclosure Schedule, and as required by law, GA does not maintain, and is not required to contribute to and has no liabilities with respect to, any GA Benefit Plan and no GA Personnel or dependent thereof is entitled to any benefits from GA. All GA Benefit Plans have been maintained and operated in material compliance with their terms and applicable law. Except as set forth on the GA Disclosure Schedule, no individual is a party to an employment contract pertaining to the GA Business that will be effective on the Closing Date. (e) Except as set forth in Section 4.13(e) of the GA Disclosure Schedule, the transactions contemplated by this Agreement (either alone or together with any other transaction) will not (i) entitle any GA Personnel to severance pay or other similar payments, (ii) accelerate the time of payment or vesting or increase the amount of benefits or compensation due to any GA Personnel or (iii) result in any payments (including parachute payments) becoming due to any GA Personnel. (f) GA has complied in all material aspects with all applicable laws, rules and regulations relating to the employment of labor, including those relating to wages, hours, collective bargaining and the payment of social security and similar Taxes. 15 (g) GA is not an employer subject to the Worker Adjustment and Retraining Notification Act. (h) There are no GA Personnel who are entitled to (i) any pension benefit that is unfunded or (ii) any pension or other benefit to be paid upon termination of employment other than as required by Section 601 of ERISA, and no other benefits whatsoever are payable to any GA Personnel after termination of employment (including retiree medical and death benefits). (i) In connection with the operation of the GA Business, (i) there is no significant labor trouble, labor strike, material controversy, material slowdown or stoppage actually pending against or affecting GA and, to the best knowledge of GA, none is or has been threatened, and (ii) GA has no collective bargaining agreements with respect to any GA Personnel. (j) Section 4.13(j) of the GA Disclosure Schedule sets forth the name, location, title, date of employment, salaries, bonuses (and any changes in salaries or bonuses since April 30, 1999 other than increases in salary or bonus of less than 5% to each employee of GA). Except as set forth on Section 4.13(j) of the GA Disclosure Schedule, no employee of GA whose annual rate of income (including salary and bonus) is greater than $50,000 has terminated, or has provided notice to GA of his or her intention to terminate, his or her relationship with GA. GA has no knowledge of any plan of any employee of GA to do so. 4.14 Small Business Issues. None of the existing business relationships --------------------- of GA are based on or are the result of any agreement, understanding or relationship arising out of or relating to GA's status as a "small business concern" or "minority-owned business concern" or other similar status, as such terms or similar terms are used under applicable federal or state law. 4.15 Intellectual Property. Except as set forth in Section 4.15 of the GA --------------------- Disclosure Schedule, (i) no claim is pending or, to the best knowledge of GA, threatened to the effect that the present or past operations of GA infringes upon or conflicts with the rights of others with respect to any GA Intellectual Property, and (ii) no claim is pending or, to the best knowledge of GA, threatened to the effect that any of GA's rights to the GA Intellectual Property is/are invalid or unenforceable. To the best knowledge of GA, no contract, agreement or understanding with any party exists which would impede or prevent the continued use by GA of the entire right, title and interest of GA in and to any GA Intellectual Property. The GA Intellectual Property listed in Section 4.7(c)of the GA Disclosure Schedule consists of all GA Intellectual Property used or being developed for use in the GA Business or necessary for the conduct of the GA Business. GA has all right, title and interest in and to the GA Intellectual Property, free and clear of any encumbrances. No person has a right to receive a royalty with respect to any of the GA Intellectual Property listed in Section 4.7(c)of the GA Disclosure Schedule. GA has no licenses granted by or to it or other agreements to which it is a party relating in whole or in part to any GA Intellectual Property, whether owned by GA or otherwise. GA is not infringing upon or otherwise violating the rights of any third party with respect to any GA Intellectual Property or using any of the GA Intellectual Property in a manner that would give rise to an obligation to render an accounting to any person as a result of co-authorship, co-invention or an express or 16 implied contract for any use or transfer thereof. GA has taken all reasonable measures to secure and to protect confidential business information and the trade secrets of GA. GA has not sent or otherwise communicated to any other person any notice, charge, claim or assertion of, or has any knowledge of, any present, impending or threatened infringement by such other person of any GA Intellectual Property or misappropriation of any GA Intellectual Property by such other person. 4.16 Change in Control. Except as set forth in Section 4.16 of the GA ----------------- Disclosure Schedule, GA is not a party to any contract, agreement or understanding which contains a "change in control" provision or "potential change in control" provision. 4.17 Insurance. All policies of insurance (or renewals thereof) set forth --------- in Section 4.7(e)of the GA Disclosure Schedule are outstanding and duly in force on the date hereof. Such policies are in the amounts shown in Section 4.7(e) of the GA Disclosure Schedule, and insure the structures and equipment of GA for their replacement values against loss, theft and destruction and insure the properties and business of GA against such losses and risks as are adequate in accordance with customary industry practice to protect the properties and business of GA. GA has not received notice from any insurer or agent of such insurer that substantial capital improvements or other expenditures will have to be made in order to continue such insurance, and no such improvements or expenditures are required. 4.18 Accounts Receivable. The accounts receivables shown on the GA ------------------- Reports are less than sixty (60) days due, are valid debts owed to GA and are not in dispute. GA has adequately and properly established reserves for collectability on the GA Reports. 4.19 Business Plan. The twelve (12) month forecast and projections ------------- provided to EUI is set forth on the GA Disclosure Schedule and such forecast and projections represent the best judgment of GA as to the likely results of operations and the assumptions underlying such forecast and projections, and the forecasts contained therein are reasonable. 4.20 Licenses. Except as set forth in Section 4.20 of the GA Disclosure -------- Schedule, to the best knowledge of GA and the GA Shareholders, no Licenses are required for GA to own and operate the GA Business in the manner operated on the date hereof. The Licenses are in full force and effect and have been validly issued. As of the date hereof, no action or proceeding is pending or, to the best knowledge of GA and the GA Shareholders, threatened before any Governmental Entity to revoke, refuse to renew or modify such Licenses or other authorizations of the GA Business. 4.21 Brokers. Neither this Agreement nor the conveyance of the GA Shares ------- or any other transaction contemplated by this Agreement was induced or procured through any person acting on behalf of or representing GA and/or any of the GA Shareholders as broker, finder, investment banker, financial advisor or in any similar capacity. 4.22 Powers of Attorney. There are no persons holding a power of attorney ------------------ on behalf of any GA Shareholder(s) which would enable such persons to sell any GA Shares. 17 4.23 Prepaid Expenses. All of the Prepaid Expenses set forth on Schedule ---------------- 2 have been paid by GA prior to the date hereof and relate to good faith expenses incurred by GA in connection with the conduct of the GA Business. 5. Continued Accuracy of Representations and Warranties. All representations and warranties of the parties contained herein shall be true in all material respects at and as of the Closing Date with the same effect as though such representations and warranties were made at and as of such time; and each party shall have performed and complied with all obligations, covenants, and conditions required by this Agreement to have been performed or complied with by it prior to or on the Closing Date. 6. Covenants of the Parties. 6.1 Covenants of EUI. EUI covenants and agrees that the Operating Budget ---------------- of GA for the period commencing on the Closing Date and ending June 30, 2000 as set forth in Section 6. 1 of the GA Disclosure Schedule (the "GA Operating Budget") has been approved by EUI. EUI shall implement the GA Operating Budget from and after the Closing and shall not make any material changes to the GA Operating Budget without the consent of the GA Shareholders. EUI covenants and agrees that during the period commencing on the Closing Date and ending June 30, 2000, GA shall be maintained as a subsidiary corporation and that the reporting relationship of the President of GA shall be to the Chief Executive Officer of EUI. 6.2 Covenants of GA Shareholders. ---------------------------- (a) The GA Shareholders understand and agree that the EUI Shares and the Additional Shares received hereunder are not registered under the Securities Act of 1933 (the "1933 Act") and such shares shall not be resold except pursuant to a registration statement under the 1933 Act or an exemption thereunder. (b) The GA Shareholders covenant and agree that the domain names listed in the GA Disclosure Schedule not currently owned by GA shall be transferred with full title, free and clear of any encumbrances, to GA on or before 60 days following the Closing. 7. Indemnification. 7.1 Obligation of the GA Shareholders to Indemnify. The GA Shareholders ---------------------------------------------- shall, jointly and severally, indemnify, defend and hold harmless EUI from and against any and all losses, judgments, claims, awards, damages, settlements, costs and expenses, including, without limitation, attorneys fees, sustained or incurred by EUI as a result or arising out of any the following: (i) the breach of any representation, warranty or covenant of the GA Shareholders, or 18 each of them, contained herein or in any agreement or document executed and delivered in connection with the transactions contemplated herein or (ii) the GA Business prior to the Closing or any other business of the GA Shareholders, or each of them, or any act, omission, debt, obligation or liability of the GA Shareholders, or each of them, their agents, contractors, employees, officers, directors. 7.2 Obligation of EUI to Indemnify. EUI shall indemnify, defend and hold ------------------------------ harmless the GA Shareholders from and against any and all losses, judgments, claims, awards, damages, settlements, costs and expenses, including, without limitation, attorneys' fees, sustained or incurred by the GA Shareholders as a result of EUI's breach of any representation, warranty or covenant of EUI in this Agreement. 7.3 Notice to Indemnifying Party. If any party (the "Indemnitee") ---------------------------- receives notice of any third-party claim or of the commencement of any action or proceeding or becomes aware of the occurrence of any event with respect to which any other party (or parties) (the "Indemnifying Party") is required to provide indemnification pursuant to Section 7.1 or 7.2, the Indemnitee shall promptly give the Indemnifying Party notice thereof. The Indemnifying Party may take control of the defense, settlement or compromise of such claim, action or proceeding at the Indemnifying Party's own expense and with the assistance of the Indemnifying Party's own counsel, which counsel shall be reasonably acceptable to the Indemnitee. If the Indemnifying Party chooses to defend any claim, the Indemnitee shall make available to the Indemnifying Party any books, records or other documents within its control that are necessary or appropriate for such defense, and shall otherwise cooperate fully with the Indemnifying Party. The Indemnitee shall also have the right to participate in any defense and/or settlement of a claim at Indemnitee's expense and may, if the Indemnifying Party shall not choose to defend or resist said claim within twenty (20) days after notice thereof from the Indemnitee (or such shorter time specified in the notice as the circumstances of the matter may dictate), dispose of the matter at the reasonable cost of the Indemnifying Party in any way it reasonably deems to be in its best interest. 8. Conditions Precedent to the Obligations of the Parties. 8.1 Conditions Precedent to the Obligations of EUI. The obligations of ---------------------------------------------- EUI to effect the Reorganization are further subject to the satisfaction at or prior to the Closing Date of the following conditions, unless waived by EUI in writing: (a) The representations and warranties of GA and the GA Shareholders set forth in this Agreement shall be true and correct as of the date of this Agreement, and shall also be true and correct (except for such changes as are contemplated by the terms of this Agreement) on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. 19 (b) From the date of this Agreement through the Closing Date, GA shall not have suffered any adverse material changes in the GA Business or the assets, operations or financial condition of GA (other than changes relating to the transactions contemplated by this Agreement, including the change in control contemplated hereby). (c) GA and the GA Shareholders shall have performed all obligations and covenants and conditions required to be performed by it and them under this Agreement at or prior to the Closing Date. (d) GA shall have furnished EUI with copies of (i) resolutions duly adopted by the Board of Directors of GA approving the execution and delivery of this Agreement and all other necessary or proper corporate action to enable GA to comply with the terms of this Agreement, and (ii) resolutions duly adopted by the GA Shareholders approving and adopting this Agreement and the Reorganization, such resolutions to be certified by the Secretary or Assistant Secretary of GA. (e) GA shall have no outstanding debt (other than reasonable and customary accounts payable incurred in the ordinary course of business). (f) GA shall have one hundred ninety-five thousand dollars ($195,000) excess of current assets over current liabilities as shown on GA's financial statements as of the Closing Date prepared in accordance with GAAP, subject to normal year end adjustments. Such excess shall be comprised of (i) non-disputed accounts receivables due less than sixty days and (ii) cash of at least five thousand dollars ($5,000). (g) GA shall have provided to EUI a business plan for the period commencing on the Closing Date and ending June 30, 2000 following the Closing Date satisfactory in form and substance to EUI. (h) GA shall have provided to EUI an appraisal of GA's assets by an independent third party appraiser reasonably acceptable to EUI, which appraisal is satisfactory in form and substance to EUI. (i) GA shall have caused each of Adam Goldenberg, Lorien Newman and Matthew Rowell to have executed and delivered to GA a transfer of domain name agreement substantially in the form attached hereto as Exhibits E through G (collectively, the "Transfer Agreements"). (j) GA shall have furnished EUI with an opinion (the "GA Opinion"), dated the Closing Date, of counsel to GA, in form and substance satisfactory to EUI and its counsel, to the effect that: (i) GA is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Missouri; 20 (ii) the authorized capital stock of GA consists of 30,000 shares of common stock, $ 1.00 par value, and the GA Shares issued and outstanding on the date hereof were validly issued and outstanding, fully paid and nonassessable and none of such issued and outstanding GA Shares were issued in violation of any preemptive rights of shareholders of GA, and between the date hereof and the Closing Date no additional shares of stock of GA have been issued; (iii) GA has taken all required corporate action to approve and adopt this Agreement, and this Agreement is a valid and binding obligation of GA enforceable against GA and the GA Shareholders in accordance with its terms, subject as to enforcement to bankruptcy, reorganization, moratorium, insolvency and other laws of general applicability relating to or affecting creditors' rights and to general equity principles; (iv) the execution and delivery of this Agreement by GA and the GA Shareholders does not, and the consummation of the transactions contemplated by this Agreement by GA and the GA Shareholders will not, constitute (i) a breach or violation of, or a default under, the charter or bylaws of GA, or (ii) a breach, violation or impairment of, or a default under, any judgment, decree, order, statute, law, ordinance, rule or regulation now in effect applicable to the GA Shareholders, GA or its properties known to such counsel, or any agreement, indenture, mortgage, lease or other instrument of GA; (v) all filings required to be made by GA prior to or on the Closing Date with, and all consents, approvals, permits or authorizations required to be obtained by GA prior to or on the Closing Date from, Governmental Entities in connection with the execution and delivery of this Agreement by GA and the GA Shareholders and the consummation of the transactions contemplated by this Agreement by GA and the GA Shareholders, have been so made or obtained, as the case may be; (vi) except as otherwise disclosed in the GA Disclosure Schedule, such counsel does not know of any litigation, proceedings, arbitral action or governmental investigation pending against GA, its assets, business or properties, the GA Shares, the GA Shareholders or the transactions contemplated by this Agreement; (vii) the employment agreements with Adam Goldenberg, Matt Rowell, Tony Wyss and the consulting agreement with Larry Pevnick, substantially in the form attached hereto as Exhibits A through D, respectively (collectively, the "Employment Agreements"), have been duly executed and delivered by the employees stated therein and are valid and binding obligations of the employees stated therein enforceable against the employees stated therein in accordance with their terms, subject as to enforcement to bankruptcy, reorganization, moratorium and other laws of general applicability relating to or affecting creditors' rights and to general equity principles; and (viii) the Transfer Agreements with Adam Goldenberg, Lorien Newman and Matthew Rowell, respectively, have been duly executed and delivered by the employees stated therein and are valid and binding obligations of the persons stated therein enforceable 21 against the persons stated therein in accordance with their terms, subject as to enforcement of bankruptcy, reorganization, moratorium and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. In rendering the GA Opinion, such counsel may rely on certificates of officers and other agents of GA and public officials as to matters of fact and, as to matters relating to the law of jurisdictions other than Missouri, upon opinions of counsel of such other jurisdictions reasonably satisfactory to EUI and its counsel, provided such reliance is expressly noted in the GA Opinion and the opinions of such other counsel and the certificates of such officers, agents and public officials relied on are attached to the GA Opinion. (j) GA shall have received all credit and debit cards listed on the GA Disclosure Schedule. (k) GA shall have delivered to EUI (i) one or more certificates representing the GA Shares, free and clear of all liens and encumbrances of any nature whatsoever, duly endorsed in blank for transfer or accompanied by stock powers duly executed in blank and with all requisite documentary or stock transfer tax stamps affixed and (ii) the official and complete corporate records of GA (including, without limitation, the minute books, stock ledger and by-laws of GA and the official corporate seal of GA). (l) GA shall have delivered to EUI written resignations, effective as of the Closing Date, of each person that is a director or officer of GA from such officer or director. (m) GA shall have delivered to EUI unaudited monthly statements of income and a balance sheet for GA for each month after April 30, 1999, to and including the month ended June 30, 1999. (n) All actions, proceedings, instruments and documents required to carry out this Agreement, or incidental hereto, and all other legal matters shall have been approved by counsel to EUI, and such counsel shall have received all documents, certificates and other papers reasonably requested by it in connection therewith. (o) The GA Shareholders shall state, and reaffirm as of the Closing Date, that the materials, including current financial statements, prepared and delivered by EUI to the GA Shareholders, have been read and understood by the GA Shareholders, that they are familiar with the business of EUI, that they are acquiring the EUI Shares under Section 4(2), commonly known as the private offering exemption of the Securities Act, and that the EUI Shares are restricted and may not be resold, except in reliance on an exemption under the Securities Act. 8.2 Conditions Precedent to Obligations of GA. The obligations of GA to ----------------------------------------- effect the Reorganization are subject to the satisfaction at or prior to the Closing Date of the following conditions, unless waived by GA in writing: 22 (a) The representations and warranties of EUI set forth in this Agreement shall be true and correct as of the date of this Agreement, and shall also be true in all material respects (except for such changes as are contemplated by the terms of this Agreement) on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, except if and to the extent any failures to be true and correct would not have a material adverse effect on EUI. (b) From the date of this Agreement through the Closing Date, except as set forth in the EUI Disclosure Schedule, EUI shall not have suffered any adverse changes in its business, operations or financial condition which are material to EUI (other than changes generally affecting the industries in which EUI operates, including changes due to actual or proposed changes in law or regulation). (c) EUI shall have materially performed all obligations required to be performed by it under this Agreement at or prior to the Closing Date. (d) EUI shall have furnished GA with copies of (i) resolutions duly adopted by its Boards of Directors approving the execution and delivery of this Agreement and all other necessary or proper corporate action to enable them to comply with the terms of this Agreement, and (ii) to the extent required pursuant to EUI's charter or bylaws, resolutions duly adopted by the holders of the EUI Shares approving the issuance of the EUI Shares, such resolutions to be certified by the Secretary or Assistant Secretary of EUI. (e) EUI shall have furnished GA with an opinion (the "EUI Opinion"), dated the Closing Date, of counsel to EUI, in form and substance satisfactory to GA and its counsel, to the effect that: (i) EUI is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada; (ii) EUI has the corporate power to carry on its business as it is being conducted on the Closing Date; (iii) the EUI Shares are validly issued and outstanding, fully paid and nonassessable; (iv) EUI has taken all required corporate action to approve and adopt this Agreement, and this Agreement is a valid and binding obligation of EUI, enforceable in accordance with its terms, subject as to enforcement of bankruptcy, reorganization, moratorium, insolvency and other laws of general applicability relating to or affecting creditors' rights and to general equity principles; (v) the execution and delivery of this Agreement by EUI do not, and the consummation of the transactions contemplated by this Agreement by EUI will not, constitute (i) a breach or violation of, or a default under, the charter or bylaws of EUI, or (ii) a 23 breach, violation or impairment of, or a default under, any judgment, decree, order, statute, law, ordinance, rule or regulation now in effect applicable to either EUI or EUI's properties known to such counsel, or any agreement, indenture, mortgage, lease or other instrument of either or to which EUI is subject and in each case known to such counsel; (vi) all filings required to be made by EUI prior to or on the Closing Date with, and all consents, approvals, permits or authorizations required to be obtained by EUI prior to or on the Closing Date from, governmental and regulatory authorities of the United States and the State of Nevada in connection with the execution and delivery of this Agreement by EUI and the consummation of the transactions contemplated by this Agreement have been so made or obtained, as the case may be; and (vii) the Employment Agreements have been duly executed and delivered by EUI and are valid and binding obligations of EUI, enforceable against EUI in accordance with their terms, subject as to enforcement to bankruptcy, reorganization, moratorium and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. In rendering the EUI Opinion, such counsel may rely on certificates of officers and other agents of EUI and public officials as to matters of fact and, as to matters relating to the law of jurisdictions other than Nevada, upon opinions of counsel of such other jurisdictions reasonably satisfactory to GA and its counsel, provided such reliance is expressly noted in the EUI Opinion and the opinions of such other counsel and the certificates of such officers, agents and public officials relied on are attached to the EUI Opinion. (f) All actions, proceedings, instruments and documents required to carry out this Agreement, or incidental hereto, and all other legal matters shall have been approved by counsel to GA, and such counsel shall have received all documents, certificates and other papers reasonably requested by it in connection therewith. 9. Closing. The Closing of the Reorganization shall take place on the Closing Date, or on such other date as the parties may mutually agree. All shares of capital stock to be delivered hereunder shall be duly endorsed or with duly executed stock powers attached, in either case in proper form for transfer, and in accordance with all necessary corporate action. 10. Termination. This Agreement shall terminate upon the occurrence of any of the following: (a) the written agreement of all parties to this Agreement; (b) the bankruptcy, receivership or dissolution of GA; or (c) the failure to satisfy any of the conditions precedent as provided in Section 6 above, in which case this Agreement shall be null and void and the parties shall have no further obligations hereunder, provided that the parties have used reasonable efforts to satisfy such conditions 24 precedent; and provided, however, that the parties obligations under Section 11.9 herein shall survive termination of this Agreement. 11. Miscellaneous. 11.1 Successors and Assigns. This Agreement shall be binding upon and ---------------------- shall inure to the benefit of each of the parties hereto and their respective heirs, legal representatives, successors and assigns, and shall also be binding on all persons who have or claim an interest in any shares of capital stock of GA. 11.2 Entire Agreement. This Agreement constitutes the entire ---------------- understanding between the parties and no modification, discharge or waiver, in whole or in part, of any of the provisions contained herein or therein shall be valid unless in writing and signed by the parties. 11.3 Headings. The paragraph headings in this Agreement are for -------- convenience of reference and do not constitute part of the agreement. 11.4 Validity. If any provision of this Agreement is found to be invalid -------- or unenforceable, such provision shall be, and shall be deemed to be, modified so as to cure the invalidity or unenforceability, and all other provisions of this Agreement shall be enforceable notwithstanding such invalidity or unenforceability. 11.5 Governing Law; Consent to Jurisdiction. This Agreement shall be -------------------------------------- construed and enforced in accordance with the laws of the State of Connecticut. 11.6 Enforcement. In the event that either party hereto commits a breach ----------- of that party's obligations hereunder, the non-breaching party damaged thereby shall be entitled to recover from the party in breach the costs and expenses incurred, including reasonable attorneys' fees and disbursements, in connection with enforcing the provisions hereof. The obligation of any person to transfer shares in accordance with the terms of this Agreement may be specifically enforced by any court of competent jurisdiction, it being acknowledged and agreed that money damages will not provide an adequate remedy for the breach of any such obligation. The rights and remedies set forth in this subsection shall be in addition to, and not in lieu of, any other rights and remedies available at law or in equity. 11.7 Notices. All notices and other communications hereunder shall be in ------- writing (and shall be deemed given upon receipt) if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to EUI, to eUniverse, Inc. 25 100 North Industrial Plains Road Wallingford, CT 06492 Attention: President with a copy to Christopher G. Martin, Esq. Martin, Lois & Gasparrini, LLC 1177 Summer Street Stamford, CT 06905 (b) if to GA or GA Shareholders, to Gamer's Alliance, Inc. 14013 Boxford Ct. Chesterfield, MO 63017 Attention: Larry N. Pevnick with a copy to: Jeffrey Michelman, Esq. Blumenfeld, Kaplan and Sandweiss, P.C. 168 N. Meramec Ave. St. Louis, Mo. 63105 11.8 Waivers. No waiver by a party, or by anyone claiming by, through or ------- under such party, of any right or of the breach of any representation, warranty, covenant, agreement, condition or duty, shall ever be held or construed as a waiver of the same or any other right or waiver of any other breach of the same or of any representation, warranty, covenant, agreement, condition, or duty. In the event of a breach by a party of any representation, warranty, covenant, agreement, condition or duty, the failure by any other party to take action on account of such breach or to enforce any rights resulting therefrom shall not be deemed a waiver, and such breach shall be a continuing breach until the same has been cured. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a continuing waiver unless otherwise expressly provided therein. 11.9 Confidentiality. GA shall not, and GA shall use its best efforts to --------------- ensure that all GA Personnel do not, discuss with or disclose to any company other than GA or any individual other than GA Personnel any term or terms of this Agreement or that certain letter of intent between EUI and GA dated May 3, 1999. 11.10 Arbitration. Any claim or dispute arising under this Agreement that ----------- cannot be resolved through negotiation among the parties shall be determined by arbitration before a single 26 arbitrator in Fairfield County, Connecticut, in accordance with the Commercial Arbitration rules then obtaining of the American Arbitration Association, including the production of documents and other information in accordance with Rule 10 thereof. No demand for arbitration shall, however, be instituted after the date after which legal proceedings on the same claim would have been barred by the applicable statute of limitations. The arbitrator shall take such steps as the arbitrator may deem necessary or desirable to avoid delay and to achieve a just, speedy and cost-effective resolution of the matter. The award rendered in such arbitration may provide for equitable remedies, an accounting and/or reimbursement for attorneys', accountants' or consultants' fees, as the arbitrator shall see fit. Such award shall be final, and judgment on it may be entered in or enforced by any court, state, federal or foreign, with competent jurisdiction. Any party may apply to the arbitrator or an appropriate court of law for a preliminary injunction, attachment or other provisional remedy available to it in aid of the arbitration proceeding provided for herein. This provision shall not preclude the impleading or joining of one of the parties hereto by the other in an action brought by a third party. __________________________________________ Signatures appear on the following page. 27 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. eUNIVERSE, INC. By_____________________________ Its GAMER'S ALLIANCE, INC. By_____________________________ Its Chief Executive Officer GA SHAREHOLDERS: --------------- __________________________________________________ Larry N. Pevnick and Robin T. Pevnick, Ten Ent. __________________________________________________ Stan Goldenberg and Andrea R. Goldenberg, Ten Ent. 28 EX-10.16 3 AGREEMENT AND PLAN DATED AUGUST 31, 1999 EXHIBIT 10.16 AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization (the "Agreement") is made as of the 30th day of July, 1999, by and among eUNIVERSE, INC., a Nevada corporation ("EUI"), THE BIG NETWORK, INC., a Delaware corporation ("BNI"), and Steve Sellers, John Hanke and Michael Sellers (each individually, a "Majority BNI Shareholder" and collectively, the "Majority BNI Shareholders"). RECITALS: WHEREAS, the Majority BNI Shareholders are the owners of the issued and outstanding shares of the capital stock of BNI, $0.001 par value, set forth on Exhibit A hereto (collectively, the "Majority BNI Shares"). WHEREAS, EUI desires to acquire all of the issued and outstanding capital stock of BNI in exchange for 1,800,000 shares of common stock, $.001 par value, of EUI (the "EUI Shares") as set forth in this Agreement, and each Majority BNI Shareholder desires to convey its Majority BNI Shares to EUI in exchange for the number of EUI Shares set forth opposite such Majority BNI Shareholder's name on Exhibit A hereto. WHEREAS, EUI, BNI and the shareholders of BNI have determined that it is desirable to effect a plan of reorganization (the "Reorganization") meeting the requirements of Section 368(a) of the Internal Revenue Code of 1986, as amended, as more particularly described below. AGREEMENT: NOW, THEREFORE, for and in consideration of the premises and respective representations, warranties, covenants and agreements hereinafter contained, the parties hereby agree as follows: 1. Certain Definitions. 1.1 Certain Definitions. As used in this Agreement, the following ------------------- capitalized terms shall have the respective meanings set forth below: "BNI Benefit Plans" shall mean any and all employee benefit plans maintained or ----------------- contributed to by BNI (including, without limitation, any "employee benefit plan", as defined in Section 3(3) of ERISA), and any material bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, retirement, vacation, severance, disability, death benefit, hospitalization, insurance or other plan, arrangement or understanding (whether or not legally binding). "BNI Business" shall mean the business of creating and developing gaming, ------------ entertainment and community software and other products for the Internet. "BNI Disclosure Schedule" shall mean the disclosure schedule prepared and ----------------------- executed by BNI and attached hereto as Schedule 2. "BNI Intellectual Property" shall mean any and all intellectual property ------------------------- (including, without limitation, patents, patent rights, patent applications, trademarks, trademark applications, service marks, trade names, brands, franchises, copyrights, drawings, trade secrets, know-how, computer software and general intangibles of a like nature) licensed or owned by BNI or used by BNI in the conduct of its business. "BNI Permits" shall mean all permits, licenses and approvals of all Governmental ----------- Entities (as defined hereinafter) necessary for the lawful conduct of the BNI Business. "BNI Personnel" shall mean all personnel employed by BNI. ------------- "BNI Revenue" shall mean the gross revenue of BNI (as determined by EUI's ----------- regular accounting firm in accordance with United States generally accepted accounting principles, consistently applied). "BNI Shareholders" shall mean the Majority BNI Shareholders and each of the ---------------- other shareholders of BNI who execute an Exchange Agreement. "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as ----- amended, and all rules and regulations issued thereunder, as amended. "EUI Disclosure Schedule" shall mean the disclosure schedule prepared and ----------------------- executed by EUI and attached hereto as Schedule 1. "Exchange Act" shall mean the Securities Exchange Act of 1934. ------------ "Exchange Agreement" shall mean each of those certain Stock Exchange Agreements ------------------ by and between EUI and the shareholders of BNI, other than the Majority BNI Shareholders, dated of equal date herewith and incorporated by reference herein. "GAAP" shall mean United States generally accepted accounting principles, ---- consistently applied. "Governmental Entity" shall mean any national, state, municipal or local ------------------- government, public body or authority, domestic or foreign, or any subdivision or agency thereof, or any quasi-governmental or private body exercising any regulatory, taxing, importing or other governmental or quasi-governmental authority, including courts of competent jurisdiction, domestic or foreign. "Licenses" shall mean all licenses, registrations, franchises, qualifications, -------- provider numbers, 2 permits and authorizations issued by any Governmental Entity to BNI for the operation of the BNI Business including, without limitation, those listed on Section 4.18 of Schedule 2; "Person" shall mean any individual, corporation, limited liability company, ------ partnership, association, trust, unincorporated organization, other entity or group (as defined in the Exchange Act). "Prepaid Expenses" shall mean those actual prepaid expenses described in ---------------- reasonable detail on Section 4.21 of Schedule 2, all of which have been prepaid by BNI and/or the Majority BNI Shareholders in connection with the BNI Business. "Securities Act" shall mean the Securities Act of 1933. -------------- "Specified Exchange Act Filings" shall mean, with respect to EUI, the Form 10 ------------------------------ filed with the Securities and Exchange Commission (the "SEC") on June 14, 1999 (the "Specified 10"), and (ii) each Quarterly Report, if any, on Form 10-Q and Current Report on Form 8-K filed with the S EC since the filing of the Specified 10. "Taxes" shall mean all taxes, assessments and governmental charges and any other ----- similar charges imposed by any federal, state, county, local or foreign government, taxing authority, subdivision or agency thereof, inclusive of interest, penalties or additions imposed thereon or in connection therewith. 1.2 Terms Defined in Other Sections. Capitalized terms defined in a ------------------------------- Section of this Agreement are defined in the Sections indicated below: "Agreement" shall have the meaning set forth in the outset of this Agreement. "BNI" shall have the meaning set forth in the outset of this Agreement. "BNI Opinion" shall have the meaning set forth in Section 6.1(i). "BNI Reports" shall have the meaning set forth in Section 4.5(b). "Closing" shall have the meaning set forth in Section 2.1. "Closing Date" shall have the meaning set forth in Section 2.1. "Employment Agreements" shall have the meaning set forth in Section 6.1(i)(vii). "EUI" shall have the meaning set forth in the outset of this Agreement. "EUI Opinion" shall have the meaning set forth in Section 6.2(e). "EUI Shares" shall have the meaning set forth in the recitals of this Agreement. 3 "Leased Premises" shall have the meaning set forth in Section 4.7(b). "Majority BNI Shareholders" shall have the meaning set forth in the outset of this Agreement. "Majority BNI Shares" shall have the meaning set forth in the recitals of this Agreement. "Reorganization" shall have the meaning set forth in the recitals of this Agreement. "Returns" shall have the meaning set forth in Section 4.12. 2. Plan of Reorganization. The Reorganization shall consist of the following transactions: 2.1 At the closing of the transactions described in this Agreement (the "Closing") within thirty (30) days from the execution of this Agreement, unless otherwise agreed between the parties (the actual date, the "Closing Date"), the Majority BNI Shareholders shall convey, assign, transfer and deliver all of the Majority BNI Shares to EUI. Subsequent closings may occur from time to time up until six (6) months from the date of this Agreement pursuant to executions of the Exchange Agreements. 2.2 At the Closing on the Closing Date, EUI shall issue and deliver to each Majority BNI Shareholder the number of EUI Shares set forth opposite such Majority BNI Shareholder's name on Exhibit A hereto, provided, that, for the purpose of securing the indemnification obligations of the Majority BNI Shareholders set forth in this Agreement, twenty percent (20%) of the EUI Shares, (together with the EUI Shares deposited pursuant to each of the Exchange Agreements, the "Escrow Amount") which would otherwise have been delivered to the Majority BNI Shareholders and the remaining BNI Shareholders at the Closing shall instead be delivered to the Escrow Agent (as defined in Section 8.2(a) below) and be held in escrow and disbursed solely for the purposes and in accordance with the terms set forth in Section 8 of this Agreement. 2.3 On or prior to the Closing Date, all options, warrants and other stock purchase rights to purchase BNI capital stock (the "Purchase Rights") shall be terminated by either BNI or the Majority BNI Shareholders and there shall be no outstanding Purchase Rights that survive the Closing. The Purchase Rights as of the date of execution of this Agreement are listed in Schedule 2.3 hereto. 2.4 No fractional shares of EUI Shares will be issued, no cash will be paid in lieu of fractional shares, and the total number of EUI Shares issued to each BNI Shareholder shall be rounded down to the nearest whole number. 3. Representations and Warranties of EUI. 4 EUI represents and warrants to BNI (which representations and warranties shall survive the Closing for a period of fifteen (15) months from the Closing Date) as follows: 3.1 Organization. Each of EUI and its subsidiaries is a corporation or ------------ other legal entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Each of EUI and its subsidiaries is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and/or in good standing would not in the aggregate have a material adverse effect on the business, operations or financial condition of EUI or its subsidiaries. 3.2 Capitalization. The authorized capital stock of EUI consists of -------------- 250,000,000 shares of common stock, $.001 par value, of which, as of June 23, 1999 there were 14,809,598 issued and outstanding, and 50,000,000 shares of Preferred Stock, $0.10 par value, of which, as of the date of this Agreement 1,832,912 shares of Series A 6% Convertible Preferred Stock are issued and outstanding. 3.3 EUI Shares. All EUI Shares which are to be issued pursuant to the ---------- Reorganization will be, when issued in accordance with the terms thereof, original issue, duly authorized, validly issued, fully paid and nonassessable and free of all encumbrances. 3.4 Authority Relative to this Agreement. EUI has full corporate power ------------------------------------ and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of EUI, and no other corporate proceedings on the part of EUI are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by EUI and constitutes a valid and binding agreement of EUI, enforceable against EUI in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws of general applicability relating to or affecting creditors' rights generally and by the application of general principles of equity. 3.5 Consents and Approvals; No Violations. Except for applicable ------------------------------------- requirements of the Exchange Act, the Securities Act and state Blue Sky laws, no filing with, and no permit, authorization, consent or approval of, any Governmental Entity is necessary for the consummation by EUI of the transactions contemplated by this Agreement; provided that in making this representation EUI is relying on and this representation is conditioned upon the accuracy of the representations and warranties of BNI and the Majority BNI Shareholders in Section 4 of this Agreement. Except as set forth in Section 3.5 of the EUI Disclosure Schedule, neither the execution and delivery of this Agreement by EUI nor the consummation by EUI of the transactions contemplated hereby nor compliance by EUI with any of the provisions hereof 5 will (i) conflict with or result in any breach of any provision of the charter or bylaws of EUI; (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which EUI or any of its subsidiaries is a party or by which any of them or any of their properties or assets may be bound; or (iii) to the best knowledge of the officer executing this Agreement on behalf of EUI, violate any order, writ, injunction, decree, statute, treaty, rule or regulation applicable to EUI, any of its subsidiaries or any of their properties or assets, except in the case of (ii) or (iii) for violations, breaches or defaults which are not material to the business, operations or financial condition of EUI or its subsidiaries and which will not prevent or delay the consummation of the transactions contemplated hereby. 3.6 Specified Exchange Act Filings. EUI has made all filings with the SEC ------------------------------ required by federal law or the applicable rules and regulations of the SEC thereunder since June 14, 1999. EUI has delivered to BNI and the Majority BNI Shareholders a copy of each of its Specified Exchange Act Filings. Each Specified Exchange Act Filing, at the time filed, (i) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not materially false or misleading, and (ii) complied as to form in all material respects with the applicable requirements of the Exchange Act and the applicable rules and regulations of the SEC thereunder. Since June 14, 1999, there has been no material adverse change in the business, assets, operations or financial condition of EUI or its subsidiaries. 3.7 Litigation. There is no action, suit, proceeding, claim, arbitration ---------- or investigation pending, or as to which EUI has received any notice of assertion against EUI which in any manner challenges or seeks to prevent, enjoin, alter or materially delay any of the transactions contemplated by this Agreement. 3.8 No Material Adverse Changes. Except as set forth in Section 3.8 of --------------------------- the EUI Disclosure Schedule, since the date of the balance sheet included in EUI's recently filed Form 10, EUI has conducted its business in the ordinary course and there has not occurred: (a) any material adverse change in the financial condition, liabilities, assets or business of EUI; (b) any amendment or change in the Articles of Incorporation or Bylaws or EUI (except for the reincorporation of EUI in Delaware that may be accomplished prior to the Closing); or (c) any damage to, destruction or loss of any assets of EUI (whether or not covered by insurance) that materially and adversely affects the financial condition or business of EUI. 6 4. Representations and Warranties of BNI and the Majority BNI Shareholders. BNI and each Majority BNI Shareholder hereby jointly and severally represent and warrant to EUI (which representations and warranties shall survive the Closing for a period of fifteen (15) months from the Closing Date): 4.1 Organization. BNI is a corporation duly organized, validly existing ------------ and in good standing under the laws of the State of Delaware and has all requisite power and authority to own, lease and operate its properties and to carry on the BNI Business as now being conducted and to perform the terms of this Agreement and the transactions contemplated herein. BNI is duly qualified or registered and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the BNI Business conducted by it makes such qualification or licensing necessary. BNI has heretofore delivered to EUI complete copies of the charter and bylaws, as currently in effect, of BNI. Such charter and bylaws are in full force and effect and BNI is not in violation of any of the provisions therein. 4.2 Capitalization, Stock Ownership. ------------------------------- (a) The authorized capital stock of BNI consists of 15,000,000 shares of Common Stock, $ 0.001 par value, of which, as of July 29, 1999, 2,928,572 are issued and outstanding, and 5,000,000 shares of Preferred Stock, $ 0.001 par value. The authorized Preferred Stock consists of 1,300,000 shares designated as Series A Preferred Stock, of which, as of July 29, 1999, 1,160,772 shares are issued and outstanding and 3,700,000 shares of undesignated Preferred Stock, none of which are issued and outstanding. All the issued and outstanding Majority BNI Shares are validly issued, fully paid and non-assessable and free of preemptive rights. As of the date of this Agreement, BNI has reserved 400,000 shares of Common Stock for issuance to employees and consultants pursuant to a stock option plan, none of which are subject to outstanding, unexcercised options and 120,000 shares remain available for future grant. Except as disclosed in Section 4.2 of the BNI Disclosure Schedule and except as set forth above, there are not now, and on the Closing Date there will not be, any shares of capital stock (or securities substantially equivalent to capital stock) of BNI issued or outstanding or any subscriptions, options, warrants, calls, rights, convertible securities or other agreements or commitments of any character obligating BNI to issue, transfer or sell any of its securities, except as provided by this Agreement. (b) BNI does not own, directly or indirectly, any capital stock or other equity securities of any corporation or have any direct or indirect equity or ownership interest in any Person. There are not now, and on the Closing Date there will not be, any voting trusts or other agreements or understandings to which BNI is a party or is bound with respect to the voting of the capital stock of BNI. There are no Persons in which BNI has any voting rights, equity interests or other investment. (c) Each of the Majority BNI Shareholders is the beneficial and record owners of the issued and outstanding shares of BNI set forth opposite his name on Exhibit A free and 7 clear of any liens, encumbrances or restrictions on transfer of any nature whatsoever other than the obligations arising under this Agreement. Except for this Agreement and the transactions contemplated hereby, none of the Majority BNI Shareholders has any legal obligation, absolute or contingent, to any Person or firm to sell any of the Majority BNI Shares or enter into any agreement with respect thereto. 4.3 Authority Relative to this Agreement. BNI has full corporate power ------------------------------------ and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. Each Majority BNI Shareholder has the power and authority to execute and deliver this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by BNI and the Majority BNI Shareholders, and no other corporate proceedings on the part of BNI are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement constitutes a valid and binding agreement of BNI and the Majority BNI Shareholders, enforceable against BNI and the Majority BNI Shareholders in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reoganization, moratorium and other laws of general applicability relating to or affecting creditors' rights generally and by the application of general principles of equity. 4.4 Consents and Approvals; No Violations. Except for applicable ------------------------------------- requirements, if any, of the Exchange Act, the Securities Act and state Blue Sky laws, no filing with, and no permit, authorization, consent or approval of, any Governmental Entity is necessary for the consummation by BNI and/or the Majority BNI Shareholders of the transactions contemplated by this Agreement. Neither BNI nor any of the Majority BNI Shareholders is aware of any such requirements. Neither the execution and delivery of this Agreement by BNI and/or the Majority BNI Shareholders nor the consummation by BNI and/or the Majority BNI Shareholders of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the charter or bylaws of BNI, (ii) result in a violation or breach of, or constitute a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which BNI and/or any Majority BNI Shareholder is a party or by which BNI and/or any Majority BNI Shareholder or any of their respective properties or assets may be bound, or (iii) violate any order, writ, injunction, decree, statute, treaty, rule or regulation applicable to BNI and/or any Majority BNI Shareholder or any of their respective properties or assets. 4.5 Reports. ------- (a) None of the BNI Reports (as defined hereinafter) contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading. Each of the balance sheets and related statements (including any related notes) included in the BNI Reports presents fairly the consolidated financial position of BNI as of the respective dates thereof, and present fairly the results of operations and the changes in financial position of BNI for the respective periods, except, in the case of unaudited interim financial statements, for year-end audit adjustments, consisting only of normal year end 8 adjustments. The BNI Reports are in accordance with the books and records of BNI, and have been prepared in accordance with GAAP. (b) BNI has delivered to EUI copies of unaudited statements of income and a balance sheet for BNI for each month between and including January, 1998 and June, 1999 (collectively, the "BNI Reports"). 4.6 No Material Adverse Changes. Except as disclosed on the unaudited --------------------------- statements of income and balance sheets of BNI for the six month period ended June, 1999, or as set forth in Section 4.6 of the BNI Disclosure Schedule, since June 30, 1999 there has not been any: (a) change that has had a net effect greater than $50,000 on the BNI Business, or the financial condition, assets, liabilities or earnings of BNI ("Material Adverse Change") and to the best knowledge of BNI, there is no fact, circumstance, event, occurrence, contingency or condition which should reasonably be expected to result in any Material Adverse Change in the BNI Business or the assets, financial or other condition, operations, liabilities or prospects of BNI; (b) change in the number of shares of capital stock of BNI issued or outstanding or any declaration, setting aside, or payment of any dividend or other distribution (whether in cash, securities, property or otherwise) in respect of BNI's capital stock; (c) other than increases in salary or bonus of less than five percent (5%) to each employee of BNI, (i) increase in the compensation payable or to become payable to any BNI Personnel or (ii) any bonus, incentive compensation, service award or other like benefit, granted, made or accrued, contingently or otherwise, to the credit of any BNI Personnel; (d) mortgage, pledge or subjection to any lien or encumbrance of any character whatsoever of any of the assets of BNI, except the lien of current Taxes incurred but not yet due and payable; (e) sale, assignment or transfer of any assets of BNI that are material, singly or in the aggregate to BNI other than in the ordinary course of business; (f) waiver of any rights of substantial value to BNI, whether or not in the ordinary course of business; (g) cancellation or termination by BNI of any contract, agreement or other instrument to which BNI is or was a party, which cancellation or termination has caused or could reasonably be expected to cause a loss of expected revenue to BNI of more than $25,000; (h) liability incurred by BNI except liabilities incurred in the ordinary course of business; 9 (i) capital expenditures or the execution of any lease other than leases of personal property in the ordinary course with respect to any aspect of the BNI Business or the incurring of any liability therefor; (j) borrowing of money by BNI or guaranteeing by BNI of any indebtedness of others; (k) lending of any money by BNI or otherwise pledging the credit of BNI; (l) failure to conduct the business of BNI in the ordinary course consistent with past practices; (m) change in the method of accounting or accounting practice of BNI from the methods and practice used to prepare the June, 1999 financial statements; (n) loss of services of any BNI Personnel that is material to the conduct of the BNI Business; (o) material cancellation by any supplier or contractor to BNI; (p) cancellation by any customer or customers which have caused or could reasonably be expected to cause a loss of expected revenue to BNI of more than $10,000; (q) extraordinary item of loss (as defined in Opinion No. 30 of the Accounting Principles Board of the American Institute of Certified Public Accountants); or (r) agreement by BNI to do any of the foregoing. 4.7 Lists of Properties, Contracts, Etc. Sections 4.7(a) through 4.7(k) ------------------------------------ of the BNI Disclosure Schedule contain accurate lists and summary descriptions of the following: (a) Qualification. Section 4.7(a) of the BNI Disclosure Schedule ------------- contains all jurisdictions in which BNI is a registered foreign corporation; (b) Real Property and Leases. Section 4.7(b) of the BNI Disclosure ------------------------ Schedule contains all leases of real property to which BNI is a party (indicating in each such case, the terms of the lease) and all premises occupied by BNI under rental arrangements without leases (including in each case the amount of rent and the type of occupancy (collectively, the "Leased Premises"). (c) Intellectual Property. Section 4.7(c) of the BNI Disclosure --------------------- Schedule contains, to the best knowledge of BNI, all BNI trademark, service mark, patent and copyright registrations, pending or otherwise; 10 (d) Personal Property. Section 4.7(d) of the BNI Disclosure Schedule ----------------- contains, except for individual items having a fair market value of less than $5,000 (subject to a maximum fair market value of $50,000 for all such individual items in the aggregate), each item of machinery, inventory, equipment, computer hardware, motor vehicles, office furniture, fixtures and similar personal property and furnishings owned or leased by BNI indicating the current depreciated book value of owned items and the terms and annual lease payments of leased items; (e) Insurance. Section 4.7(e) of the BNI Disclosure Schedule contains --------- all policies of insurance in force with respect to BNI, including, without restricting the generality of the foregoing, those covering properties, buildings, machinery, inventory, equipment, furniture, fixtures, operations and lives of, or performance of their duties by, BNI Personnel, including the policy numbers, names and addresses of insurers, expiration dates, descriptions and amounts of coverage and annual premiums as of the date hereof; (f) Other Contracts. Section 4.7(f) of the BNI Disclosure Schedule --------------- contains all material contracts and commitments valued at greater than $10,000 in revenue or expense per year and not otherwise listed in any other schedule hereto of BNI (including, without limitation, confidentiality agreements, purchase orders, agreements, undertakings or commitments to any governmental or regulatory authority, agreements with salespersons, and other agreements with customers and suppliers). Section 4.7(f) also contains descriptions of each existing oral agreement or arrangement of BNI (other than agreements or arrangements that do not involve, individually, more than $15,000 per year in revenue or expense). Except for oral agreements or arrangements that do not involve, individually, more than $25,000 per year in revenue or expense, and, in the aggregate, more than $100,000 per year in revenue or expense, BNI has no obligations or liabilities under any oral agreements or arrangements that have not been disclosed to EUI; (g) Labor Agreements. Section 4.7(g) of the BNI Disclosure Schedule ---------------- contains all labor contracts, employment agreements and BNI Benefit Plans with respect to BNI; (h) Powers of Attorney. Section 4.7(h) of the BNI Disclosure Schedule ------------------ contains the names of all Persons holding powers of attorney from BNI; (i) Indebtedness. Section 4.7(i) of the BNI Disclosure Schedule ------------ contains all notes, debentures, bonds, letters of credit and other instruments evidencing indebtedness (including capital leases, guarantees and lines of credit) of BNI; (j) Bank Accounts. Section 4.7(j) of the BNI Disclosure Schedule ------------- contains the name of each institution in which BNI has a bank account, safe- deposit box, the number of any such account or box, and the names of all Persons authorized to draw thereon or to have access thereto; and (k) Credit Cards. Section 4.7(k) of the BNI Disclosure Schedule ------------ contains the name of each institution with whom BNI has credit cards, debit cards or similar charge accounts 11 or lines of credit, the identifying account numbers for each such card, account or line of credit and the names of all Persons authorized to use, draw upon or have access to such cards, accounts or lines of credit. (l) Copies of Documents. BNI has previously delivered to EUI or EUI's ------------------- agents or representatives or otherwise made available for inspection by EUI or EUI's agents or representatives, true and complete copies of: (i) all leases, agreements, contracts, undertakings, commitments and arrangements listed in Sections 4.7(b), 4.7(d), 4.7(f) and 4.7(g) of the BNI Disclosure Schedule; (ii) all agreements or written materials with respect to the BNI Intellectual Property listed in Section 4.7(c) of the BNI Disclosure Schedule; (iii) all policies of insurance listed in Section 4.7(e) of the BNI Disclosure Schedule; (iv) all instruments evidencing a power of attorney listed in Section 4.7(h) of the BNI Disclosure Schedule; and (v) all securities, notes, debentures, bonds, letters of credit and other instruments of indebtedness listed in Section 4.7(i) of the BNI Disclosure Schedule. 4.8 Title to Properties. Except as otherwise disclosed in Section 4.8 of ------------------- the BNI disclosure Schedule, to the best knowledge of BNI, (i) BNI has good and marketable title to all of its properties and assets, real and personal, tangible and intangible; (ii) such properties and assets referred to in clause (i) of this Section are free and clear of all liens and encumbrances of any character whatsoever, except of the lien of Taxes not yet due and payable; (iii) BNI has valid and enforceable leases with respect to the Leased Premises, has performed all the obligations required to be performed by it under said leases and possesses and quietly enjoys said premises under said leases, and such premises are not subject to any liens, encumbrances, easements, rights of way, building or use restrictions, exceptions, reservations or limitations that interfere with or impair the present and continued use thereof in the usual and normal conduct of the business of BNI. BNI has not has received notice of violation of any applicable zoning regulation, ordinance or other law, order, regulation or requirement relating to the operations of the Leased Premises, and BNI knows of no such violation. BNI has not received notice of any pending or threatened condemnation proceedings relating to any of the Leased Premises, and to the best knowledge of BNI, there are no such pending or threatened proceedings. The tangible properties and equipment owned, operated or leased by BNI are in good operating condition, ordinary wear and tear excepted, and, to the best knowledge of BNI, are in conformity in all material respects with all applicable laws, ordinances, orders, regulations and other requirements (including applicable zoning, environmental, occupational safety and health laws and regulations) presently in effect or presently scheduled to take effect. BNI does not own any of the buildings, plants or structures located on the Leased Premises or any other real property and 12 is not a party to any contract, and does not hold any options, for the purchase of any real property. The tangible properties and equipment owned, operated or leased by BNI and the real property leased by BNI are all the tangible and real properties necessary to operate the BNI Business in the manner currently operated by BNI. 4.9 No Default. Except as set forth in Section 4.9 of the BNI Disclosure ---------- Schedule, BNI is not in default or violation (and no event has occurred which with notice or the lapse of time or both would constitute a default or violation) of any term, condition or provision of (i) its Certificate of Incorporation or its bylaws, (ii) any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which BNI is a party or by it or to which any of its properties or assets may be bound or (iii) any order, writ, injunction, decree, statute, rule or regulation applicable to BNI. 4.10 Litigation. Except as disclosed in Section 4.10 of the BNI ---------- Disclosure Schedule, there is no action, suit, proceeding, tax audit, investigation or review pending or to BNI's knowledge threatened with respect to BNI, the BNI Business, any of the assets of BNI, the Majority BNI Shares, or any of the transactions contemplated hereby before any Governmental Entity, or otherwise at law or in equity, which individually or in the aggregate are reasonably likely to (i) have a material adverse effect on the assets, business, operations or financial condition of BNI or (ii) prevent or impair the consummation of the transactions contemplated hereby. BNI is not in default with respect to any order, writ, injunction or decree of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality which, if not cured, should reasonably be expected to (i) have a material adverse effect upon the BNI Business, or the assets, operations and financial condition of BNI, or (ii) prevent or impair the consummation of the transactions contemplated hereby. 4.11 Compliance with Applicable Law. BNI holds all BNI Permits, except ------------------------------ for such BNI Permits which would not have a material adverse effect on the BNI Business or the assets, operations or financial condition of BNI. BNI is in compliance with the terms of all BNI Permits, except where the failure to so comply would not have a material adverse effect on the BNI Business or the assets, operations or financial condition of BNI. The BNI Business is not being conducted in violation of any applicable law, ordinance, rule, regulation, decree or order of any Governmental Entity, except for violations which do not and would not have a material adverse effect on the BNI Business, or the assets, operations or financial condition of BNI. 4.12 Taxes. Except as set forth in Section 4.12 of the BNI Disclosure ----- Schedule, BNI has correctly prepared and timely filed all material federal, state, local and foreign tax returns, estimates and reports, including payroll and sales tax reports (collectively, the "Returns") required to be filed by it, and BNI has duly paid, caused to be paid or made adequate provision for the payment of all Taxes required to be paid in respect of the periods covered by the Returns and has established on its books and records reserves that are adequate for payment of all Taxes anticipated to be payable in respect of all calendar periods since the periods covered by the Returns. All deficiencies and assessments asserted by federal, state, local or foreign taxing authorities have been paid, fully settled or adequately provided for in the financial statements contained in the BNI Reports. Except as set forth in Section 4.12 of the BNI Disclosure 13 Schedule, there are no outstanding agreements or waivers extending the statutory period of limitation applicable to any federal or foreign income tax return of BNI. BNI has complied in all material respects with all applicable laws, rules and regulations relating to the payment and withholding of taxes and has timely and properly withheld from employees' wages and paid over to the proper governmental authorities all amounts required to be so withheld and paid over under applicable laws. 4.13 ERISA and BNI Benefit Plans. --------------------------- (a) With respect to any and all BNI Benefit Plans, BNI has provided to EUI a true and correct copy of, where applicable, (i) the most recent annual report, if any, (Form 5500) filed with the IRS, (ii) each BNI Benefit Plan, (iii) each trust agreement and group annuity contract, if any, relating to such BNI Benefit Plan and (iv) the most recent actuarial report or valuation relating to a BNI Benefit Plan subject to Title IV of ERISA, if any. None of the BNI Benefit Plans are multiemployer plans within the meaning of Section 3(37) of ERISA. Each of the BNI Benefit Plans covered by ERISA, if any (i) has been operated in all material respects in accordance with ERISA, (ii) has not engaged in any prohibited transactions (as such term is defined in Section 406 of ERISA) and (iii) has met the minimum funding standards of Section 412 of the Code. No material Reportable Event (within the meaning of Section 4043 of ERISA) has occurred and is continuing with respect to any BNI Benefit Plan. Since the enactment of ERISA, BNI has not terminated any pension plan or withdrawn from any multiemployer pension plan. (b) With respect to the BNI Benefit Plans, no event has occurred, and to the knowledge of BNI there exists no condition or set of circumstances which are reasonably likely to occur, in connection with which BNI would be subject to any liability (except liability for benefits claims and funding obligations payable in the ordinary course) under ERISA, the Code or any other applicable law. (c) Except as set forth in Section 4.13(c) of the BNI Disclosure Schedule, with respect to the BNI Benefit Plans, there are no funded benefit obligations for which contributions have not been made or properly accrued and there are no unfunded benefit obligations which have not been accounted for by reserves, or otherwise properly footnoted in accordance with generally accepted accounting principles, on the financial statements of BNI, which obligations are reasonably likely to have a material adverse effect on the BNI Business or the assets, operations or financial condition of BNI. (d) Except as set forth in Section 4.13(d) of the BNI Disclosure Schedule, and as required by law, BNI does not maintain, and is not required to contribute to and has no liabilities with respect to, any BNI Benefit Plan and no BNI Personnel or dependent thereof is entitled to any benefits from BNI. All BNI Benefit Plans have been maintained and operated in material compliance with their terms and applicable law. Except as set forth in Section 4.13(d) of the BNI Disclosure Schedule, no individual is a party to an employment contract pertaining to the BNI Business that will be effective on the Closing Date. 14 (e) Except as set forth in Section 4.13(e) of the BNI Disclosure Schedule, the transactions contemplated by this Agreement (either alone or together with any other transaction) will not (i) entitle any BNI Personnel to severance pay or other similar payments, (ii) accelerate the time of payment or vesting or increase the amount of benefits or compensation due to any BNI Personnel or (iii) result in any payments (including parachute payments) becoming due to any BNI Personnel. (f) BNI has complied in all material aspects with all applicable laws, rules and regulations relating to the employment of labor, including those relating to wages, hours, collective bargaining and the payment of social security and similar Taxes. (g) BNI is not an employer subject to the Worker Adjustment and Retraining Notification Act. (h) There are no BNI Personnel who are entitled to (i) any pension benefit that is unfunded or (ii) any pension or other benefit to be paid upon termination of employment other than as required by Section 601 of ERISA, and no other benefits whatsoever are payable to any BNI Personnel after termination of employment (including retiree medical and death benefits). (i) In connection with the operation of the BNI Business, (i) there is no significant labor trouble, labor strike, material controversy, material slowdown or stoppage actually pending against or affecting BNI and, to the best knowledge of BNI, none is or has been threatened, and (ii) BNI has no collective bargaining agreements with respect to any BNI Personnel. (j) Section 4.13(j) of the BNI Disclosure Schedule sets forth the name, location, title, date of employment, salaries, bonuses (and any changes in salaries or bonuses since June, 1999 other than increases in salary or bonus of less than 5% to each employee of BNI) of each employee of BNI. Except as set forth on Section 4.13(j) of the BNI Disclosure Schedule, no employee of BNI whose annual rate of income (including salary and bonus) is greater than $50,000 has terminated, or has provided notice to BNI of his or her intention to terminate, his or her relationship with BNI. BNI has no knowledge of any plan of any employee of BNI to do so. 4.14 Small Business Issues. None of the existing business relationships --------------------- of BNI are based on or are the result of any agreement, understanding or relationship arising out of or relating to BNI's status as a "small business concern" or "minority-owned business concern" or other similar status, as such terms or similar terms are used under applicable federal or state law. 4.15 Intellectual Property. Except as set forth in Section 4.15 of the --------------------- BNI Disclosure Schedule, (i) no claim is pending or, to the knowledge of BNI, threatened to the effect that the present or past operations of BNI infringes upon or conflicts with the rights of others with respect to any BNI Intellectual Property, and (ii) no claim is pending or, to the best knowledge of BNI, threatened to the effect that any of BNI's rights to the BNI Intellectual Property is/are invalid or unenforceable. To the knowledge of BNI, no contract, agreement or understanding with any 15 party exists which would impede or prevent the continued use by BNI of the entire right, title and interest of BNI in and to any BNI Intellectual Property. The BNI Intellectual Property listed in Section 4.15 of the BNI Disclosure Schedule consists of all BNI Intellectual Property used or being developed for use in the BNI Business or necessary for the conduct of the BNI Business. No Person has a right to receive a royalty with respect to any of the BNI Intellectual Property. Except as set forth in Section 4.15 of the BNI Disclosure Schedule, BNI has no licenses granted by or to it or other agreements to which it is a party relating in whole or in part to any BNI Intellectual Property, whether owned by BNI or otherwise. Except as set forth in Section 4.15 of the BNI Disclosure Schedule, and to the knowledge of BNI, BNI is not infringing upon or otherwise violating the rights of any third party with respect to any BNI Intellectual Property or using any of the BNI Intellectual Property in a manner that would give rise to an obligation to render an accounting to any Person as a result of co-authorship, co-invention or an express or implied contract for any use or transfer thereof. BNI has taken all reasonable measures to secure and to protect confidential business information and the trade secrets of BNI. BNI has not sent or otherwise communicated to any other Person any notice, charge, claim or assertion of, or has any knowledge of, any present, impending or threatened infringement by such other Person of any BNI Intellectual Property or misappropriation of any BNI Intellectual Property by such other Person. 4.16 Change in Control. Except as set forth in Section 4.16 of the BNI ----------------- Disclosure Schedule, BNI is not a party to any contract, agreement or understanding which contains a "change in control" provision or "potential change in control" provision that would violate the terms of this Agreement. 4.17 Insurance. All policies of insurance (or renewals thereof) set forth --------- in Section 4.7(e) of the BNI Disclosure Schedule are outstanding and duly in force on the date hereof. Such policies are in the amounts shown in Section 4.7(e) of the BNI Disclosure Schedule, and insure the structures and equipment of BNI for their replacement values against loss, theft and destruction and insure the properties and business of BNI against such losses and risks as are adequate in accordance with customary industry practice to protect the properties and business of BNI. BNI has not received notice from any insurer or agent of such insurer that substantial capital improvements or other expenditures will have to be made in order to continue such insurance, and no such improvements or expenditures are required. 4.18 Licenses. Except as set forth in Section 4.18 of the BNI Disclosure -------- Schedule, to the best knowledge of BNI and the Majority BNI Shareholders, no Licenses are required for BNI to own and operate the BNI Business in the manner operated on the date hereof. The Licenses are in full force and effect and have been validly issued. As of the date hereof, no action or proceeding is pending or, to the knowledge of BNI and the Majority BNI Shareholders, threatened before any Governmental Entity to revoke, refuse to renew or modify such Licenses or other authorizations of the BNI Business. 4.19 Brokers. Neither this Agreement nor the conveyance of the Majority ------- BNI Shares or any other transaction contemplated by this Agreement was induced or procured through any 16 Person acting on behalf of or representing BNI and/or any of the Majority BNI Shareholders as broker, finder, investment banker, financial advisor or in any similar capacity. 4.20 Powers of Attorney. There are no Persons holding a power of attorney ------------------ on behalf of any Majority BNI Shareholder(s) which would enable such Persons to sell any Majority BNI Shares. 4.21 Prepaid Expenses. All of the Prepaid Expenses set forth in Section ---------------- 4.21 of Schedule 2 have been paid by BNI prior to the date hereof and relate to good faith expenses incurred by BNI in connection with the conduct of the BNI Business. 4.22 No Registration Under the Securities Act. Except as provided under ---------------------------------------- the terms of the Registration Rights Agreement attached hereto as Exhibit D (the "Rights Agreement"), each Majority BNI Shareholder understands that the EUI Shares to be issued to the Majority BNI Shareholders under this Agreement have not been and will not be registered under the Securities Act in reliance upon exemptions contained in the Securities Act or interpretations thereof, and cannot be offered for sale, sold or otherwise transferred unless such shares of EUI stock are registered or qualify for exemption from registration under the Securities Act. 4.23 Investment. Each Majority BNI Shareholder has such knowledge and ---------- experience in financial and business matters that such Majority BNI Shareholder is capable of evaluating the merits and risks such Majority BNI Shareholder's investment in the EUI Shares being acquired hereunder. Each Majority BNI Shareholder understands and is able to bear any economic risks associated with such investment. Each Majority BNI Shareholder acknowledges that EUI has had the opportunity ask questions to the officers and management of EUI about the business and financial condition of EUI. The EUI Shares being issued to the Majority BNI Shareholders hereunder are being acquired by the Majority BNI Shareholders in good faith solely for their own accounts, for investment and not with a view toward resale or other distribution within the meaning of the Securities Act. Such EUI Shares shall not be offered for sale, sold or otherwise transferred by the Majority BNI Shareholders without either registration or exemption from registration under the Securities Act or applicable state securities laws. No EUI Shares were offered to any of the Majority BNI Shareholders by means of publicly disseminated advertisements or sales literature. 5. Continued Accuracy of Representations and Warranties. All representations and warranties of the parties contained herein shall be true in all material respects at and as of the Closing Date with the same effect as though such representations and warranties were made at and as of such time; and each party shall have performed and complied with all obligations, covenants, and conditions required by this Agreement to have been performed or complied with by it prior to or on the Closing Date. 6. Conditions Precedent to the Obligations of the Parties. 17 6.1 Conditions Precedent to the Obligations of EUI. The obligations of ---------------------------------------------- EUI to effect the Reorganization are further subject to the satisfaction at or prior to the Closing Date of the following conditions, unless waived by EUI in writing: (a) The representations and warranties of BNI and the Majority BNI Shareholders set forth in this Agreement shall be true and correct as of the date of this Agreement, and shall also be true and correct (except for such changes as are contemplated by the terms of this Agreement) on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. At the Closing, BNI shall deliver to EUI, a certificate signed by an officer of BNI certifying that the representations and warranties of BNI set forth in this Agreement are true and correct as of the date of this Agreement. (b) From the date of this Agreement through the Closing Date, BNI shall not have suffered any Material Adverse Changes (as defined in Section 4.6(a) herein) in the BNI Business or the assets, operations or financial condition of BNI (other than changes relating to the transactions contemplated by this Agreement, including the change in control contemplated hereby). (c) BNI and the Majority BNI Shareholders shall have performed all obligations and covenants and conditions required to be performed by it and them under this Agreement at or prior to the Closing Date. (d) BNI shall have furnished EUI with copies of (i) resolutions duly adopted by the Board of Directors of BNI approving the execution and delivery of this Agreement and all other necessary or proper corporate action to enable BNI to comply with the terms of this Agreement, and (ii) resolutions duly adopted by the requisite number of shareholders of BNI approving and adopting this Agreement and the Reorganization, such resolutions to be certified by the Secretary or Assistant Secretary of BNI. (e) BNI shall have no outstanding debt other than reasonable and customary accounts payable incurred in the ordinary course of business and what is incurred as a result of the consummation of the transactions contemplated by this Agreement. (f) BNI shall have twenty-five thousand dollars ($25,000.00) excess of current assets over current liabilities as shown on BNI's financial statements as of the Closing Date prepared in accordance with GAAP. (g) BNI shall have provided to EUI an earnings projection for one (1) year satisfactory in form and substance to EUI. (h) At EUI's election and expense, EUI may provide for the appraisal of BNI's assets by an independent third party appraiser reasonably acceptable to EUI, which appraisal is satisfactory to EUI. 18 (i) BNI shall have furnished EUI with an opinion (the "BNI Opinion"), dated the Closing Date, of counsel to BNI, in form and substance satisfactory to EUI and its counsel, to the effect that: (i) BNI is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware; (ii) the authorized capital stock of BNI consists of 15,000,000 shares of Common Stock, 5,000,000 shares of Preferred Stock, of which 1,300,000 shares are designated as Series A Preferred Stock and 3,700,000 shares are undesignated Preferred Stock, all of which have a par value of $ 0.001 per share, and the capital stock of BNI issued and outstanding on the date hereof were validly issued and outstanding, fully paid and nonassessable and none of such issued and outstanding capital stock of BNI were issued in violation of any preemptive rights of shareholders of BNI, and between the date hereof and the Closing Date no additional shares of stock of BNI have been issued; (iii) BNI has taken all required corporate action to approve and adopt this Agreement, and this Agreement is a valid and binding obligation of BNI enforceable against BNI and the Majority BNI Shareholders in accordance with its terms, subject as to enforcement to bankruptcy, insolvency, reorganization, moratorium, insolvency and other laws of general applicability relating to or affecting creditors' rights and to general equity principles; (iv) the execution and delivery of this Agreement by BNI and the Majority BNI Shareholders does not, and the consummation of the transactions contemplated by this Agreement by BNI and the Majority BNI Shareholders will not, constitute (i) a breach or violation of, or a default under, the charter or bylaws of BNI, or (ii) a breach, violation or impairment of, or a default under, any judgment, decree, order, statute, law, ordinance, rule or regulation now in effect applicable to the Majority BNI Shareholders, BNI or its properties known to such counsel, or any agreement, indenture, mortgage, lease or other instrument of BNI; (v) all filings required to be made by BNI prior to or on the Closing Date with, and all consents, approvals, permits or authorizations required to be obtained by BNI prior to or on the Closing Date from, Governmental Entities in connection with the execution and delivery of this Agreement by BNI and the Majority BNI Shareholders and the consummation of the transactions contemplated by this Agreement by BNI and the Majority BNI Shareholders, have been so made or obtained, as the case may be; (vi) except as otherwise disclosed in the BNI Disclosure Schedule, such counsel does not know of any litigation, proceedings, arbitral action or governmental investigation pending against BNI, its assets, business or properties, the capital stock of BNI, the Majority BNI Shareholders or the transactions contemplated by this Agreement; and (vii) the employment agreements with Steve Sellers, John Hanke, Arie Grossman, Mark Maxham, Jason Tobias, Rolf Rando, Peter Carlson and Skip Sellers, substantially in the form attached hereto as Exhibits B and C, respectively (collectively, the 19 "Employment Agreements"), have been duly executed and delivered by the employees stated therein and are valid and binding obligations of the employees stated therein enforceable against the employees stated therein in accordance with their terms, subject as to enforcement to bankruptcy, reorganization, moratorium and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. In rendering the BNI Opinion, such counsel may rely on certificates of officers and other agents of BNI and public officials as to matters of fact and, as to matters relating to the law of jurisdictions other than California, upon opinions of counsel of such other jurisdictions reasonably satisfactory to EUI and its counsel, provided such reliance is expressly noted in the BNI Opinion and the opinions of such other counsel and the certificates of such officers, agents and public officials relied on are attached to the BNI Opinion. (j) BNI shall have received all credit and debit cards listed on the BNI Disclosure Schedule. (k) BNI shall have (i) delivered to EUI one or more certificates representing the Majority BNI Shares, free and clear of all liens and encumbrances of any nature whatsoever, duly endorsed in blank for transfer or accompanied by stock powers duly executed in blank and with all requisite documentary or stock transfer tax stamps affixed; and (ii) delivered or otherwise made available for inspection to EUI, the official and complete corporate records of BNI comprised of the Certificate of Incorporation and all amendments thereto, the board and shareholder minute books, stock ledger and by- laws of BNI. (l) BNI shall have delivered to EUI written resignations, effective as of the Closing Date, of each Person that is a director or officer of BNI from such officer or director. (m) All actions, proceedings, instruments and documents required to carry out this Agreement, or incidental hereto, and all other legal matters shall have been approved by counsel to EUI, and such counsel shall have received all documents, certificates and other papers reasonably requested by it in connection therewith. (n) The Majority BNI Shareholders shall state, and reaffirm as of the Closing Date, that the materials, including current financial statements, prepared and delivered by EUI to the Majority BNI Shareholders, have been read and understood by the Majority BNI Shareholders, that they are familiar with the business of EUI, that they are acquiring the EUI Shares under Section 4(2), commonly known as the private offering exemption of the Securities Act, and that the EUI Shares are restricted and may not be resold, except in reliance on an exemption under the Securities Act. (o) Each Majority BNI Shareholder shall have executed with EUI the Rights Agreement substantially in the form attached hereto at Exhibit D. 20 6.2 Conditions Precedent to Obligations of BNI. The obligations of BNI to ------------------------------------------ effect the Reorganization are subject to the satisfaction at or prior to the Closing Date of the following conditions, unless waived by BNI in writing: (a) The representations and warranties of EUI set forth in this Agreement shall be true and correct as of the date of this Agreement, and shall also be true in all material respects (except for such changes as are contemplated by the terms of this Agreement) on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, except if and to the extent any failures to be true and correct would not have a material adverse effect on EUI. At the Closing, EUI shall deliver to BNI, a certificate signed by an officer of EUI certifying that the representations and warranties of EUI set forth in this Agreement are true and correct as of the date of this Agreement. (b) From the date of this Agreement through the Closing Date, except as set forth in the EUI Disclosure Schedule, EUI shall not have suffered any adverse changes in its business, operations or financial condition which are material to EUI (other than changes generally affecting the industries in which EUI operates, including changes due to actual or proposed changes in law or regulation). (c) EUI shall have materially performed all obligations required to be performed by it under this Agreement at or prior to the Closing Date. (d) EUI shall have furnished BNI with copies of (i) resolutions duly adopted by its Boards of Directors approving the execution and delivery of this Agreement and all other necessary or proper corporate action to enable them to comply with the terms of this Agreement, and (ii) to the extent required pursuant to EUI's charter or bylaws, resolutions duly adopted by the holders of the EUI Shares approving the issuance of the EUI Shares, such resolutions to be certified by the Secretary or Assistant Secretary of EUI. (e) EUI shall have executed with each BNI Shareholder a Rights Agreement substantially in the form attached hereto at Exhibit D. (f) EUI shall have furnished BNI with an opinion (the "EUI Opinion"), dated the Closing Date, of counsel to EUI, in form and substance satisfactory to BNI and its counsel, to the effect that: (i) EUI is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada; (ii) EUI has the corporate power to carry on its business as it is being conducted on the Closing Date; (iii) the EUI Shares are validly issued and outstanding, fully paid and nonassessable; 21 (iv) the authorized capital stock of EUI consists of 250,000,000 shares of common stock, $.001 par value, and 50,000,000 shares of preferred stock, $ 0.10 par value; (v) EUI has taken all required corporate action to approve and adopt this Agreement, and this Agreement is a valid and binding obligation of EUI, enforceable in accordance with its terms, subject as to enforcement to bankruptcy, reorganization, moratorium, insolvency and other laws of general applicability relating to or affecting creditors' rights and to general equity principles; (vi) the execution and delivery of this Agreement by EUI do not, and the consummation of the transactions contemplated by this Agreement by EUI will not, constitute (i) a breach or violation of, or a default under, the charter or bylaws of EUI, or (ii) a breach, violation or impairment of, or a default under, any judgment, decree, order, statute, law, ordinance, rule or regulation now in effect applicable to either EUI or EUI's properties known to such counsel, or any agreement, indenture, mortgage, lease or other instrument of either or to which EUI is subject and in each case known to such counsel; (vii) all filings required to be made by EUI prior to or on the Closing Date with, and all consents, approvals, permits or authorizations required to be obtained by EUI prior to or on the Closing Date from, governmental and regulatory authorities of the United States and the State of Nevada in connection with the execution and delivery of this Agreement by EUI and the consummation of the transactions contemplated by this Agreement have been so made or obtained, as the case may be; (viii) all applicable requirements of the Exchange Act, the Securities Act and state Blue Sky laws related to the consummation of the transactions contemplated by this Agreement have been so met by EUI; (ix) the Employment Agreements have been duly executed and delivered by EUI and are valid and binding obligations of EUI, enforceable against EUI in accordance with their terms, subject as to enforcement to bankruptcy, reorganization, moratorium and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. In rendering the EUI Opinion, such counsel may rely on certificates of officers and other agents of EUI and public officials as to matters of fact and, as to matters relating to the law of jurisdictions other than Nevada, upon opinions of counsel of such other jurisdictions reasonably satisfactory to BNI and its counsel, provided such reliance is expressly noted in the EUI Opinion and the opinions of such other counsel and the certificates of such officers, agents and public officials relied on are attached to the EUI Opinion. (g) All actions, proceedings, instruments and documents required to carry out this Agreement, or incidental hereto, and all other legal matters shall have been approved by counsel to BNI, and such counsel shall have received all documents, certificates and other papers reasonably requested by it in connection therewith. 22 7. Closing. The Closing of the Reorganization shall take place on the Closing Date, or on such other date as the parties may mutually agree. All shares of capital stock to be delivered hereunder shall be duly endorsed or with duly executed stock powers attached, in either case in proper form for transfer, and in accordance with all necessary corporate action. 8. Escrow. 8.1 Survival of Representations and Warranties. All of the ------------------------------------------ representations and warranties by BNI and the Majority BNI Shareholders in this Agreement or in any instrument delivered at the Closing pursuant to this Agreement (each as modified by the respective section in the BNI Disclosure Schedule) and all the representations and warranties by EUI (each as modified by the respective section in the EUI Disclosure Schedule) in this Agreement or in any instrument delivered at the Closing pursuant to this Agreement shall survive the Reorganization and shall continue for the periods following the Closing Date set forth in Section 8.2(a). No other representations or warranties of BNI and the Majority BNI Shareholders shall survive the Reorganization. 8.2 Escrow Arrangements. ------------------- (a) At the Closing, the Majority BNI Shareholders will be deemed to have received and deposited with the Escrow Agent (as defined below) the Escrow Amount (plus any additional shares as may be issued upon any stock split, stock dividend or recapitalization effected by EUI after the Closing) without any act of any BNI Shareholder. As soon as practicable after the Closing, the Escrow Amount, without any act of any BNI Shareholder, will be deposited with Martin, Lois & Gasparrini, LLC, or other institution acceptable to EUI and the Securityholder Agent (as defined in Section 8.2(g) below)) as Escrow Agent (the "Escrow Agent), such deposit to constitute an escrow fund (the "Escrow Fund") to be governed by the terms set forth herein and at EUI's cost and expense. The portion of the Escrow Amount contributed on behalf of each BNI Shareholder shall be in proportion to the aggregate EUI Shares, which such holder would otherwise be entitled under Section 2.2. The Escrow Fund shall be available to compensate EUI for any claims, losses, liabilities damages, deficiencies, costs and expenses, including reasonable attorneys' fees and expenses and expenses of investigation and defense incurred by EUI, its officers or directors directly or indirectly as a result of any inaccuracy or breach of a representation or warranty of BNI or of any Majority BNI Shareholder contained herein, or in any certificate, instrument, schedule or document delivered by BNI in connection with this Agreement or the Reorganization, or any failure by BNI prior to the Closing to perform or comply with any covenant contained herein (hereinafter individually a "Loss" and collectively "Losses"), provided that claims arising out of an inaccuracy or breach of any representations and warranties and any covenant of BNI and the Majority BNI Shareholders contained in this Agreement and in any certificate, instrument, schedule or document delivered 23 by BNI or the Majority BNI Shareholders at the Closing in connection with this Agreement or the Reorganization must be asserted on or before 5:00 p.m., California time on the date that is fifteen (15) months following the Closing Date. EUI may not receive any shares from the Escrow Fund unless and until Officer's Certificates (as defined in paragraph (d) below) identifying Losses, the aggregate amount of which exceed $25,000, have been delivered to the Escrow Agent as provided in paragraph (d) and either there is no objection thereto or any objection has been resolved in accordance with the provisions of this Section 8.2. (b) Escrow Period; Distribution upon Termination of Escrow Period. ------------------------------------------------------------- Subject to the following requirements, the Escrow Fund shall be in existence immediately following the Closing and shall terminate at 5:00 p.m., California time on the date that is fifteen (15) months following the Closing Date, both such dates to be certified to the Escrow Agent in an Officer's Certificate (the "Escrow Period"). That amount of the Escrow Fund that is necessary in the reasonable judgment of EUI, subject to the objection of the Securityholder Agent and the subsequent arbitration of the matter in the manner provided in Section 8.2(f) hereof, to satisfy any unsatisfied claims (and reasonable legal and other fees) asserted prior to the termination of such Escrow Period as are specified in any Officer's Certificate delivered to the Escrow Agent prior to termination of such Escrow Period, may be retained in the Escrow Fund after termination of the Escrow Period. As soon as all such claims have been resolved as evidenced by the written memorandum of the Securityholder Agent and EUI, the Escrow Agent shall deliver to the BNI Shareholders the remaining portion of the Escrow Fund that is not required to satisfy such claims and related expenses. If no Officer's Certificate pertaining to unsatisfied claims is delivered to the Escrow Agent prior to the termination of the Escrow Period, upon termination of the Escrow Period, the Escrow Agent, without further authorization or instruction shall distribute the remainder of the Escrow Fund to the BNI Shareholders in accordance with the provisions of this Section 8.2(b). Deliveries of Escrow Amounts to the BNI Shareholders pursuant to this Section 8.2(b) shall be made in proportion to their respective original contributions to the Escrow Fund (as set forth in Exhibit A delivered to the Escrow Agent immediately upon the formation of the Escrow Fund). (c) Protection of Escrow Fund. ------------------------- (i) The Escrow Agent shall hold and safeguard the Escrow Fund during the Escrow Period, shall treat such fund as a trust fund in accordance with the terms of this Agreement and not as the property of EUI and shall hold and dispose of the Escrow Fund only in accordance with the terms hereof. (ii) Any of the EUI Shares or other equity securities issued or distributed by EUI (including shares issued upon a stock split) ("New Shares") in respect of EUI Shares in the Escrow Fund which have not been released from the Escrow Fund shall be deposited with the Escrow Agent and added to the Escrow Fund and become a part thereof. New Shares issued in respect of shares of EUI Shares which have been released from the Escrow Fund shall not be added to the Escrow Fund but shall be distributed to the record holders thereof. Cash dividends on EUI Shares held in the Escrow Fund shall not be added to the Escrow Fund but shall be distributed to the record holders thereof. 24 (iii) Until a claim is made by EUI under this Section 8.2, each BNI Shareholder shall have voting rights with respect to the EUI Shares contributed to the Escrow Fund by such BNI Shareholder (and on any voting securities added to the Escrow Fund in respect of such EUI Shares). (d) Claims Upon Escrow Fund. ----------------------- (i) Upon receipt by the Escrow Agent at any time on or before the last day of the Escrow Period of a certificate signed by any officer of EUI (an "Officer's Certificate''): (A) stating that EUI has paid or properly accrued or reasonably anticipates that it will have to pay or accrue Losses, and (B) specifying in reasonable detail the individual items of Losses included in the amount so stated, the date each such item was paid or properly accrued, or the basis for such anticipated liability and the nature of the misrepresentation, breach of warranty or covenant to which such item is related, the Escrow Agent shall, subject to the provisions of Section 8.2(e) hereof, deliver to EUI out of the Escrow Fund, as promptly as practicable, EUI Shares held in the Escrow Fund in an amount equal to such Losses. (ii) For the purposes of determining the number of EUIShares to be delivered to EUI out of the Escrow Fund pursuant to Section 8.2(d)(i) hereof, the EUI Shares shall be valued at the price per share of the EUI Shares on the Closing Date. (e) Objections to Claims. At the time of delivery of any Officer's -------------------- Certificate to the Escrow Agent, a duplicate copy of such certificate shall be delivered to the Securityholder Agent and for a period of thirty (30) days after receipt of such Officer's Certificate, the Escrow Agent shall make no delivery to EUI of any Escrow Amounts pursuant to Section 8.2(d) hereof unless the Escrow Agent shall have received written authorization from the Securityholder Agent to make such delivery. After the expiration of such thirty (30) day period, the Escrow Agent shall make delivery of shares of EUI Shares from the Escrow Fund in accordance with Section 8.2(d) hereof, provided that no such payment or delivery may be made if the Securityholder Agent shall object in a written statement to the claim made in the Officer's Certificate, and such statement shall have been delivered to the Escrow Agent prior to the expiration of such thirty (30) day period. (f) Resolution of Conflicts; Arbitration. ------------------------------------ (i) In case the Securityholder Agent shall so object in writing to any claim or claims made in any Officer's Certificate, the Securityholder Agent and EUI shall attempt in good faith to agree upon the rights of the respective parties with respect to each of such claims. If the Securityholder Agent and EUI should so agree, a memorandum setting forth such agreement shall be prepared and signed by both parties and shall be furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on any such memorandum and distribute EUI Shares from the Escrow Fund in accordance with the terms thereof. 25 (ii) If no such agreement can be reached after good faith negotiation, either EUI or the Securityholder Agent may demand arbitration of the matter unless the amount of the damage or loss is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties agree to arbitration; and in such matter shall be settled by arbitration conducted by three arbitrators. EUI and the Securityholder Agent shall each select one arbitrator, and the two arbitrators so selected shall select a third arbitrator, each of which arbitrators shall be independent and have at least ten years relevant experience. The arbitrators shall set a limited time period and establish procedures designed to reduce the cost and time for discovery while allowing the parties an opportunity, adequate in the sole judgment of the arbitrators, to discover relevant information from the opposing parties about the subject matter of the dispute. The arbitrators shall rule upon motions to compel or limit discovery and shall have the authority to impose sanctions, including attorneys' fees and costs, to the same extent as a court of competent law or equity, should the arbitrators determine that discovery was sought without substantial justification or that discovery was refused or objected to without substantial justification. The decision of a majority of the three arbitrators as to the validity and amount of any claim in such Officer's Certificate shall be binding and conclusive upon the parties to this Agreement, and notwithstanding anything in Section 8.2(e) hereof, the Escrow Agent shall be entitled to act in accordance with such decision and make or withhold payments out of the Escrow Fund in accordance therewith. Such decision shall be written and shall be supported by written findings of fact and conclusions which shall set forth the award, judgment, decree or order awarded by the arbitrators. (iii) Any arbitration under this Section 8 shall be held in San Francisco County, California, and shall be conducted by, and under the Commercial Arbitration Rules then in effect, of the American Arbitration Association. For purposes of this Section 8.2(f), in any arbitration hereunder in which any claim or the amount is at issue, EUI shall be deemed to be the Non- Prevailing Party in the event that the arbitrators award EUI less than the sum of one-third (1/3) of the disputed amount; otherwise, the BNI Shareholders as represented by the Securityholder Agent shall be deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an arbitration shall pay its own expenses, the fees of each arbitrator, the administrative costs of the arbitration, and the expenses, including without limitation reasonable attorneys' fees and costs, incurred by the other party to the arbitration. Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. The Securityholder Agent may pay such amounts (including without limitation unreimbursed expenses of counsel for the BNI Shareholders and EUI, arbitrator fees and administrative costs) by distributing shares of EUI Shares from the Escrow Fund with respect to which EUI has not made a claim; provided, however, that no EUI Shares may be distributed from the Escrow Fund prior to the termination of the Escrow Period and such shares may be distributed only to the extent that such shares are not required to satisfy any claim for Losses. (g) Securityholder Agent of the BNI Shareholders; Power of Attorney. --------------------------------------------------------------- (i) In the event that the Reorganization is approved, effective upon such vote, and without further act of any Shareholder, Stephen Sellers shall be appointed as agent and attorney-in-fact (the "Securityholder Agent") for each BNI Shareholder (except such BNI 26 Shareholders, if any, as shall have perfected their appraisal or dissenters' rights under California Law), for and on behalf of BNI Shareholders, to give and receive notices and communications, to authorize delivery to EUI of EUI Shares from the Escrow Fund in satisfaction of claims by EUI, to object to such deliveries, to agree to, negotiate, enter into settlements and compromises of, and demand arbitration and comply with orders of courts and awards of arbitrators with respect to such claims, and to take all actions necessary or appropriate in the judgment of Securityholder Agent for the accomplishment of the foregoing. Such agency may be changed by the BNI Shareholders from time to time upon no less than thirty (30) days prior written notice to EUI and Escrow Agent; provided that the Securityholder Agent may not be removed unless holders of a two-thirds interest of the Escrow Fund agree to such removal and to the identity of the substituted agent. Any vacancy in the position of Securityholder Agent may be filled by approval of the holders of a majority in interest of the Escrow Fund. No bond shall be required of the Securityholder Agent, and the Securityholder Agent shall not receive compensation for his or her services. Notices or communications to or from the Securityholder Agent shall constitute notice to or from each of the BNI Shareholders. (ii) The Securityholder Agent shall not be liable for any act done or omitted hereunder as Securityholder Agent while acting in good faith and in a manner that is not grossly negligent. (h) Actions of the Securityholder Agent. A decision, act, consent or ----------------------------------- instruction of the Securityholder Agent shall constitute a decision of all the BNI Shareholders for whom a portion of the Escrow Amount otherwise issuable to them is deposited in the Escrow Fund and shall be final, binding and conclusive upon each of such BNI Shareholders, and the Escrow Agent and EUI may rely upon any such decision, act, consent or instruction of the Securityholder Agent as being the decision act, consent or instruction of each and every such BNI Shareholder of BNI. The Escrow Agent and EUI are hereby relieved from any liability to any person for any acts done by them in accordance with such decision, act, consent or instruction of the Securityholder Agent. (i) Third-Party Claims. In the event either EUI or any BNI ------------------ Shareholder becomes aware of a third-party claim which it believes may result in a demand against the Escrow Fund, such party shall notify the Securityholder Agent or EUI, as the case may be, of such claim, and the Securityholder Agent, as representative for the BNI Shareholders, shall be entitled, at the expense of the BNI Shareholders, to participate in any defense of such claim. EUI shall have the right in its sole discretion to settle any such claim; provided, however, that except with the consent of the Securityholder Agent, no settlement of any such claim with third-party claimants shall alone be determinative of the amount of any claim against the Escrow Fund. In the event that the Securityholder Agent has consented to any such settlement and acknowledged that the claim is a valid claim against the Escrow Fund, the Securityholder Agent shall have no power or authority to object under any provision of this Section 8 to the amount of any claim by EUI against the Escrow Fund with respect to such settlement amount. (j) Escrow Agent's Duties. --------------------- 27 (i) The Escrow Agent shall be obligated only for the performance of such duties as are specifically set forth in this Section 8.2, and as set forth in any additional written escrow instructions which the Escrow Agent may receive after the date of this Agreement which are signed by an officer of EUI and the Securityholder Agent and approved by the Escrow Agent, and may rely and shall be protected in relying or refraining from acting on any Officer's Certificate, memorandum, instruction or other instrument reasonably believed to be genuine and to have been signed or presented by the proper party or parties. The Escrow Agent shall not be liable for any act done or omitted hereunder as Escrow Agent while acting in good faith and in the exercise of reasonable judgment, and any act done or omitted pursuant to the advice of counsel shall be conclusive evidence of such good faith. (ii) Except as otherwise provided herein, the Escrow Agent is hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person, excepting only orders or process of courts of law, and is hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In the event that the Escrow Agent obeys or complies with any such order, judgment or decree of any court, the Escrow Agent shall not be liable to any of the parties hereto or to any other person by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. (iii) The Escrow Agent shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver this Agreement or any documents or papers deposited or called for hereunder. (iv) The Escrow Agent shall not be liable for the expiration of any rights under any statute of limitations with respect to this Agreement or any documents deposited with the Escrow Agent. (v) In performing any duties under the Agreement, the Escrow Agent shall not be liable to any party for damages, losses, or expenses, except for gross negligence or willful misconduct on the part of the Escrow Agent. The Escrow Agent shall not incur any such liability for (A) any act or failure to act made or omitted in good faith, or (B) any action taken or omitted in reliance upon any instrument, including any written statement or affidavit provided for in this Agreement that the Escrow Agent shall in good faith believe to be genuine, nor will the Escrow Agent be liable or responsible for forgeries, fraud, impersonations, or determining the scope of any representative authority. In addition, the Escrow Agent may consult with legal counsel in connection with Escrow Agent's duties under this Agreement and shall be fully protected in any act taken, suffered, or permitted by it in good faith in accordance with the advice of counsel. The Escrow Agent is not responsible for determining and verifying the authority of any person acting or purporting to act on behalf of any party to this Agreement. (vi) If any controversy arises between the parties to this Agreement, or with any other party, concerning the subject matter of this Agreement, its terms or conditions, the Escrow Agent will not be required to determine the controversy or to take any action regarding 28 it. The Escrow Agent may hold all documents and EUI Shares and may wait for settlement of any such controversy by final appropriate legal proceedings or other means as, in the Escrow Agent's discretion, may be required, despite what may be set forth elsewhere in this Agreement. In such event, the Escrow Agent will not be liable for damage. Furthermore, the Escrow Agent may at its option, file an action of interpleader requiring the parties to answer and litigate any claims and rights among themselves. The Escrow Agent is authorized to deposit with the clerk of the court of competent jurisdiction all documents and EUI Shares held in escrow, except all costs, expenses, charges and reasonable attorney fees incurred by the Escrow Agent due to the interpleader. The parties jointly and severally agree to immediately pay the Escrow Agent, to the extent not previously reimbursed, such amounts so incurred by the Escrow Agent upon the Escrow Agent's demand therefor, which demand may be made at any time before or after completion of such action of interpleader. Upon initiating such action, the Escrow Agent shall be fully released and discharged of and from all obligations and liability imposed by the terms of this Agreement. (vii) EUI and the BNI Shareholders agree jointly and severally to indemnify and hold the Escrow Agent harmless against any and all losses, claims, damages, liabilities and expenses, including reasonable costs of investigation, counsel fees, and disbursements that may be imposed on the Escrow Agent or incurred by Escrow Agent in connection with the performance of its duties under this Agreement, including but not limited to any litigation arising from this Agreement or involving its subject matter. (viii) The Escrow Agent may resign at any time upon giving at least thirty (30) days written notice to EUI and the Securityholder Agent; provided, however, that no such resignation shall become effective until the appointment of a successor escrow agent which shall be accomplished as follows: EUI and the Securityholder Agent shall use their best efforts to mutually agree on a successor escrow agent within thirty (30) days after receiving such notice. If EUI and the Securityholder Agent fail to agree upon a successor escrow agent within such time, the Escrow Agent shall have the right to appoint a successor escrow agent. The successor escrow agent shall execute and deliver an instrument accepting such appointment and it shall, without further acts, be vested with all the estates, properties, rights, powers, and duties of the predecessor escrow agent as if originally named as escrow agent. Thereafter, the predecessor escrow agent shall be discharged from any further duties and liability under this Agreement. (k) Fees. All fees of the Escrow Agent for performance of its ---- duties hereunder shall be paid by EUI. It is understood that the fees and usual charges agreed upon for services of the Escrow Agent shall be considered compensation for ordinary services as contemplated by this Agreement. In the event that the conditions of this Agreement are not promptly fulfilled, or if the Escrow Agent renders any service not provided for in this Agreement, or if the parties request a substantial modification of its terms, or if any controversy arises, or if the Escrow Agent is made a party to, or intervenes in, any litigation pertaining to this escrow or its subject matter, the Escrow Agent shall be reasonably compensated for such extraordinary services and reimbursed for all costs, attorney's fees, and expenses occasioned 29 thereby. EUI promises to pay these sums upon demand. (l) Consequential Damages. In no event shall the Escrow Agent be --------------------- liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Escrow Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. 9. Termination. 9.1 This Agreement shall terminate prior to the Closing upon the occurrence of any of the following: (a) the written agreement of all parties to this Agreement; (b) the bankruptcy, receivership or dissolution of BNI or EUI; or (c) the failure to satisfy any of the conditions precedent as provided in Section 6 above, in which case this Agreement shall be null and void and the parties shall have no further obligations hereunder, except for the obligations set forth in Section 10 herein, provided that the parties have used reasonable efforts to satisfy such conditions precedent. 10. Publicity. Neither BNI nor the Majority BNI Shareholders shall issue any press release or otherwise make any public statements with respect to the Reorganization or this Agreement or the transactions contemplated herein without consulting EUI and obtaining the prior written consent of EUI. As a breach or threatened breach of any of the provisions of this Section 10 of this Agreement by BNI or the Majority BNI Shareholders cannot be adequately compensated for in money damages and would cause irreparable harm to the non-breaching party, the parties agree that in the event of a breach or threatened breach of any of the provisions of this Section 10, EUI shall have the right, in addition to any other remedies available to it at law or in equity, to enjoin the breaching party in a court of equity from violating or threatening to violate its obligations under this Section 10 and recover all reasonable costs and expenses (including, without limitation, reasonable attorney's fees and expenses) incurred in connection with the enforcement of any of the provisions of this Section 10. 11. Indemnification. 11.1 Obligation of the Majority BNI Shareholders to Indemnify. The Majority BNI Shareholders shall, jointly and severally, indemnify, defend and hold harmless EUI, together with its officer, directors, employees, agents and representatives from and against any and all 30 losses, judgments, claims, awards, damages, settlements, costs and expenses, including, without limitation, attorneys fees, resulting from, imposed upon, sustained or incurred by EUI, directly or indirectly, as a result or arising out of any the following: (i) the breach of any representation, warranty or covenant of BNI or the Majority BNI Shareholders, or each of them, contained herein or in any agreement or document executed and delivered in connection with the transactions contemplated herein at or before the date hereof under this Agreement; or (ii) the BNI Business prior to the Closing or any other business of the Majority BNI Shareholders related to the BNI Business, or each of them, or any act, omission, debt, obligation or liability of the Majority BNI Shareholders, or each of them, their agents, contractors, employees, officers, directors. 11.2 Obligation of EUI to Indemnify. EUI shall indemnify, defend and hold harmless the Majority BNI Shareholders from and against any and all losses, judgments, claims, awards, damages, settlements, costs and expenses, including, without limitation, reasonable attorneys' fees, sustained or incurred by the Majority BNI Shareholders as a result of EUI's breach of any representation, warranty or covenant of EUI in this Agreement. 11.3 Notice to Indemnifying Party. If any party (the "Indemnitee") receives notice of any third-party claim or of the commencement of any action or proceeding or becomes aware of the occurrence of any event with respect to which any other party (or parties) (the "Indemnifying Party") is required to provide indemnification pursuant to Section 11.1 or 11.2, the Indemnitee shall promptly give the Indemnifying Party notice thereof. The Indemnifying Party may take control of the defense, settlement or compromise of such claim, action or proceeding at the Indemnifying Party's own expense and with the assistance of the Indemnifying Party's own counsel, which counsel shall be reasonably acceptable to the Indemnitee. If the Indemnifying Party chooses to defend any claim, the Indemnitee shall make available to the Indemnifying Party any books, records or other documents within its control that are necessary or appropriate for such defense, and shall otherwise cooperate fully with the Indemnifying Party. The Indemnitee shall also have the right to participate in any defense and/or settlement of a claim at the Indemnitee's expense and may, if the Indemnifying Party shall not choose to defend or resist said claim within twenty (20) days after notice thereof from the Indemnitee (or such shorter time specified in the notice as the circumstances of the matter may dictate), dispose of the matter at the reasonable cost of the Indemnifying Party in any way it reasonably deems to be in its best interest. 11.4 Limitation. Notwithstanding anything to the contrary set forth herein, except with respect to claims based on fraud, bad faith, gross negligence or willful misconduct, the aggregate liability of the Majority BNI Shareholders, other than those described in clause (ii) of Section 11.1(a), shall not exceed the Escrow Amount, and the sole remedy of EUI for damages under this Section 11 shall be to make a claim against the Escrow Amount in accordance with Section 8 of this Agreement. No Majority BNI Shareholder shall have any right of contribution, subrogation or recovery against BNI with respect to any liability of any of the Majority BNI Shareholders or BNI that may arise out of any of its representations, warranties, covenants or agreements hereunder. Each Majority BNI Shareholder hereby irrevocably waives any and all right to recourse against BNI with respect to any misrepresentation or breach of any representation, warranty or indemnity, or noncompliance with any conditions or covenants, given or made by the Majority BNI 31 Shareholders or BNI in this Agreement or in any document, certificate or agreement entered into or delivered pursuant to this Agreement. 12. Miscellaneous. 12.1 Successors and Assigns. This Agreement shall be binding upon and ---------------------- shall inure to the benefit of each of the parties hereto and their respective heirs, legal representatives, successors and assigns, and shall also be binding on all Persons who have or claim an interest in any shares of capital stock of BNI. 12.2 Entire Agreement. This Agreement constitutes the entire understanding ---------------- between the parties with respect to the subject matter hereof and no modification, discharge or waiver, in whole or in part, of any of the provisions contained herein or therein shall be valid unless in writing and signed by the parties. All exhibits and attachments referenced herein are hereby incorporated by reference. 12.3 Headings. The paragraph headings in this Agreement are for -------- convenience of reference and do not constitute part of the agreement. 12.4 Validity. If any provision of this Agreement is found to be invalid -------- or unenforceable, such provision shall be, and shall be deemed to be modified so as to cure the invalidity or unenforceability, and all other provisions of this Agreement shall be enforceable notwithstanding such invalidity or unenforceability. 12.5 Governing Law; Consent to Jurisdiction. This Agreement shall be -------------------------------------- construed and enforced in accordance with the laws of the State of Connecticut. 12.6 Enforcement. In the event that either party hereto commits a breach ----------- of that party's obligations hereunder, the non-breaching party damaged thereby shall be entitled to recover from the party in breach the costs and expenses incurred, including reasonable attorneys' fees and disbursements, in connection with enforcing the provisions hereof. The obligation of any Person to transfer shares in accordance with the terms of this Agreement may be specifically enforced by any court of competent jurisdiction, it being acknowledged and agreed that money damages will not provide an adequate remedy for the breach of any such obligation. The rights and remedies set forth in this subsection shall be in addition to, and not in lieu of, any other rights and remedies available at law or in equity. 12.7 Notices. All notices and other communications hereunder shall be in ------- writing (and shall be deemed given upon receipt) if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to EUI, to 32 eUniverse, Inc. 100 North Industrial Plains Road Wallingford, CT 06492 Attention: President --------- with a copy to Christopher G. Martin, Esq. Martin, Lois & Gasparrini, LLC 1177 Summer Street Stamford, CT 06905 (b) if to BNI, to The Big Network, Inc. 78 First St., Fifth floor San Francisco, CA 94105 Attention: Steve Sellers with a copy to: Thomas J. Cervantez, Esq. Britton Silberman & Cervantez LLP 461 Second Street, Suite 332 San Francisco, CA 94117 12.9 Waivers. No waiver by a party, or by anyone claiming by, through or ------- under such party, of any right or of the breach of any representation, warranty, covenant, agreement, condition or duty, shall ever be held or construed as a waiver of the same or any other right or waiver of any other breach of the same or of any representation, warranty, covenant, agreement, condition, or duty. In the event of a breach by a party of any representation, warranty, covenant, agreement, condition or duty, the failure by any other party to take action on account of such breach or to enforce any rights resulting therefrom shall not be deemed a waiver, and such breach shall be a continuing breach until the same has been cured. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a continuing waiver unless otherwise expressly provided therein. 12.10 Confidentiality. BNI shall not, and BNI shall use its best efforts --------------- to ensure that all BNI Personnel do not, discuss with or disclose to any Person other than BNI or any individual other than BNI Personnel any term or terms of this Agreement or that certain letter of intent between EUI and BNI dated June 9, 1999. ---------------------------------------- 33 Signatures appear on the following page. 34 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. eUNIVERSE, INC. By______________________________________ Its THE BIG NETWORK, INC. By_______________________________________ Its MAJORITY BNI SHAREHOLDERS _________________________________________ STEPHEN D. SELLERS _________________________________________ JOHN V. HANKE _________________________________________ MICHAEL J. SELLERS 35 EX-10.17 4 LETTER AGREEMENT EXHIBIT 10.17 July 30, 1999 Mr. Stephen D. Sellers Mr. John V. Hanke The Big Network, Inc. 2680 Bancroft Way Berkeley, CA 94704 Re: Agreement and Plan of Reorganization by and among eUniverse, Inc. (the "Company"), The Big Network, Inc. ("BNI") and certain shareholders of BNI (the "Agreement") Dear Messrs. Sellers and Hanke: In connection with and in consideration of the above-referenced transaction, this letter confirms our agreement that, commencing on the Closing Date of the Agreement and until such time that neither Steve Sellers or John Hanke are employed by the Company, Brad Greenspan shall vote his shares of capital stock in the Company to elect either Steve Sellers or John Hanke (as mutually agreed by Sellers and Hanke) to serve as a member of the Board of Directors of the Company. Accordingly, to effectuate the foregoing, the parties hereby further agree as follows: 1. Brad D. Greenspan and Charles Beilman shall vote all shares of capital stock of the Company collectively owned by them for the election of the person nominated by Messrs. Sellers and Hanke to the Board of Directors; 2. Effective as of the first date that both Mr. Sellers and Mr. Hanke are no longer employed by the Company, the person nominated to the Board of Directors of the Company by Messrs. Sellers and Hanke will resign as a member of the Board of Directors of the Company. Kindly acknowledge receipt and agreement to the foregoing by signing in the appropriate space below and returning an executed copy of this letter agreement to the undersigned at the address stated above. Sincerely, Brad D. Greenspan Charles Beilman ACCEPTED AND AGREED TO this ___ day of July, 1999. _____________________________ Stephen D. Sellers _____________________________ John V. Hanke EX-10.18 5 EMPLOYMENT AGREEMENT - JOHN HAIDUCK EXHIBIT 10.18 June 17, 1999 Mr. James Haiduck 1911 Matzen Ranch Circle Petuluma, CA 94954 Dear Jim: This letter sets forth our agreement on the terms and conditions of your employment by eUniverse, Inc., a Nevada corporation (the "Company"). 1. Term of Employment. Subject to the terms and conditions of this letter ------------------ agreement, the Company agrees to employ you and you hereby accept employment with the Company, on a full-time basis commencing on August 1, 1999. You or the Company may terminate the employment relationship under this agreement upon (30) days written notice. For all purposes under this letter agreement, you are an employee-at-will of the Company. The period during which you are employed by the Company pursuant to this agreement shall be referred to as the "Employment Period." 2. Position and Duties. The Company hereby employs you as Vice President, ------------------- Sales. You shall report directly to the President and Chief Executive Officer of the Company. You hereby agree that you will not engage in services for hire for any employer other than the Company during the Employment Period. 3. Compensation. ------------ (a) Base Salary. The Company shall to pay to you, as base ------------ compensation for the services to be rendered by you pursuant to this agreement of $108,000.00 on an annualized basis (the "Base Salary"), in accordance with ----------- the Company's normal payroll practices. (b) Review and Adjustment of Salary. On an annual basis, the Company -------------------------------- shall review your performance and other relevant factors relating to salary, and at the time of such review, the Base Salary may be increased as determined in the sole discretion of the Compensation Committee of the Board of Directors of the Company. (c) Bonuses. In addition to the Base Salary, you shall be eligible to ------- receive an annual bonus as determined by the Compensation Committee of the Board of Directors of the Company. Mr. James Haiduck June 17, 1999 Page 2 4. Stock Grants and Options. ------------------------ (a) Stock Options. Pursuant to the Company's 1999 Stock Awards Plan -------------- and Section 422 of the Internal Revenue Code, the Company hereby grants you options (the "Stock Options") to purchase 200,000 shares of common stock, $.001 ------------- par value, of the Company (the Shares") at an exercise price per share of $9.50. One-twelfth of the Stock Options shall vest and become exercisable ("Vest") over ---- the period from the date of this Agreement through July 31, 2002 as follows: 16,667 of said Stock Options shall Vest on the last day of each January, April, July and October, commencing on October 31, 1999 and continuing until the first to occur of (i) all 200,000 of said Stock Options have Vested, or (ii) you are no longer employed by the Company. The number of Shares exercisable pursuant to the Stock Options shall be adjusted for any stock-splits or stock dividends by the Company after the date hereof. (b) Accelerated Vesting of Stock Options Upon a Change of Control. ------------------------------------------------------------- In the event of a "Change of Control" of the Company during the Employment Period, all of the remaining Stock Options granted in Section 4(a) above shall immediately Vest as of the date of the Change of Control. "Change of Control" shall occur: (i) upon the acquisition by any person, including a group (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended), other than the Company or any of its subsidiaries or any executive benefit plan maintained by the Company or any of its subsidiaries, of beneficial ownership of 50% or more of the outstanding stock of the Company entitled to vote; (ii) upon the approval by the shareholders of the Company of a definitive agreement for the merger, consolidation, liquidation, recapitalization or sale of substantially all of the assets of the Company; or (iii) Upon a sale or other transfer of all or substantially all of the assets of the Company in one or a series of transactions. 5. Reimbursement of Expenses. The Company shall reimburse you for normal ------------------------- and reasonable business expenses incurred by you in the course of your employment, including the reasonable costs for transportation and accommodations when you are required to travel away from the location in which you are employed. Such reimbursement shall be subject to the Company's standard procedures with respect to reimbursement, including such matters as pre-approval requirements, lodging and meal allowances, and reimbursement rates for automobile travel. 6. Benefits. You shall be entitled to participate in all benefit plans -------- that the Company provides to the other employees of the Company. Mr. James Haiduck June 17, 1999 Page 3 7. Vacation. You shall be entitled to three (3) weeks of vacation per -------- year earned pro rata throughout each year. 8. Confidentiality. You acknowledge that in connection with your --------------- employment by the Company, you will have access to trade secrets of the Company and other information and materials which the Company desires to keep confidential, including customer lists, supplier lists, financial statements, business records and data, marketing and business plans, and information and materials relating to the Company's services, products, methods of operation, key personnel, proprietary software and other proprietary intellectual property (collectively, the "Confidential Information"); provided however, that ------------------------ Confidential Information does not include information which (i) is or becomes publicly known through the lawful action of any party other than you; (ii) has been made available by the Company, directly or indirectly, to a non-affiliated third party without obligation of confidentiality; or (iii) you are obligated to produce as a result of a court order or pursuant to governmental action or proceeding. You covenant and agree that, both during and after the Employment Period, you will keep secret all Confidential Information and will not disclose, reveal, divulge or otherwise make known any Confidential Information to any person (other than the Company or its executives or agents in the course of performing your duties hereunder) or use any Confidential Information for your own account or for the benefit of any other individual or entity, except with the prior written consent of the Company. 9. Ownership of Intellectual Property. You agree that all inventions, ---------------------------------- copyrightable material, software, formulas, trademarks, trade secrets and the like which are developed or conceived by you in the course of your employment by the Company (collectively, the "Intellectual Property"), shall be disclosed --------------------- promptly to the Company and the Company shall own all right, title and interest in and to the Intellectual Property. All of the Intellectual Property shall be considered works made-for-hire pursuant to the United States Copyright Act of 1976, as amended from time to time. In order to ensure that the Company shall own all right, title and interest in and to the Intellectual Property in the event that any of the Intellectual Property is not deemed a work made-for-hire and in any other event, you hereby assign all such Intellectual Property to the Company, and you agree to affix to the Intellectual Property appropriate legends and copyright notices indicating the Company's ownership of all Intellectual Property and all underlying documentation to the extent reasonably appropriate, and will execute such instruments of transfer, assignment, conveyance or confirmation as the Company considers necessary to transfer, confirm, vest, perfect, maintain or defend the Company's right, title and interest in and to the Intellectual Property. 10. Non-Solicitation. You will not, during your employment with the ---------------- Company and for a period of six (6) months following the termination of your employment with the Company, either for your benefit or for the benefit of any other person or entity, directly or indirectly solicit any contractor, employee or customer of the Company or its affiliates ("customer" shall mean any person or entity to which the Company or any of its affiliates has provided services or provided a proposal to provide services within the six (6) months preceding the date of Mr. James Haiduck June 17, 1999 Page 4 termination of your employment with the Company) to terminate his or her employment or other relationship with the Company or its affiliates. 11. Non-Disparagement. You will not, during your employment with the ----------------- Company or at any time thereafter, publicly disparage the Company, its affiliates and shareholders or any of their officers, directors, employees or agents, other than in connection with disclosures required by applicable law, regulation or order of court or governmental agency. 12. Entire Agreement. This agreement contains all of the representations, ---------------- covenants and agreements between you and the Company with respect to the subject matter hereof, and constitutes the entire agreement between you and the Company with respect to said subject matter. This agreement supersedes any and all other prior or contemporaneous agreements, whether oral or in writing, between you and the Company with respect to the subject matter thereof. 13. Governing Law. This agreement shall be governed by and construed in ------------- accordance with the laws of the State of Connecticut without giving effect to the conflicts of law principles thereof. 14. Amendment. Following your execution of this letter, no provision --------- thereof may be amended unless such amendment is agreed to in writing and signed by you and an authorized officer of the Company. 15. Remedy. You hereby recognize and agree that the Company would not have ------ an adequate remedy at law or in equity for the breach or threatened breach by you of any one or more of the covenants set forth in paragraphs 8, 9, 10 and 11 and agree that, in addition to such other remedies as may be available to the Company, in law or in equity, the Company may obtain an injunction or restraining order, without the posting of any bond or security and without the proof of special damages, to enjoin you from the breach or threatened breach of such covenants. The restrictions set forth in paragraphs 8, 9, 10 and 11 are considered by you and the Company to be reasonable for the purposes of protecting the business of the Company. However, if any such restriction is found by a court of competent jurisdiction to be unenforceable because it is too broad, it is the intention of you and the Company that such restriction shall be interpreted to be as broad as possible consistent with allowing its enforceability. 16. Survival of Obligations. You agree that your obligations under ----------------------- paragraphs 8, 9 10 and 11 will survive any termination of your employment. 17. Notices. All notices, requests, demands and other communications ------- hereunder shall be in writing and shall be deemed to have been duly given if delivered in person or by reputable commercial messenger service or if mailed by registered or certified mail, postage prepaid, return receipt requested. Mr. James Haiduck June 17, 1999 Page 5 Our respective signatures below indicate our mutual assent to the terms of this letter agreement. Very truly yours, eUniverse, Inc. By:______________________________________ Leland N. Silvas Its President and Chief Executive Officer Accepted and agreed to: ______________________________ James Haiduck EX-10.19 6 EMPLOYMENT AGREEMENT - STEPHEN D. SELLERS EXHIBIT 10.19 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the --------- Closing Date, by and between eUniverse, Inc., a corporation organized under the laws of the State of Nevada (the "Company"), and Stephen D. Sellers, an ------- individual residing in Oakland, California (the "Employee"). Except as -------- otherwise defined herein, capitalized terms used herein and defined in that certain Agreement and Plan of Reorganization by and among the Company, The Big Network, Inc. ("BNI"), the Employee and certain shareholders of BNI (the "Reorganization Agreement") shall be used herein as so defined. WITNESSETH: ---------- WHEREAS, the Employee and Company have entered into the Reorganization Agreement, providing for the sale of all of the BNI capital stock owned by the Employee to the Company; and WHEREAS, the Company desires to employ the Employee, and the Employee desires to accept such employment, on the terms and subject to the conditions hereinafter set forth; NOW, THEREFORE, for and in consideration of the premises and mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Term of Employment. ------------------- Subject to the terms and conditions of this Agreement, the Company hereby employs the Employee and the Employee hereby accepts employment with the Company pursuant to this Agreement for the period commencing on the Closing Date (the "Commencement Date"), and ending twelve months after the Commencement Date. - ------------------ Said period of time is hereinafter referred to as the "Initial Term". ------------ Subsequent to the last day of the Initial Term, if the parties do not expressly agree in writing to extend this Agreement for a specified period of time, the Employee's employment by the Company shall continue pursuant to the terms of this Agreement except that the Employee shall be an employee-at-will, without a specified term of employment. As used herein, the term "Employment Period" shall mean the entire period ----------------- of time that the Employee is employed by the Company, inclusive of the Initial Term, any extensions hereof for a specified period of time, and any period during which the Employee is an employee-at-will without a specified term of employment. 2. Position; Duties and Place of Employment. ----------------------------------------- (a) The Company hereby employs the Employee as Vice President, Business Affairs. The Employee shall report to the Chief Executive Officer; provided, however, that the Company, in its sole discretion, shall have the right to make changes in the Employee's reporting assignment. The Employee and the Company agree that the Employee's duties and areas of authority shall be as described on Exhibit "A" attached hereto and shall also include such other duties as shall from time to time be assigned to him reasonably and in good faith by the Company. (b) The Employee shall perform his duties faithfully, diligently and to the best of his ability in accordance with the reasonable directions and orders of the person to whom he reports, and the Company's Board of Directors, or their designees, and shall devote such time, efforts and attention to the business and affairs of the Company as may reasonably be required to achieve its objectives and to perform the duties required hereunder. The Employee shall devote substantially all of his working time, efforts and attention for the benefit of the Company and to the performance of his duties and responsibilities under this Agreement. (c) The Employee shall not render to others any service of any kind for compensation without the prior approval of the Chief Executive Officer of the Company, which approval shall be at his sole discretion to grant or deny. The Employee shall not engage in any activity, including any ownership interest, which conflicts or interferes with the performance of duties hereunder or usurps the business interests, existing or potential, of the Company, provided, that Employee shall not be prohibited from acquiring a five percent (5%) or under ownership interest in any other publicly traded company. (d) The place of employment of the Employee shall be at San Francisco, California. During the Employment Period, the Company shall lease or sublease approximately 2300 square feet of office space in San Francisco, California for the Company's operations (the "San Francisco Office"). During the Employment Period, Employee shall work in the San Francisco office and the Company shall pay all support costs and lease payments for the San Francisco Office up to an amount equal to $10,000.00 per month. At any time that the Company and the Employee deem it to be appropriate, the Employee shall temporarily work at other place or places as may be determined by the Company. (e) Except as authorized by the Company in writing or under the terms of this Agreement, the Employee shall not have any right to obligate or bind the Company in any manner whatsoever nor represent to third parties that he has any right to enter into any binding obligation on the Company's behalf. 3. Compensation. ------------- (a) During the Initial Term, the Company shall pay to the Employee, as compensation for Employee's services and his compliance with this Agreement, a salary of $96,000 per annum, payable in periodic installments in accordance with the Company's normal payroll practices (the "Compensation"), and the whole amount of which shall be guaranteed for the Initial Term as provided herein. (b) In addition to the Compensation set forth above in Section 3(a), within thirty (30) days from the date of this Agreement, Employee shall be granted an option to purchase 300,000 shares of Common Stock of the Company, at a per share price of $8.25 with such shares vesting quarterly over a three year period. 4. Benefits. -------- The Company shall provide the Employee with coverage pursuant to a medical plan which shall be selected by the Company in its sole discretion. The Employee shall also be entitled to participate in all other benefit plans provided by the Company to which Employee is eligible. 5. Reimbursement of Expenses. -------------------------- The Company shall reimburse the Employee for normal and reasonable business expenses incurred by him in the course of his employment, including the reasonable costs for transportation and accommodations when the Employee is required by the Company to travel away from the location set forth at Section 2(d) herein. Such reimbursement shall be subject to the Company's standard procedures with respect to reimbursement, including such matters as pre-approval requirements, lodging and meal allowances, and reimbursement rates for automobile travel. The Employee shall present to the Company an itemized accounting for such expenses, including receipts, within two (2) weeks of such expenditures. 6. Confidentiality. ---------------- For a period commencing with the date first above written and continuing in perpetuity, the Employee shall not, either directly or indirectly, on his own behalf or in the service of or on behalf of others, copy, make use of, or disclose or make available, directly or indirectly, to any person, any of the Company's Trade Secrets, as that term is defined in Section 35-51(d) of the Connecticut General Statutes Annotated. The Employee acknowledges that in connection with his employment by the Company, he will have access to information and materials which the Company desires to keep confidential, including customer lists, supplier lists, financial statements, business records and data, marketing and business plans, and information and materials relating to the Company's services, products, methods of operation, key personnel, proprietary software and other proprietary intellectual property and any of the Company's information and materials, whether oral or written, that are not Trade Secrets but may be reasonably understood, from legends, the nature of such information itself and/or the circumstances of such information's disclosure, to be confidential and/or proprietary to the Company or to third parties to which the Company owes a duty of nondisclosure (collectively, the "Confidential Information"); provided, ------------------------ however, that Confidential Information does not include information which (i) is or becomes publicly known through the lawful action of any party other than the Employee; (ii) has been made available by the Company, directly or indirectly, to a non-affiliated third party without obligation of confidentiality; or (iii) is independently developed by the Employee from sources or through persons that the Employee can demonstrate had no access to the Confidential Information or Trade Secrets; or (iv) is lawfully known by the Employee at the time of disclosure other than by reason of discussions with or disclosures by the Company. The Employee may disclose Confidential Information if required by law, a court, or governmental agency of competent jurisdiction, provided that the Company has been notified of the requirement promptly after the Employee becomes aware of the requirement, and provided, further, that the Employee undertakes all lawful and reasonable measures to avoid disclosing such Confidential Information until the Company has had reasonable time to seek a protective order. The Employee agrees to comply with any protective order that covers the Confidential Information to be disclosed. The Employee covenants and agrees that, both during the Employment Period and for a period of two (2) years thereafter, he shall keep secret all Confidential Information and shall not disclose, reveal, divulge or otherwise make known any Confidential Information to any person (other than the Company or its employees or agents in the course of performing his duties hereunder) or use any Confidential Information for his own account or for the benefit of any other individual or entity, except with the prior written consent of the Company. 7. Ownership of Intellectual Property. ----------------------------------- The Employee agrees that all inventions, copyrightable material, software, formulas, trademarks, Trade Secrets and the like which are developed or conceived by the Employee in the course of his employment by the Company or on the Company's time or property (collectively, the "Intellectual Property") shall --------------------- be disclosed promptly to the Company and the Company shall own all right, title and interest in and to the Intellectual Property. The Parties expressly agree that any and all of the Intellectual Property developed by the Employee shall be considered works made-for-hire for the Company pursuant to the United States Copyright Act of 1976, as amended from time to time. In order to ensure that the Company shall own all right, title and interest in and to the Intellectual Property in the event that any of the Intellectual Property is not deemed a work made-for-hire (as defined in Section 101 of the Copyright Act of 1976) and in any other event, the Employee hereby assigns all such Intellectual Property to the Company, and the Employee covenants and agrees to affix to the Intellectual Property appropriate legends and copyright notices indicating the Company's ownership of all Intellectual Property and all underlying documentation to the extent reasonably appropriate, and shall execute such instruments of transfer, assignment, conveyance or confirmation as the Company considers necessary to transfer, confirm, vest, perfect, maintain or defend the Company's right, title and interest in and to the Intellectual Property throughout the world. 8. Covenant to Deliver Business Materials and to Report. ----------------------------------------------------- The Employee acknowledges and agrees that all written materials including, without limitation, all memoranda, notes, records, reports, programs, algorithms and other documents or codes (and all copies thereof) concerning the business or affairs of the Company including, without limitation, the Intellectual Property, which he created or obtained or which otherwise came into his possession or control while employed with the Company, are property of the Company. Upon termination of his employment with the Company for any reason whatsoever the Employee shall promptly deliver all such materials and all copies thereof within the Employee's possession to the Company by courier or registered U.S. mail (return receipt requested). In addition, the Employee agrees to render to the Company such reports as it may request with respect to the activities undertaken by him or conducted under his direction in connection with his employment by the Company. 9. Non-Competition Agreement. -------------------------- The Employee hereby acknowledges and recognizes that prior to the date hereof and during the Employment Period he has been and will be privy to Trade Secrets and other Confidential Information which is critical to the business of the Company; that his services to the Company will be of special, unique and intellectual character; and that the Company would find it extremely difficult to replace the Employee. Accordingly, in the event the employment of the Employee is terminated for any reason, the Employee agrees that, in consideration of the covenants and agreements of the Company contained in this Agreement, the sufficiency of which are hereby acknowledged by the Employee, he shall not, either directly or indirectly through another person or entity, on his own behalf or in the service of or on behalf of others, from the date hereof through the date which is twelve months after the last day of the Employee's employment by the Company (i) engage or participate in, offer, perform or provide any services, business or products which are competitive with those Big Network-style interactive games and instant messaging/live help products and services provided to the Company by Employee within the two year period immediately preceding the date of termination of the Employee's employment by the Company, or (ii) solicit, or attempt to solicit, persuade or induce any client or customer of the Company or any of its subsidiaries to terminate or reduce its business relationship with the Company or any of its subsidiaries. The Employee understands that the foregoing restrictions may limit his ability to earn a livelihood in a business similar to the business of the Company and its subsidiaries, but he nevertheless believes that he has received and will receive sufficient consideration and other benefits pursuant to this Agreement to clearly justify such restrictions. In light of his education, skills and ability, the Employee believes that the foregoing restrictions will not prevent him from earning a living. 10. Right of Injunction. -------------------- The Employee acknowledges that the harm and injury to the Company that would result from the breach or threatened breach of any of the provisions of Sections 6, 7, 8 or 9 of this Agreement (the "Injunctive Sections") by the ------------------- Employee cannot be adequately compensated for in money damages. The Employee further acknowledges that any breach of any of the provisions of the Injunctive Sections by him would cause the Company irreparable harm. Therefore, the Employee agrees that in the event of a breach or threatened breach of any of the provisions of the Injunctive Sections by him, the Company shall have the right, in addition to any other remedies available to it at law or in equity, to enjoin the Employee in a court of equity from violating or threatening to violate its obligations under the Injunctive Sections; and in any such lawsuit seeking an injunction restraining the Employee from such actual or threatened breach, shall not be required to prove (i) that irreparable harm or injury would result from the breach of said Injunctive Sections, or (ii) that the Company has no adequate remedy at law. The Employee shall reimburse the Company for all reasonable costs and expenses (including, without limitation, reasonable attorney's fees and expenses) incurred in connection with the enforcement of any of the provisions of the Injunctive Sections. Nothing contained herein shall be construed as prohibiting the Company or the Employee from pursuing any other remedies (including, without limitation, an action for damages) which may be available for any actual or threatened breach of any provision this Agreement, and the pursuit of an injunction or any other particular remedy shall not be deemed to be an election of such remedy to the exclusion of any other remedy. 11. Termination of Employment. (a) Termination by Company for Cause. Notwithstanding anything to the --------------------------------- contrary contained herein, the Company may terminate the employment of the Employee at any time for Cause (as defined below) upon written notice to the Employee. As used herein, the term for "Cause" shall be defined as (i) the ----- Employee shall have committed any material breach of any of the provisions set forth herein; provided that the Employee shall have been provided written notice of such breach and shall not have cured or taken steps to cure such breach within one week after receiving such notice; or (ii) the Employee shall have committed any act of fraud or willful misconduct in connection with the performance of his duties or obligations hereunder, or shall have been convicted of any felony under the laws of the United States or any of its subdivisions (or pleaded guilty or nolo contendre to any such crime) or any other crime that relates to the Employee's services to, or employment by, the Company; or (iii) the Employee shall have committed any material act of misfeasance, malfeasance, nonfeasance, or, dishonesty to the detriment of the Company. (b) Termination Due to Disability. Notwithstanding anything to the ------------------------------ contrary contained herein, but subject to the provisions of applicable law, the Company shall have the right to terminate the Employee's employment by the Company if he becomes Disabled (as hereinafter defined) during the Employment Period. As used herein, "Disabled" shall mean that the Employee has a physical -------- or mental condition which prevents him from performing the essential functions required of him pursuant to this Agreement, with or without accommodation, which condition has continued for a period of sixty (60) consecutive business days or existed for a total of at least ninety (90) business days in any twelve month period as determined in good faith by the Board of Directors of the Company. (c) Termination Due to Death. Notwithstanding anything to the contrary ------------------------- contained herein, the Employee's employment by the Company shall terminate if he dies during the Employment Period. (d) Effect of Termination. Upon termination of this Agreement under --------------------- Section 11(a) above, the compensation and all other obligations of the parties under the Agreement shall cease; provided, however, that the covenants in the Injunctive Sections shall remain in full force and effect. (e) Termination by Company Without Cause. Notwithstanding anything to the ------------------------------------- contrary contained herein, in the event that the Company terminates the Employee other than for Cause, then the Employee shall be entitled to receive the remainder of his Compensation for the unexpired portion of the Initial Term of this Agreement; provided, however, that if the Company has filed a registration statement with the Securities and Exchange Commission pertaining to the offer of any shares of EUI capital stock owned by the Employee and the registration statement has become effective, Employee shall not receive any such remainder Compensation. The covenants in the Injunctive Sections shall survive termination of this Agreement for any reason whatsoever. 12. Miscellaneous Provisions. ------------------------- (a) Survival of Certain Obligations. The Employee's duties and obligations -------------------------------- under Sections 6, 7, 8 and 9 and the Company's rights under Section 10 of this Agreement and any other provision hereof specifying an obligation or a right of a party after the termination of Employee's employment, for any reason whatsoever, shall survive such termination and shall remain in full force and effect. (b) Successors and Assigns; Prohibition on Assignment. This Agreement is -------------------------------------------------- binding upon, and shall inure to the benefit of, the Company and its successors and assigns. With respect to the Employee, this is an agreement for the performance of personal services. Absent the prior written consent of the Company, and subject to the terms of the Employee's will and the laws of descent and distribution, the Employee shall not assign, transfer, convey, encumber or otherwise dispose of any of his rights under this Agreement, and likewise, he shall not assign any of his duties or obligations under this Agreement. (c) No Conflicts. The Employee represents and warrants to, and covenants ------------- with, the Company that the execution and delivery by him of this Agreement do not, and his performance of his obligations hereunder will not, constitute a breach of any agreement, written or oral, to which he is a party or by which he is bound. (d) Entire Agreement. This Agreement contains all of the representations, ----------------- covenants and agreements between the parties hereto with respect to the subject matter hereof, and constitutes the entire agreement of the parties with respect to said subject matter. This Agreement supersedes any and all other prior or contemporaneous agreements, whether oral or in writing, between the parties with respect to the subject matter thereof. (e) Construction in Favor of Validity. It is the desire and intent of the ---------------------------------- parties hereto that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or enforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. (f) Amendment and Waiver. This Agreement may not be amended or modified --------------------- except by an instrument in writing signed by the party to be bound thereby. No delay by either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power or privilege hereunder. Any failure by either party hereto to require strict performance by the other party or any waiver by any party hereto of any term, covenant or agreement herein shall not be construed as a waiver of any other breach of the same or any other term, covenant or agreement herein. (g) Governing Law. This Agreement shall be governed by and construed in -------------- accordance with the laws of the State of Connecticut without giving effect to any principles of conflicts of law. (h) Notices. Any notice required or permitted to be given hereunder shall -------- be (a) in writing, (b) effective on the first business day following the date of receipt, and (c) delivered by one of the following means: (i) by personal delivery; (ii) by prepaid, overnight package delivery or courier service; (iii) by the United States Postal Service, first class, certified mail, return receipt requested, postage prepaid; or (iv) by prepaid telecopier, telex, or other similar means of electronic communication (followed by confirmation on the same or following day by overnight delivery or by mail as aforesaid). All notices given under this Agreement shall be addressed as follows: in the case of the Company: eUniverse, Inc. 101 North Plains Industrial Road Wallingford, Connecticut 06492 Attention: President --------- with a copy to Christopher G. Martin, Esq. Martin, Lois & Gasparrini, LLC 1177 Summer Street Stamford, CT 06905 and, in the case of the Employee: Stephen D. Sellers or to such other addresses or telecopier numbers of which the parties have been advised in writing by any of the above-described means. Personal delivery to a party or to any officer, partner, agent, or employee of such party at its address herein shall constitute receipt. The following shall also constitute receipt: (i) a party's rejection or other refusal to accept notice, and (ii) the inability to deliver to a party because of a changed address or telecopier number of which no notice has been received by the other party. Notwithstanding the foregoing, no notice of change of address or telecopier number shall be effective until ten (10) days after the date of receipt thereof. This Section shall not be construed in any way to affect or impair any waiver of notice or demand herein provided. IN WITNESS WHEREOF, this Agreement was executed by the undersigned as of the date first above written. eUniverse, Inc. ("Company") By: __________________________ Name: Its: ___________________________ Name: Stephen D. Sellers ("Employee') EXHIBIT "A" ----------- DUTIES AND AREAS OF AUTHORITY ----------------------------- The Employee shall be employed as Vice President, Business Affairs, and will have responsibility for Company strategy and oversight of all business development activity for the Company. Specfically, he shall chair the Senior Management Board (the internal Board constituted of the Company Vice Presidents and Division Chiefs, the CTO and CFO, which may be constituted under another name) so long as it is in existence. He shall also be responsible for all business development activity. All other employees engaged in business development activities (with the exception of the CEO) shall report to him or shall channel their activity through him for his approval. Under the direction of the Chairman and CEO, he shall have signing and approval responsibility for all business development activity. EX-10.20 7 EMPLOYMENT AGREEMENT - JOHN V. HANKE EXHIBIT 10.20 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the --------- Closing Date, by and between eUniverse, Inc., a corporation organized under the laws of the State of Nevada (the "Company"), and John V. Hanke, an individual ------- residing in Berkeley, California (the "Employee"). Except as otherwise defined -------- herein, capitalized terms used herein and defined in that certain Agreement and Plan of Reorganization by and among the Company, The Big Network, Inc. ("BNI"), the Employee and certain shareholders of BNI (the "Reorganization Agreement") shall be used herein as so defined. WITNESSETH: ---------- WHEREAS, the Employee and Company have entered into the Reorganization Agreement, providing for the sale of all of the BNI capital stock owned by the Employee to the Company; and WHEREAS, the Company desires to employ the Employee, and the Employee desires to accept such employment, on the terms and subject to the conditions hereinafter set forth; NOW, THEREFORE, for and in consideration of the premises and mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Term of Employment. ------------------- Subject to the terms and conditions of this Agreement, the Company hereby employs the Employee and the Employee hereby accepts employment with the Company pursuant to this Agreement for the period commencing on the Closing Date (the "Commencement Date"), and ending twelve months after the Commencement Date. - ------------------ Said period of time is hereinafter referred to as the "Initial Term". ------------ Subsequent to the last day of the Initial Term, if the parties do not expressly agree in writing to extend this Agreement for a specified period of time, the Employee's employment by the Company shall continue pursuant to the terms of this Agreement except that the Employee shall be an employee-at-will, without a specified term of employment. As used herein, the term "Employment Period" shall mean the entire period ----------------- of time that the Employee is employed by the Company, inclusive of the Initial Term, any extensions hereof for a specified period of time, and any period during which the Employee is an employee-at-will without a specified term of employment. 2. Position; Duties and Place of Employment. ----------------------------------------- (a) The Company hereby employs the Employee as Vice President, Marketing and Community Architecture. The Employee shall report to the Chief Executive Officer; provided, however, that the Company, in its sole discretion, shall have the right to make changes in the Employee's reporting assignment. The Employee and the Company agree that the Employee's duties and areas of authority shall be as described on Exhibit "A" attached hereto and shall also include such other duties as shall from time to time be assigned to him reasonably and in good faith by the Company. (b) The Employee shall perform his duties faithfully, diligently and to the best of his ability in accordance with the reasonable directions and orders of the person to whom he reports, and the Company's Board of Directors, or their designees, and shall devote such time, efforts and attention to the business and affairs of the Company as may reasonably be required to achieve its objectives and to perform the duties required hereunder. The Employee shall devote substantially all of his working time, efforts and attention for the benefit of the Company and to the performance of his duties and responsibilities under this Agreement. (c) The Employee shall not render to others any service of any kind for compensation without the prior approval of the Chief Executive Officer of the Company, which approval shall be at his sole discretion to grant or deny. The Employee shall not engage in any activity, including any ownership interest, which conflicts or interferes with the performance of duties hereunder or usurps the business interests, existing or potential, of the Company, provided, that Employee shall not be prohibited from acquiring a five percent (5%) or under ownership interest in any other publicly traded company. . (d) The place of employment of the Employee shall be at San Francisco, California. During the Employment Period, the Company shall lease or sublease approximately 2300 square feet of office space in San Francisco, California for the Company's operations (the "San Francisco Office"). During the Employment Period, Employee shall work in the San Francisco office and the Company shall pay all support costs and lease payments for the San Francisco Office up to an amount equal to $10,000.00 per month. At any time that the Company and the Employee deem it to be appropriate, the Employee shall temporarily work at other place or places as may be determined by the Company. (e) Except as authorized by the Company in writing or under the terms of this Agreement, the Employee shall not have any right to obligate or bind the Company in any manner whatsoever nor represent to third parties that he has any right to enter into any binding obligation on the Company's behalf. 3. Compensation. ------------- (a) During the Initial Term, the Company shall pay to the Employee, as compensation for Employee's services and his compliance with this Agreement, a salary of $96,000 per annum, payable in periodic installments in accordance with the Company's normal payroll practices (the "Compensation"), and the whole amount of which shall be guaranteed for the Initial Term as provided herein. (b) In addition to the Compensation set forth above in Section 3(a), within thirty (30) days from the date of this Agreement, Employee shall be granted an option to purchase 300,000 shares of Common Stock of the Company, at a per share price of $8.25 with such shares vesting quarterly over a three year period. 4. Benefits. -------- The Company shall provide the Employee with coverage pursuant to a medical plan which shall be selected by the Company in its sole discretion. The Employee shall also be entitled to participate in all other benefit plans provided by the Company to which Employee is eligible. 5. Reimbursement of Expenses. -------------------------- The Company shall reimburse the Employee for normal and reasonable business expenses incurred by him in the course of his employment, including the reasonable costs for transportation and accommodations when the Employee is required by the Company to travel away from the location set forth at Section 2(d) herein. Such reimbursement shall be subject to the Company's standard procedures with respect to reimbursement, including such matters as pre-approval requirements, lodging and meal allowances, and reimbursement rates for automobile travel. The Employee shall present to the Company an itemized accounting for such expenses, including receipts, within two (2) weeks of such expenditures. 6. Confidentiality. ---------------- For a period commencing with the date first above written and continuing in perpetuity, the Employee shall not, either directly or indirectly, on his own behalf or in the service of or on behalf of others, copy, make use of, or disclose or make available, directly or indirectly, to any person, any of the Company's Trade Secrets, as that term is defined in Section 35-51(d) of the Connecticut General Statutes Annotated. The Employee acknowledges that in connection with his employment by the Company, he will have access to information and materials which the Company desires to keep confidential, including customer lists, supplier lists, financial statements, business records and data, marketing and business plans, and information and materials relating to the Company's services, products, methods of operation, key personnel, proprietary software and other proprietary intellectual property and any of the Company's information and materials, whether oral or written, that are not Trade Secrets but may be reasonably understood, from legends, the nature of such information itself and/or the circumstances of such information's disclosure, to be confidential and/or proprietary to the Company or to third parties to which the Company owes a duty of nondisclosure (collectively, the "Confidential Information"); provided, ------------------------ however, that Confidential Information does not include information which (i) is or becomes publicly known through the lawful action of any party other than the Employee; (ii) has been made available by the Company, directly or indirectly, to a non-affiliated third party without obligation of confidentiality; or (iii) is independently developed by the Employee from sources or through persons that the Employee can demonstrate had no access to the Confidential Information or Trade Secrets; or (iv) is lawfully known by the Employee at the time of disclosure other than by reason of discussions with or disclosures by the Company. The Employee may disclose Confidential Information if required by law, a court, or governmental agency of competent jurisdiction, provided that the Company has been notified of the requirement promptly after the Employee becomes aware of the requirement, and provided, further, that the Employee undertakes all lawful and reasonable measures to avoid disclosing such Confidential Information until the Company has had reasonable time to seek a protective order. The Employee agrees to comply with any protective order that covers the Confidential Information to be disclosed. The Employee covenants and agrees that, both during the Employment Period and for a period of two (2) years thereafter, he shall keep secret all Confidential Information and shall not disclose, reveal, divulge or otherwise make known any Confidential Information to any person (other than the Company or its employees or agents in the course of performing his duties hereunder) or use any Confidential Information for his own account or for the benefit of any other individual or entity, except with the prior written consent of the Company. 7. Ownership of Intellectual Property. ----------------------------------- The Employee agrees that all inventions, copyrightable material, software, formulas, trademarks, Trade Secrets and the like which are developed or conceived by the Employee in the course of his employment by the Company or on the Company's time or property (collectively, the "Intellectual Property") shall --------------------- be disclosed promptly to the Company and the Company shall own all right, title and interest in and to the Intellectual Property. The Parties expressly agree that any and all of the Intellectual Property developed by the Employee shall be considered works made-for-hire for the Company pursuant to the United States Copyright Act of 1976, as amended from time to time. In order to ensure that the Company shall own all right, title and interest in and to the Intellectual Property in the event that any of the Intellectual Property is not deemed a work made-for-hire (as defined in Section 101 of the Copyright Act of 1976) and in any other event, the Employee hereby assigns all such Intellectual Property to the Company, and the Employee covenants and agrees to affix to the Intellectual Property appropriate legends and copyright notices indicating the Company's ownership of all Intellectual Property and all underlying documentation to the extent reasonably appropriate, and shall execute such instruments of transfer, assignment, conveyance or confirmation as the Company considers necessary to transfer, confirm, vest, perfect, maintain or defend the Company's right, title and interest in and to the Intellectual Property throughout the world. 8. Covenant to Deliver Business Materials and to Report. ----------------------------------------------------- The Employee acknowledges and agrees that all written materials including, without limitation, all memoranda, notes, records, reports, programs, algorithms and other documents or codes (and all copies thereof) concerning the business or affairs of the Company including, without limitation, the Intellectual Property, which he created or obtained or which otherwise came into his possession or control while employed with the Company, are property of the Company. Upon termination of his employment with the Company for any reason whatsoever the Employee shall promptly deliver all such materials and all copies thereof within the Employee's possession to the Company by courier or registered U.S. mail (return receipt requested). In addition, the Employee agrees to render to the Company such reports as it may request with respect to the activities undertaken by him or conducted under his direction in connection with his employment by the Company. 9. Non-Competition Agreement. -------------------------- The Employee hereby acknowledges and recognizes that prior to the date hereof and during the Employment Period he has been and will be privy to Trade Secrets and other Confidential Information which is critical to the business of the Company; that his services to the Company will be of special, unique and intellectual character; and that the Company would find it extremely difficult to replace the Employee. Accordingly, in the event the employment of the Employee is terminated for any reason, the Employee agrees that, in consideration of the covenants and agreements of the Company contained in this Agreement, the sufficiency of which are hereby acknowledged by the Employee, he shall not, either directly or indirectly through another person or entity, on his own behalf or in the service of or on behalf of others, from the date hereof through the date which is twelve months after the last day of the Employee's employment by the Company (i) engage or participate in, offer, perform or provide any services, business or products which are competitive with those Big Network-style interactive games and instant messaging/live help products and services provided to the Company by Employee within the two year period immediately preceding the date of termination of the Employee's employment by the Company, or (ii) solicit, or attempt to solicit, persuade or induce any client or customer of the Company or any of its subsidiaries to terminate or reduce its business relationship with the Company or any of its subsidiaries. The Employee understands that the foregoing restrictions may limit his ability to earn a livelihood in a business similar to the business of the Company and its subsidiaries, but he nevertheless believes that he has received and will receive sufficient consideration and other benefits pursuant to this Agreement to clearly justify such restrictions. In light of his education, skills and ability, the Employee believes that the foregoing restrictions will not prevent him from earning a living. 10. Right of Injunction. -------------------- The Employee acknowledges that the harm and injury to the Company that would result from the breach or threatened breach of any of the provisions of Sections 6, 7, 8 or 9 of this Agreement (the "Injunctive Sections") by the ------------------- Employee cannot be adequately compensated for in money damages. The Employee further acknowledges that any breach of any of the provisions of the Injunctive Sections by him would cause the Company irreparable harm. Therefore, the Employee agrees that in the event of a breach or threatened breach of any of the provisions of the Injunctive Sections by him, the Company shall have the right, in addition to any other remedies available to it at law or in equity, to enjoin the Employee in a court of equity from violating or threatening to violate its obligations under the Injunctive Sections; and in any such lawsuit seeking an injunction restraining the Employee from such actual or threatened breach, shall not be required to prove (i) that irreparable harm or injury would result from the breach of said Injunctive Sections, or (ii) that the Company has no adequate remedy at law. The Employee shall reimburse the Company for all reasonable costs and expenses (including, without limitation, reasonable attorney's fees and expenses) incurred in connection with the enforcement of any of the provisions of the Injunctive Sections. Nothing contained herein shall be construed as prohibiting the Company or the Employee from pursuing any other remedies (including, without limitation, an action for damages) which may be available for any actual or threatened breach of any provision this Agreement, and the pursuit of an injunction or any other particular remedy shall not be deemed to be an election of such remedy to the exclusion of any other remedy. 11. Termination of Employment. (a) Termination by Company for Cause. Notwithstanding anything to the --------------------------------- contrary contained herein, the Company may terminate the employment of the Employee at any time for Cause (as defined below) upon written notice to the Employee. As used herein, the term for "Cause" shall be defined as (i) the ----- Employee shall have committed any material breach of any of the provisions set forth herein; provided that the Employee shall have been provided written notice of such breach and shall not have cured or taken steps to cure such breach within one week after receiving such notice; or (ii) the Employee shall have committed any act of fraud or willful misconduct in connection with the performance of his duties or obligations hereunder, or shall have been convicted of any felony under the laws of the United States or any of its subdivisions (or pleaded guilty or nolo contendre to any such crime) or any other crime that relates to the Employee's services to, or employment by, the Company; or (iii) the Employee shall have committed any material act of misfeasance, malfeasance, nonfeasance, or , dishonesty to the detriment of the Company. (b) Termination Due to Disability. Notwithstanding anything to the ------------------------------ contrary contained herein, but subject to the provisions of applicable law, the Company shall have the right to terminate the Employee's employment by the Company if he becomes Disabled (as hereinafter defined) during the Employment Period. As used herein, "Disabled" shall mean that the Employee has a physical -------- or mental condition which prevents him from performing the essential functions required of him pursuant to this Agreement, with or without accommodation, which condition has continued for a period of sixty (60) consecutive business days or existed for a total of at least ninety (90) business days in any twelve month period as determined in good faith by the Board of Directors of the Company. (c) Termination Due to Death. Notwithstanding anything to the contrary ------------------------- contained herein, the Employee's employment by the Company shall terminate if he dies during the Employment Period. (d) Effect of Termination. Upon termination of this Agreement under --------------------- Section 11(a) above, the compensation and all other obligations of the parties under the Agreement shall cease; provided, however, that the covenants in the Injunctive Sections shall remain in full force and effect. (e) Termination by Company Without Cause. Notwithstanding anything to the ------------------------------------- contrary contained herein, in the event that the Company terminates the Employee other than for Cause, then the Employee shall be entitled to receive the remainder of his Compensation for the unexpired portion of the Initial Term of this Agreement; provided, however, that if the Company has filed a registration statement with the Securities and Exchange Commission pertaining to the offer of any shares of EUI capital stock owned by the Employee and the registration statement has become effective, Employee shall not receive any such remainder Compensation. The covenants in the Injunctive Sections shall survive termination of this Agreement for any reason whatsoever. 12. Miscellaneous Provisions. ------------------------- (a) Survival of Certain Obligations. The Employee's duties and obligations -------------------------------- under Sections 6, 7, 8 and 9 and the Company's rights under Section 10 of this Agreement and any other provision hereof specifying an obligation or a right of a party after the termination of Employee's employment, for any reason whatsoever, shall survive such termination and shall remain in full force and effect. (b) Successors and Assigns; Prohibition on Assignment. This Agreement is -------------------------------------------------- binding upon, and shall inure to the benefit of, the Company and its successors and assigns. With respect to the Employee, this is an agreement for the performance of personal services. Absent the prior written consent of the Company, and subject to the terms of the Employee's will and the laws of descent and distribution, the Employee shall not assign, transfer, convey, encumber or otherwise dispose of any of his rights under this Agreement, and likewise, he shall not assign any of his duties or obligations under this Agreement. (c) No Conflicts. The Employee represents and warrants to, and covenants ------------- with, the Company that the execution and delivery by him of this Agreement do not, and his performance of his obligations hereunder will not, constitute a breach of any agreement, written or oral, to which he is a party or by which he is bound. (d) Entire Agreement. This Agreement contains all of the representations, ----------------- covenants and agreements between the parties hereto with respect to the subject matter hereof, and constitutes the entire agreement of the parties with respect to said subject matter. This Agreement supersedes any and all other prior or contemporaneous agreements, whether oral or in writing, between the parties with respect to the subject matter thereof. (e) Construction in Favor of Validity. It is the desire and intent of the ---------------------------------- parties hereto that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or enforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. (f) Amendment and Waiver. This Agreement may not be amended or modified --------------------- except by an instrument in writing signed by the party to be bound thereby. No delay by either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power or privilege hereunder. Any failure by either party hereto to require strict performance by the other party or any waiver by any party hereto of any term, covenant or agreement herein shall not be construed as a waiver of any other breach of the same or any other term, covenant or agreement herein. (g) Governing Law. This Agreement shall be governed by and construed in -------------- accordance with the laws of the State of Connecticut without giving effect to any principles of conflicts of law. (h) Notices. Any notice required or permitted to be given hereunder shall -------- be (a) in writing, (b) effective on the first business day following the date of receipt, and (c) delivered by one of the following means: (i) by personal delivery; (ii) by prepaid, overnight package delivery or courier service; (iii) by the United States Postal Service, first class, certified mail, return receipt requested, postage prepaid; or (iv) by prepaid telecopier, telex, or other similar means of electronic communication (followed by confirmation on the same or following day by overnight delivery or by mail as aforesaid). All notices given under this Agreement shall be addressed as follows: in the case of the Company: eUniverse, Inc. 101 North Plains Industrial Road Wallingford, Connecticut 06492 Attention: President --------- with a copy to Christopher G. Martin, Esq. Martin, Lois & Gasparrini, LLC 1177 Summer Street Stamford, CT 06905 and, in the case of the Employee: John V, Hanke or to such other addresses or telecopier numbers of which the parties have been advised in writing by any of the above-described means. Personal delivery to a party or to any officer, partner, agent, or employee of such party at its address herein shall constitute receipt. The following shall also constitute receipt: (i) a party's rejection or other refusal to accept notice, and (ii) the inability to deliver to a party because of a changed address or telecopier number of which no notice has been received by the other party. Notwithstanding the foregoing, no notice of change of address or telecopier number shall be effective until ten (10) days after the date of receipt thereof. This Section shall not be construed in any way to affect or impair any waiver of notice or demand herein provided. IN WITNESS WHEREOF, this Agreement was executed by the undersigned as of the date first above written. eUniverse, Inc. ("Company") By: __________________________ Name: Its: ___________________________ Name: John V. Hanke ("Employee') EXHIBIT "A" ----------- DUTIES AND AREAS OF AUTHORITY ----------------------------- Employee is to be hired as the Vice President for Marketing and Community Architecture. Employee will be responsible for creating a new eUniverse web presence that combines content from eUniverse sites, and for overseeing site design, development, and rollout for all eUniverse sites. Employee will also be responsible for creating a new eUniverse corporate identity and brand and for orchestrating consumer-oriented company PR including selecting and working with an outside PR firm. Employee will coordinate marketing activities for all eUniverse groups. Employee will also continue to lead the LivePlace/LiveStore/LiveGames product development team. EX-10.21 8 REGISTRATION RIGHTS AGREE. EXHIBIT 10.21 REGISTRATION RIGHTS AGREEMENT ----------------------------- THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of July 30, 1999, among eUniverse, Inc., a Nevada corporation (the "Company"), and the purchasers of shares of Common Stock of the Company, as set forth on the signature pages and Schedule A hereto (individually, a "Holder" and ---------- collectively, the "Holders"). This Agreement is being entered into in connection with an Agreement and Plan of Reorganization dated the date hereof (the "Reorganization Agreement"), among the Company and the Holders, providing for the issuance and sale to the Holders of an aggregate of up to 1,800,000 shares of Common Stock (the "Registrable Securities"). It is a condition precedent to the obligations of the Holders to consummate the transactions contemplated by the Reorganization Agreement that the Company and the Holders enter into this Agreement. Capitalized terms used herein but not otherwise defined shall have the meanings given them in the Reorganization Agreement. 1. Registration Under Securities Act, etc. --------------------------------------- 1.1 Registration on Request . ----------------------- (a) Request. At any time on or after September 14, 1999, the Holders of ------- Registrable Securities may, upon the written request of one or more holders (the "Initiating Holders") of Registrable Securities representing not less than 25% of the Registrable Securities, request that the Company file to effect the registration under the Securities Act of all or part of such Holders' Registrable Securities. The Company will promptly give written notice of such requested registration to all registered Holders of Registrable Securities, and thereupon the Company will take all necessary and required steps to have timely declared effective, as soon as practicable but no later than April 14, 2000, for registration under the Securities Act of (i) the Registrable Securities which the Company has been so requested to register by such Initiating Holders, and (ii) all other Registrable Securities which the Company has been requested to register by the holders thereof (such holders together with the Initiating Holders hereinafter are referred to as the "Selling Holders") by written request given to the Company within 30 days after the giving of such written notice by the Company, all to the extent requisite to permit the disposition of the Registrable Securities so to be registered. (b) Registration Statement Form. Registrations under this Section 1.1 shall be --------------------------- on such appropriate registration form of the Commission as shall be reasonably selected by the Company. (c) Selection of Underwriters. The underwriter or underwriters of each ------------------------- underwritten offering of the Registrable Securities so to be registered shall be selected by the Company. (d) Limitations on Registration on Request. Notwithstanding anything in this -------------------------------------- Section 1.1 to the contrary, the Company shall not be required to take any action to file a registration statement pursuant to this Section 1.1: (i) beginning with the date of filing by the Company of a registration statement covering an offering of the Company's securities to the general public and ending 60 days after the effective date of any such registered offering; or 1 (ii) after the Company has effected one registration pursuant to this Agreement. (f) Expenses. The Company will pay all Registration Expenses in connection -------- with any registration requested pursuant to this Section 1.1 and each Selling Holder shall pay all underwriting discounts or commissions with respect to the Registrable Securities sold by such Selling Holder in such registration. 1.2 Cooperation of Selling Holders. The Company may require each ------------------------------ seller of Registrable Securities as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities, as is required by law or the Commission to be included within the registration statement or as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of a discovery that the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, such holder will forthwith discontinue such holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such holder's receipt of the copies of the Company's supplemented or amended prospectus if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such holder's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. 1.3 Qualification to Obligations under Registration Covenants. The Company --------------------------------------------------------- shall be entitled to postpone for a reasonable period of time (but not exceeding 60 days) the filing of any registration statement otherwise required to be prepared and filed by it pursuant to Section 1.1 if the Company is involved in a secondary offering of securities or a private placement and if filing a registration statement would interfere with such a financing. The Company may not postpone the filing of a registration statement pursuant to this Section more than once during any twelve-month period. 1.4 Indemnification. --------------- (a) Indemnification by the Company. The Company will, and hereby does, ------------------------------ indemnify and hold harmless, in the case of any registration statement filed pursuant to this Agreement, each seller of any Registrable Securities covered by such registration statement and each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such seller or any such underwriter within the meaning of the Securities Act, and their respective directors, officers, partners, employees and affiliates against any losses, claims, damages or liabilities, joint or several, to which such seller or underwriter or any such director, officer, partner, employee, affiliate or controlling person may become subject under the Securities Act or otherwise, including, without limitation, the reasonable fees and expenses of legal counsel, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading, and the Company will reimburse such seller or underwriter and each such director, officer, partner, employee, affiliate and controlling Person for any legal or any other 2 expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, that the Company shall not be liable in any such case to the -------- extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by or on behalf of such seller or underwriter, as the case may be, specifically stating that it is for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such seller or any such director, officer, employee, affiliate, partner or controlling Person and shall survive the transfer of such securities by such seller. (b) Indemnification by the Sellers. As a condition to including any ------------------------------ Registrable Securities in any registration statement, the Company shall have received an undertaking satisfactory to it from the prospective seller of such Registrable Securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in subdivision (a) of this Section 1.4) the Company, and each director of the Company, each officer of the Company and each other Person, if any, who participates as an underwriter in the offering or sale of such securities and each other Person who controls the Company or any such underwriter within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement; provided, however, that the liability of such indemnifying party under this Section 1.4(b) shall be limited to the amount of proceeds received by such indemnifying party in the offering giving rise to such liability. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller. (c) Notices of Claims, etc. Promptly after receipt by an indemnified party of ---------------------- notice of the commencement of any action or proceeding involving a claim referred to in the preceding subdivisions of this Section 1.4, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any -------- ------- indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 1.4, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation, provided, however, -------- ------- that if the indemnified party reasonably believes it is advisable for it to be represented by separate counsel because there exists a conflict of interest between its interests and those of the indemnifying party with respect to such claim, or there exist defenses available to such indemnified party which may not be available to the indemnifying party, or if the indemnifying party shall fail to assume responsibility for such defense, the indemnified party may retain 3 counsel satisfactory to it and the indemnifying party shall pay all reasonable fees and expenses of such counsel. No indemnifying party shall be liable for any settlement of any action or proceeding effected without its written consent. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation or which requires action other than the payment of money by the indemnifying party. (d) Contribution. If the indemnification provided for in this Section 1.4 ------------ shall for any reason be held by a court to be unavailable to an indemnified party under subparagraph (a) or (b) hereof in respect of any loss, claim, damage or liability, or any action in respect thereof, then, in lieu of the amount paid or payable under subparagraph (a) or (b) hereof, the indemnified party and the indemnifying party under subparagraph (a) or (b) hereof shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating the same), (i) in such proportion as is appropriate to reflect the relative fault of the Company and the prospective sellers of Registrable Securities covered by the registration statement which resulted in such loss, claim, damage or liability, or action in respect thereof, with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as shall be appropriate to reflect the relative benefits received by the Company and such prospective sellers from the offering of the securities covered by such registration statement. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Such prospective sellers' obligations to contribute as provided in this subparagraph (d) are several in proportion to the relative value of their respective Registrable Securities covered by such registration statement and not joint. In addition, no Person shall be obligated to contribute hereunder any amounts in payment for any settlement of any action or claim effected without such Person's consent, which consent shall not be unreasonably withheld or delayed. (e) Other Indemnification. Indemnification and contribution similar to that --------------------- specified in the preceding subdivisions of this Section 1.4 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority other than the Securities Act. (f) Indemnification Payments. The indemnification and contribution required by ------------------------ this Section 1.4 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. 2. Definitions. As used herein, unless the context otherwise ----------- requires, the following terms have the following respective meanings: "Affiliate" means any person that directly or indirectly controls or is --------- controlled by or is under common control with any Holder. For purposes of this definition, an Affiliate of any Holder shall be deemed to include any corporation, partnership, limited liability company or other entity in which such Holder (whether directly, or indirectly through any other Person that is an Affiliate) is an officer or director, general partner, managing member or otherwise holds a significant equity interest. 4 "Commission" means the Securities and Exchange Commission or any other federal ---------- agency at the time administering the Securities Act. "Common Stock" is defined in the second introductory paragraph on page 1. ------------ "Company" is defined in the first introductory paragraph on page 1. ------- "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any ------------ similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Exchange Act of 1934, as amended, shall include a reference to the comparable section, if any, of any such similar Federal statute. "Holder" and "Holders" are defined in the first introductory paragraph on page ------ ------- 1. "Initiating Holder" is defined in Section 1.1. ----------------- "Person" means any individual, corporation, partnership, trust, incorporated ------ or unincorporated association, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Reorganization Agreement" is defined in the second introductory paragraph on ------------------------ page 1. "Registrable Securities" means (i) any shares of Common Stock acquired by the ---------------------- Holders pursuant to the Reorganization Agreement, (ii) any shares of Common Stock acquired from time by any Holder or any Affiliate thereof, and (iii) any Related Registrable Securities. As to any particular Registrable Securities, once issued such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent public distribution of them shall not require registration of them under the Securities Act, or (d) they shall have ceased to be outstanding. All references to percentages of Registrable Securities shall be calculated pursuant to Section 7. "Registration Expenses" means all expenses incident to the Company's --------------------- performance of or compliance with Section 1, including, without limitation, all registration, filing and NASD fees, all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of "cold comfort" letters required by or incident to such performance and compliance, any fees and disbursements of underwriters customarily paid by issuers or sellers of securities (excluding any underwriting discounts or commissions with respect to the Registrable Securities) with respect to an underwritten offering. "Related Registrable Securities" means any securities of the Company issued or ------------------------------ issuable with respect to the securities by way of a dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. 5 "Securities Act" means the Securities Act of 1933, or any similar Federal -------------- statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. References to a particular section of the Securities Act of 1933 shall include a reference to the comparable section, if any, of any such similar statute. "Selling Holder" is defined in Section 1.1. -------------- 3. Amendments and Waivers. This Agreement may be amended with the ---------------------- written consent of the Company and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act of the holder or holders of more than 50% of the Registrable Securities affected by such amendment, action or omission to act. Each holder of any Registrable Securities at the time or thereafter outstanding shall be bound by any consent authorized by this Section 3, whether or not such Registrable Securities shall have been marked to indicate such consent. 4. Nominees for Beneficial Owners. In the event that any ------------------------------ Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election in writing delivered to the Company, be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder or holders of Registrable Securities pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Securities hold by any holder or holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities. 5. Notices. All notices, demands and other communications ------- provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telex, telegram, telecopier, reputable courier service or personal delivery: (a) if to the Holders, addressed to them in the manner set forth in the Reorganization Agreement, or at such other address as it shall have furnished to the Company in writing; (b) if to any other holder of Registrable Securities, at the address that such holder shall have furnished to the Company in writing, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such Registrable Securities who has furnished an address to the Company; or (c) if to the Company, addressed to it in the manner set forth in the Reorganization Agreement, or at such other address as the Company shall have furnished to each holder of Registrable Securities at the time outstanding. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one business day after being sent by reputable courier service; three business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; and when receipt is acknowledged, if telecopied. 6. Assignment. This Agreement shall be binding upon and inure to ---------- the benefit of and be enforceable by the parties hereto and, with respect to the Company, its respective successors and assigns and, with respect to each Holder, any holder who is an affiliate or successor entity to such Holder or a transferee therefrom of any Registrable Securities, subject to the provisions respecting the minimum 6 numbers of percentages of shares of Registrable Securities required in order to be entitled to certain rights, or take certain actions, contained herein. The Holders named on the signature page of this Agreement (and not any other holder of Registrable Securities or any other Person) shall be permitted, in connection with a transfer or disposition of Registrable Securities, to eliminate or impose conditions or constraints on the ability of the transferee, as a holder of Registrable Securities, to request a registration pursuant to this Agreement and shall provide the Company with copies of such conditions or constraints and the identity of such transferees. 7. Calculation of Percentage Interests in Registrable Securities. ------------------------------------------------------------- For purposes of this Agreement, all references to a percentage of the Registrable Securities shall be calculated based upon the number of shares of Registrable Securities outstanding at the time such calculation is made. 8. No Inconsistent Agreements. The Company will not hereafter enter -------------------------- into any agreement with respect to its securities which is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement. 9. Remedies. Each holder of Registrable Securities, is entitled -------- to exercise all rights granted by law, including recovery of damages; such rights not to extend to incidental or consequential damages. 10. Severability. In the event that any one or more of the ------------ provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the Holder shall be enforceable to the fullest extent permitted by law. 11. Entire Agreement. This Agreement is intended by the parties as ---------------- a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 12. Descriptive Headings. The descriptive headings of the several -------------------- sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. 13. Governing Law. This Agreement shall be construed and ------------- enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Connecticut applicable to agreements made and to be performed entirely within such State. 14. Counterparts. This Agreement may be executed in any number ------------ of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. 15. Termination. This Agreement shall terminate, be of no further ----------- force and effect, and the rights and obligations of the parties hereunder shall terminate on the first anniversary date of the Closing Date (the "Termination Date"), provided that, if at such time a registration statement has not been filed or declared effective, then this Agreement shall continue in full force and effect until such time as the 7 registration statement has been filed by the Company and declared effective and is effective for a period of one hundred and twenty (120) days thereafter. IN WITNESS WHEREOF, the parties have executed or have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. eUniverse, Inc. By:___________________________________ Name: Brad Greenspan Title: Chairman HOLDERS: All those Holders whose signature pages, substantially in the form of page 10 hereto, are attached hereto 8 FORM OF HOLDER SIGNATURE PAGE HOLDER: [holder] By:------------------------ Name: Title: Address: _____________________________ (Street Address) _____________________________ (City, State and Zip Code) Number of Shares of Common Stock Subject To Registration Rights:________________ 9 SCHEDULE A ---------- No. Shares of Common Stock Name and Address of Holder Subject to Registration Rights Hereunder - -------------------------- ---------------------------------------- 10 EX-10.22 9 BIG NETWORK LEASE EXHIBIT 10.22 OFFICE SUBLEASE BASIC SUBLEASE INFORMATION 78 FIRST STREET San Francisco, California Date: July 9, 1999 Sublessor: GOLDEN GATE UNIVERSITY, a California non-profit public benefit corporation Sublessee: THE BIG NETWORK, INC., a Delaware corporation Premises: 5th floor of the Building Paragraph 1(b) Base Year: 2000 Paragraph 1(c) Rentable Area of Premises: Approximately 2,133 square feet of Paragraph 1(h) Rentable Area (rsf) Rentable Area of Building: 13,480 rsf Paragraph 1(h) Sublessee's Percentage Share: 15.823% Paragraph 1(k) Term Commencement: July 15, 1999 Paragraph 2 Term Expiration: June 30, 2002 Paragraph 2 Base Rent: From the Term Commencement Date to June 30, 2000: Paragraph 3 $64,200 per year, payable in equal monthly installments of $5,350.00 each. From July 1, 2000 to June 30, 2001- $66,000 per year, payable in equal monthly installments of $5,500.00 each. From July 1, 2001 to the Term Expiration date: $67,800 per year, payable in equal monthly installments of $5,650.00 each. Security Deposit: $10,700.00 Paragraph 5 Prepayment of Rent: First month's installment of Base Rent Sublessee's Address Paragraph 8 for Notices: 78 First Street, Fifth Floor San Francisco, CA 94105 Attn: Steve Sellers, Chairman and CEO Sublessor's Address Paragraph 8 for Notices: Golden Gate University 536 Mission Street Plaza Level San Francisco, CA 94105 Attn: Ryan van Ommeren with a copy to: Grubb & Ellis Company 255 California Street, 14th Floor San Francisco, CA 94111-4904 Attention: Mike Son Sublessor's Broker: Grubb & EIlis Company Paragraph 9 Cooperating Broker: The Caramanica Group Paragraph 9 155 Montgomery Street) 14'h Floor San Francisco, CA Master Lessor Consent Date: The date that is 30 days after the full execution Paragraph 29 of this Sublease by Sublessor and Sublessee. Exhibit(s): Exhibit A - Legal Description Exhibit B - Floor Plan Exhibit C - Work Letter Exhibit D - Rules and Regulations Exhibit E - Form of Estoppel Exhibit F - Master Lease The provisions of the Sublease identified above in the margin are those provisions where references to particular Basic Sublease Information appear. Each such reference shall incorporate the applicable Basic Sublease Information. In the event of any conflict between any Basic Sublease Information and the Sublease, the latter shall control. SUBLESSEE: SUBLESSOR: THE BIG NETWORK, INC., a Delaware corporation GOLDEN GATE UNIVERSITY, a California non-profit public benefit corporation By: ________________________________ By: ____________________________ Its: ________________________________ Its: ___________________________ Dated: _______________ By: ____________________________ Its: ___________________________ Dated: __________________ 1. DEFINITIONS............................................ 6 2. TERM................................................... 8 3. RENTAL................................................. 8 4. ESCALATION RENT PAYMENTS............................... 9 5. SECURITY DEPOSIT....................................... 10 6. USE.................................................... 11 7. COMPLIANCE WITH LEGAL REQUIREMENTS..................... 11 8. NOTICES AND CONSENTS................................... 12 9. BROKERAGE COMMISSIONS.................................. 12 10. HOLDING OVER........................................... 13 11. ADDITIONAL OBLIGATIONS PAYABLE BY SUBLESSEE............ 13 12. ALTERATIONS............................................ 14 13. REPAIRS................................................ 15 14. LIENS.................................................. 16 15. ENTRY BY SUBLESSOR..................................... 16 16. SERVICES............................................... 17 17. INDEMNIFICATION, LIMITATION OF LIABILITY............... 19 18. INSURANCE AND SUBROGATION.............................. 20 20. EMINENT DOMAIN......................................... 23 21. EVENTS OF DEFAULT...................................... 24 22. TERMINATION UPON DEFAULT............................... 24 23. CONTINUATION AFTER DEFAULT............................. 25 24. OTHER RELIEF........................................... 25 25. SUBLESSOR'S RIGHT TO CURE DEFAULTS..................... 25 26. ASSIGNMENT AND SUBLETTING.............................. 25 27. SUBORDINATION.......................................... 28 28. RELATION BETWEEN SUBLEASE AND LEASE: SUBLESSOR'S OBLIGATIONS............................................ 29 29. CONDITION PRECEDENT.................................... 29 30. ESTOPPEL CERTIFICATE................................... 29 31. BUILDING PLANNING...................................... 30 32. RULES.................................................. 30 33. ATTORNEYS' FEES........................................ 30 34. WAIVER................................................. 30 35. PARKING AND TRANSPORTATION MANAGEMENT.................. 30 36. COMPLETE AGREEMENT..................................... 31 37. LIMITATIONS OF LIABILITY............................... 31 38. NO MERGER.............................................. 31 39. TRANSFER............................................... 31 40. NO LIGHT, AIR OR VIEW EASEMENT......................... 32 41. CORPORATE AUTHORITY.................................... 32 42. ABANDONMENT............................................ 32 43. WAIVER OF JURY TRIAL................................... 32 44. TELEPHONE SERVICE...................................... 32 45. MISCELLANEOUS.......................................... 33 46. EXHIBITS............................................... 33 78 FIRST STREET OFFICE SUBLEASE --------------- THIS SUBLEASE, dated July 9, 1999, for purposes Of reference only, is made and entered into by and between GOLDEN GATE UNIVERSITY, a California non- profit public benefit corporation ("Sublessor,"), and THE BIG NETWORK, INC., a Delaware corporation ("Sublessee"). WITNESSETH: Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor, the Premises described in Paragraph 1(b) below for the term and subject to the terms, covenants, agreements and conditions hereinafter set forth, to each and all of which Sublessor and Sublessee hereby mutually agree. 1. Definitions. ----------- Unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified: (a) The term "Project" shall mean the parcel of real property, the ------- street address of which is 78 First Street, San Francisco, California, and which is more particularly described on Exhibit A, and the building, sidewalks, --------- landscaping, and all other improvements on or appurtenances to the parcel (collectively, the "Building"). -------- (b) The term "Premises" shall mean the portion of the Building -------- located on the floor(s), specified in the Basic Sublease Information which is outlined on the floor plan(s) attached hereto as Exhibit B, and which is --------- improved with the Tenant Improvements. (c) The term "Base Year" shall mean the calendar year specified in the --------- Basic Sublease Information as the Base Year. (d) The term "Operating Expenses" shall mean (1) all costs of ------------------ management, operation and maintenance of the Project, including, without limitation,: wages, salaries and payroll burden of employees; property management fees (at the prevailing rate); janitorial, maintenance, guard and other services; rent or rental value of offices used in connection with the management of the Project; gas, heat, light, power, telephone, water, waste disposal and all other utilities (subject, however, to the provisions of Paragraphs 16(b) and 16(c)); materials and supplies; maintenance and repairs; license costs; insurance premiums and the deductible portion of any loss insured under Sublessor's liability insurance; and depreciation on personal property; and (2) the cost of any capital improvements made to the Project by Sublessor after the Base Year that (i) reduce other Operating Expenses, (ii) are required for the health and safety of sublessees in the Building (provided, however, that costs arising from capital improvements that are solely for the benefit of another sublessee in the Building and do not benefit Sublessee, the Premises, or the Common Area, shall not be included in Operating Expenses), or (iii) are required under any governmental law or regulation that was not applicable to the Building at the time it was constructed, such cost or allocable portion thereof to be amortized over such reasonable period as Sublessor shall determine together with interest on the unamoratized balance at the rate of interest then publicly announced by Bank of America N.T. & S.A., San Francisco Main Office, its "prime" reference rate plus 2% per annum or such higher rate as may have been paid by Sublessor on funds borrowed for the purpose of constricting such capital improvements, but not to exceed the maximum rate permitted by law. Operating Expenses shall not include: Property Taxes (its defined below); depreciation on the Building; costs of sublessees' improvements; real estate brokers' commissions; interest except as referred to in clause (2) above; capital items other than those referred to in clause (2) above; and the cost of providing services and utilities for which reimbursement is due from sublessees. If less than 95% of the total rentable area of the Building is occupied during the Base Year or any calendar year during the term of this Sublease, then the actual Operating Expenses shall be adjusted to equal Sublessor's reasonable estimate of Operating Expenses had such percentage of the total rentable area of the Building been occupied. Operating Expenses shall be determined in accordance with generally accepted accounting principals, consistently applied. (e) The term "Base Operating Expenses" shall mean the Operating ----------------------- Expenses paid or incurred by Sublessor in the Base Year. (f) The term "Property Taxes" shall mean all real property -------------- taxes (and any tax levied wholly or partly in lieu thereof) levied against the Project, and all real estate tax consultant expenses and attorneys' fees incurred for the purpose of maintaining an equitable assessed valuation of the Project. (g) The term "Base Property Taxes" shall mean the amount of Property ------------------- Taxes paid or accruing during the Base Year. (h) The term "Rentable Area" shall mean the net rentable area ------------- specified in the Basic Sublease Information. (i) The term "Common Area" shall mean the total area on a floor ----------- consisting of restrooms, janitor, telephone and electrical closets, lobbies, and public corridors providing access to tenant and sublessee space on such floor, but excluding public stairs, elevator shafts and pipe shafts, together with the enclosing walls thereof. j) The term "Tenant Improvements" shall mean the improvements made or ------------------- to be made to the Premises by Sublessor as described in Exhibit C. --------- (k) The term "Sublessee's Percentage Share" shall mean the percentage ---------------------------- figure specified in the Basic Sublease Information. In the event the Rentable Area of the Premises is increased or decreased by the addition to or deletion from the Premises of any office space, Sublessee's Percentage Share shall be appropriately adjusted, and as to the calendar year in which such change occurs, for the purposes if Paragraph 3 below Sublessee's Percentage Share shall be ----------- determined such calendar year at each such Percentage Share. (l) The term "Master Lessor" shall mean the Landlord as defined in the ------------- Master Lease. (m) The term "Master Lease" shall mean that certain Lease between ------------ Sublessor and Master Lessor, dated January 27, 1999, pursuant to which Sublessor is leasing the Building from Master Lessor. A true and correct redacted copy thereof is attached hereto as Exhibit F. --------- 2. Term. ---- (a) The term of this Sublease shall commence on July 15, 1999 (the "Commencement Date" and, unless sooner terminated as hereinafter provided, shall - ------------------ end on the earliest to occur of (i) Term Expiration date, (ii) any earlier termination of this Sublease pursuant to the terms hereof, or (iii) the date of termination of the Master Lease. Sublessor shall use reasonable efforts to substantially complete the Sublessor's Work, as described in Exhibit C prior to --------- the Commencement Date, in accordance with the standards for substantial completion of Sublessor's Work as set forth in Paragraph 7 of Exhibit C. If ----------- --------- Sublessor, for any reason whatsoever, cannot deliver possession of the Premises to Sublessee, this Sublease shall not be void or voidable, nor shall Sublessor be liable to Sublessee for any loss or damage resulting therefrom, but in that event, rental shall be waived for the period between the commencement of the term and the time when Sublessor can deliver possession of the Premises. No delay in delivery of possession shall (A) operate to extend the term hereof, or (B) affect any dates which may be set forth in the Basic Sublease Information on which Base Rent is to increase. (b) Sublessor may elect, in its sole and absolute discretion, to terminate this Sublease effective on the Early Termination Date, as defined in the Master Lease, by giving Sublessee written notice of such election not less than one hundred eighty (180) days prior to the Early Termination Date. (c) In the event, for any reason whatsoever, that either Master Lessor or Sublessor elects to demolish or substantially renovate the Building, Sublessor shall give Sublessee at least one hundred eight), (180) days notice of Master Lessor's or Sublessor's election to do so. Said notice shall set forth a date which is equal to or more than one hundred eighty (180) days from the date of the notice as the "Termination Date". This Sublease shall terminate, as if the term stated in the Basic Sublease Information of this Sublease had expired, upon the Termination Date stated in the notice, and Sublessee shall surrender the Premises on or before the Termination Date. In the event Master Lessor or Sublessor elects to demolish or substantially renovate the Building, Sublessor and Sublessee shall be entirely freed and relieved of all liability under any and all of their respective covenants and obligations contained in or derived from this Sublease as of the Termination Date, except as to any covenants and obligations that have accrued prior to the Termination Date. 3. Rental. ------ (a) Sublessee shall pay to Sublessor throughout the term of this Sublease its rental for the Premises the sum specified in the Basic Sublease Information as the Base Rent, provided that the rental payable during each calendar year subsequent to the Base Year shall be the Base Rent, increased by Sublessee's Percentage Share of the total dollar increase, if any, in Operating Expenses paid or incurred by Sublessor in such year over the Base Operating Expenses, and also increased by Sublessee's Percentage Share of the total dollar increase, if any, in Property Taxes paid by Sublessor in such year over the Base Property Taxes. The increased rental due pursuant to this Paragraph 3(a) is hereinafter referred to as "Escalation Rent." --------------- (b) Rental shall be paid to Sublessor, on or before the first day of the term hereof and on or before the first day of each and every successive calendar month thereafter during the term hereof. In the event the term of this Sublease commences on a day other than the first day of a calendar month or ends on a day other than the last day of a calendar month, the monthly rental for the first and/or last fractional months of the term hereof shall be appropriately prorated. (c) All sums of money due to Sublessor hereunder not specifically characterized as rental shall constitute additional rent and if any such sum is not paid at the time provided in this Sublease, it shall nonetheless be collectible as additional rent at any time thereafter, including without limitation on the date on which the next installment of rental is due. Nothing contained herein shall be deemed to suspend or delay the payment of any sum of money at the time it becomes due and payable hereunder, or to limit any other remedy of Sublessor. (d) Sublessee hereby acknowledges that late payment by Sublessee to Sublessor of rent and other sums due hereunder after the expiration of any applicable cure period will cause Sublessor to incur costs not contemplated by this Sublease, the exact amount of which will be difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Sublessor by the terms of the Master Lease or any deed of trust or mortgage encumbering the Building or Sublessor's leasehold interest in the Building. Accordingly, if any installment of rent or any other sums due from Sublessee shall not be received by Sublessor when due or in the time period provided herein, Sublessee shall pay to Sublessor a late charge equal to 10% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Sublessor will incur by reason of late payment by Sublessee. Acceptance of such late charge by Sublessor shall in no event constitute a waiver of Sublessee's default with respect to such overdue amount, nor prevent Sublessor from exercising any of the other rights and remedies granted hereunder. (e) Any amount due to Sublessor, if not paid when due, shall bear interest from the date due until paid at the rate equal to the lesser of (i) the maximum rate then permitted by applicable usuary law, or (ii) the reference rate, or succeeding similar index, of the Bank of America then in effect from time to time plus two percent (2%). Payment of interest shall not excuse or cure any default hereunder by Sublessee, nor prevent Sublessor from exercising any of the other rights and remedies granted hereunder. (f) All payments due from Sublessee to Sublessor shall be paid to Sublessor, without deduction, offset, notice or prior demand, in lawful money of the United States of America at Sublessor's address for notices hereunder, or to such other person or at such other place as Sublessor may from time to time designate by notice to Sublessee. 4. Escalation Rent Payments. ------------------------ Escalation Rent shall be paid monthly on an estimated basis, with subsequent annual reconciliation, in accordance with the following procedures: (a) During December of the Base Year and December of each subsequent calendar year, or as soon thereafter as practicable, Sublessor shall give Sublessee notice of its estimate of any Escalation Rent due under Paragraph --------- 3(a) above for the ensuing calendar year. On or before the first day of each - ---- month during the ensuing calendar year, Sublessee shall pay to Sublessor 1/12th of such estimated Escalation Rent, provided that if such notice is not given in December, Sublessee shall continue to pay Escalation Rent on the basis of the prior year's estimate until the month after such notice is given. If at any time or times it appears to Sublessor that the Escalation Rent for the current calendar year will vary from its estimate by more than 5%, Sublessor may, in its sole discretion, by notice to Sublessee, revise its estimate for such year, and subsequent payments by Sublessee of Escalation Rent for such year shall be based upon such revised estimate. (b) Within 90 days after the close of each calendar year or as soon after such 90-day period as practicable, Sublessor shall deliver to Sublessee a statement of the actual Escalation Rent for such calendar year, accompanied by a statement showing the Operating Expenses and Property Taxes on the basis of which the actual Escalation Rent was determined. The statement shall be final and binding upon Sublessor and Sublessee as to the amount of the Operating Expenses and Property Taxes. If Sublessor's statement discloses that Sublessee owes an amount that is less than the estimated payments for such calendar year previously made by Sublessee, Sublessor shall credit such excess against the next payment of rental due from Sublessee hereunder. If Sublessor's statement discloses that Sublessee owes an amount that is more than the estimated payments for such calendar year previously made by Sublessee, Sublessee shall pay the deficiency to Sublessor within 30 days after delivery of the statement. (c) The amount of Escalation Rent for any fractional year in the term hereof shall be appropriately prorated. The termination of this Sublease shall not affect the obligations of Sublessor and Sublessee pursuant to Paragraph 4(b) above to be performed after such termination. - -------------- 5. Security Deposit. ---------------- The Security Deposit shall be held by Sublessor as security for the faithful performance by Sublessee of all the provisions of this Sublease to be performed or observed by Sublessee. If Sublessee fails to pay rent or other sums due hereunder, or otherwise defaults with respect to any provision of this Sublease, Sublessor may use, apply or retain all or any portion of the Security Deposit for the payment of any rent or other sum in default or for the payment of' any other sum to which Sublessor may become obligated by reason of Sublessee's default, or to compensate Sublessor for any loss or damage which Sublessor may suffer thereby. If Sublessor so uses or applies all or any portion of the Security Deposit, Sublessee shall within 10 days after demand therefor deposit cash with Sublessor in an amount sufficient to restore the Security Deposit to the full amount thereof and Sublessee's failure to do so, shall be a material breach of this Sublease. Sublessor shall not be required to keep the Security Deposit separate from its general accounts. If Sublessee performs all of Sublessee's obligations hereunder, the Security Deposit, or so much thereof as has not theretofore been applied by Sublessor, shall be returned, without interest, to Sublessee (or, at Sublessor's option, to the last assignee, if any, of Sublessee's interest hereunder) at the expiration of the term hereof, and after Sublessee has vacated the Premises. No trust relationship is created herein between Sublessor and Sublessee with respect to the Security Deposit. 6. Use. --- The Premises may be used for any use permitted under the Master Lease, and no other purpose. Sublessee shall not do or permit to be done in or about the Premises, nor bring or keep or permit to be brought or kept therein, anything which is prohibited by or will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated, or which is prohibited by the standard form of fire insurance policy, or will in any way increase the existing rate of or affect any fire or other insurance upon the Building or any of its contents, or cause a cancellation of any insurance policy covering the Building or any part thereof or any of its contents. Sublessee shall not cause or permit its business in the Premises to use, generate, manufacture, refine, transport, treat store, handle, dispose, transfer, produce or process hazardous, substances, other dangerous or toxic substances, or solid waste, with the sole exception of such substances as are required, and are kept in only such quantities as are required, for normal office operations, provided that such use and storage are in compliance with all applicable federal, state and local laws or regulations. Sublessee shall notify Sublessor immediately if Sublessee learns of any non-compliance or of any facts (such as the existence of any release or the threat of release of hazardous substances at on, from or beneath the surface of the Premises) which could give rise to a claim of non- compliance with such laws or rules and regulations promulgated thereunder. Sublessee shall from time to time notify Sublessor of any hazardous or toxic substances that are maintained in the Premises. Sublessee shall not do or permit anything to be done in or about the Premises which will in any way will in any way obstruct or interfere with the rights of other tenants or sublessees of the Building, or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purposes, nor shall Sublessee cause, maintain or permit any nuisance or waste in, on or about the Premises. 7. Compliance with Legal Requirements. ---------------------------------- (a) Sublessee, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances, governmental rules, regulations and requirements now in force or which may hereafter be in force, with the requirements of any board of fire underwriters or other similar body now or hereafter constituted, with any direction or occupancy certificate issued pursuant to any law by any public officer or officers, and with the provisions of all recorded documents affecting the Premises, insofar as any thereof relate to or affect the condition; however, Sublessee shall not be required to make any structural changes to the Premises unless they are necessitated in whole or in part by (i) Sublessee's use or occupancy of, or business conducted in, the Premises, (ii) any acts or omissions of Sublessee, its employees, agents, contractors, invitees or licensees, or (iii) the performance by Sublessee of any alterations to the Premises. Sublessee must obtain all required consents in accordance with Paragraph 12 of this Sublease prior to making any structural ------------ changes to the Premises. Sublessee shall notify Sublessor immediately if Sublessee receives any notice of non-compliance with or violation of any of the above. Sublessee shall not do or permit anything to be done in the Premises, nor keep anything there in which shall constitute a nuisance. (b) As used herein, "environmental laws" means all present and future statutes, ordinances, orders, rules and regulations of all federal, state or local governmental agencies relating to the use, generation, manufacture, installation, release, discharge, storage or disposal of hazardous materials; and "hazardous materials" means petroleum, asbestos, polychlorinated biphenyls, radioactive materials, radon gas or any chemical, material or substance now or hereafter defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous waste", "restricted hazardous waste" or "toxic substances", or words of similar import, under any environmental laws. Sublessee shall not use, or allow use of, hazardous materials in the Premises or transport the same through the Project. In the event of a release of any hazardous materials by Sublessee or any of its agents, employees, contractors, representatives, visitors or guests in violation of applicable environmental laws, Sublessee shall immediately notify Sublessor, and take such remedial actions as Sublessor may deem necessary or appropriate to clean up the same. Sublessee shall otherwise remediate any release of any hazardous materials in accordance with the applicable requirements of environmental laws. Sublessee shall use, handle, store and transport any hazardous materials hereunder in accordance with the applicable requirements of environmental laws, and shall notify Sublessor of any violation of environmental laws of which it receives notice from any governmental agency having jurisdiction. As used in this Paragraph 7(b) the term "Sublessee" includes its -------------- employees, agents, contractors, invitees or licensees. (c) During the term of the Sublease, Sublessee shall obtain, shall fully comply with, and shall maintain in full force and effect all governmental licenses, permits, registrations and approvals (federal, state, local, county and foreign) necessary to conduct its business in the Premises, including but not limited to those required by the statutes enumerated in Paragraph 7(b) above. During the term of the Sublease, Sublessee shall keep a - -------------- copy of all such permits at the Premises and shall make the same available at all reasonable times for Sublessor's inspection. Sublessee warrants and represents that if during the term of the Sublease any violations are recorded or any notices are received with respect to any of such licenses, permits, registrations and approvals or if a proceeding is commenced or threatened to revoke or limit any of them, Sublessee shall notify Sublessor immediately. 8. Notices and Consents. -------------------- All notices, consents, demands and other communications from one party to the other that are given pursuant to the terms of this Sublease shall be in writing and shall be deemed to have been fully given when delivered (including delivery by commercial delivery services or by facsimile transmission), or if sent by the United States mail, certified or registered, when deposited in the mail, postage prepaid. All notices, consents, demands and other communications shall be addressed as follows: (i) to Sublessee at the address specified in the Basic Sublease Information, to the Premises, or to such other place as Sublessee may from time to time designate in a notice to Sublessor; and (ii) to Sublessor at the address specified in the Basic Sublease Information, or to such other place as Sublessor may from time to time designate in a notice to Sublessee. Sublessee hereby appoints as its agent to receive the service of all dispossessory or distraint proceedings and notices thereunder the person in charge of or occupying the Premises at the time, and, if no person shall be in charge of or occupying the same, then such service may be made by attaching the same in the mail entrance of the Premises. 9. Brokerage Commissions. --------------------- Sublessee represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction and that no broker, agent or other person brought about this transaction, other than Sublessor's Broker or a Cooperating Broker identified in the Basic Sublease Information, and Sublessee agrees to indemnify, defend, protect and hold Sublessor harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Sublessee with regard to this leasing transaction. The provisions of this paragraph shall survive the termination of this Sublease. 10. Holding Over. ------------ (a) If Sublessee holds possession of the Premises after expiration of the term of this Sublease, Sublessee shall become a subtenant from month to month upon the terms herein specified but at a monthly rental equivalent to 150% of the then prevailing monthly rental paid by Sublessee at the expiration of the term of this Sublease, payable in advance on or before the first day of each month. Each party shall give the other notice of its intention to terminate such tenancy at least one month prior to the date of termination of such monthly tenancy. Notwithstanding the above, in no event shall Sublessee hold possession of the Premises beyond the expiration of the term of the Master Lease except as otherwise permitted by Sublessor. (b) If, without Sublessors prior written consent Sublessee holds possession of the Premises after expiration of the term of this Sublease, the expiration of its holdover tenancy or the expiration of the Master Lease, without limiting the liability of Sublessee for its unauthorized occupancy of the Premises, Sublessee shall indemnify Sublessor and any replacement tenant or sublessee for the Premises for any damages or loss suffered by either Sublessor or the replacement tenant or sublessee resulting from Sublessee's failure timely to vacate the Premises. 11. Additional Obligations Payable by Sublessee. ------------------------------------------- In addition to the monthly rental and other charges to be paid by Sublessee hereunder, Sublessee shall pay or reimburse Sublessor for any and all of the following items when due (hereinafter collectively referred to as "Additional Obligations"), whether or not now customary or in the contemplation - ----------------------- the parties hereto: taxes (other than local, state and federal personal or corporate income taxes measured by the net income of Sublessor from all sources), assessments (including, without limitation, all assessments for public improvements, or benefits, irrespective of when commenced or completed), excises, levies, business taxes, license, permit, inspection and other authorization fees, transit development fees, assessments or charges for housing funds, service payments in lieu of taxes and any other fees or charges of any kind which are levied, assessed, confirmed or imposed by any public authority, but only to the extent the Additional Obligations are (a) upon, measured by or reasonably attributable to (1) the cost or value of Sublessee's equipment furniture, fixtures and other personal property located in the Premises, or (2)(a) the cost or value of any leasehold improvements made in or to the Premises by or for Sublessee; (b) upon or measured by the monthly rental or other charges payable hereunder, including, without limitation, any gross receipts tax levied by the City and County of San Francisco, the State of California, the Federal Government or any other governmental body with respect to the receipt of such rental, (c) as to the Premises, or any portion thereof, upon, with respect to or by reason of the development, possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy thereof by Sublessee; or (d) upon this transaction or any document to which Sublessee is a party creating or transferring an interest or an estate in the Premises. In the event that it shall not be lawful for Sublessee to reimburse Sublessor for the Additional Obligations but it is lawful to increase the monthly rental to take into account Sublessor's payment of the Additional Obligations, the monthly rental payable to Sublessor shall be revised to net Sublessor the same net return without reimbursement of the Additional Obligations as would have been received by Sublessor with reimbursement of the Additional Obligations. 12. Alterations. ----------- (a) Sublessee shall not make or suffer to be made any alterations, additions or improvements to the Premises or any part thereof (including without limitation any exposed brick or wood surfaces), or any alterations, additions or improvements which affect the Building structure, exterior, or plumbing system (hereinafter collectively referred to as "Alterations"), without Sublessor's (and, if applicable, Master Lessor's) prior written consent. Sublessee acknowledges that certain Alterations also require the consent of Master Lessor, and therefore Sublessee shall provide Sublessor with not less than thirty (30) days advance written notice prior to the date on which Sublessee desires Sublessor's consent. Sublessee further acknowledges that as to those certain Alterations requiring consent by the Master Lessor, such Alterations may be approved, conditionally approved or disapproved by Master Lessor. If such Alterations are conditionally approved by Master Lessor, Sublessee shall notify Sublessor within twenty (20) days of Master Lessor's notice of conditional approval whether Sublessee shall either proceed with such Alterations subject to the conditions specified by Master Lessor, or not proceed with such Alterations. All Alterations shall be made by Sublessor for Sublessee's account in accordance with the procedures set forth in this section. All Alterations shall immediately become Sublessor's property and, at the end of the term hereof, shall remain on the Premises without compensation to Sublessee unless Sublessor elects by written notice to Sublessee to have Sublessee remove any such Alterations, in which event Sublessee shall be responsible for the cost of restoring the Premises to their condition prior to the installation of such Alterations. (b) Plans and specifications for approved Alterations pursuant to Paragraph 12 above shall be prepared at Sublessee's expense by its architect or - ------------ by Sublessor's architect Sublessee so elects, and by engineers approved by Sublessor where mechanical or electrical engineering services are required by the nature of the Alterations, Sublessee shall cause any architect retained by it to follow the standard construction administration procedures and to utilize the standard specifications and details promulgated from time to time by Sublessor for the Building. The plans and specifications shall be subject to further approval by Sublessor and Sublessee, which approval shall not be unreasonably withheld by either party, and following such approval Sublessor shall obtain quotations of the cost of the Alterations as reflected by the approved plans and specifications from a contractor approved by Sublessor. Sublessor shall enter into a contract for the construction or installation of the Alterations with the contractor approved by Sublessor, and shall use reasonable effort to cause the contractor to commence, diligently proceed with and complete the Alterations in accordance with the approved plans and specifications. Sublessor shall have the right to require that the contractor, prior to commencing work on the Premises, provide Sublessor with a performance bond and a labor and materials payment bond in the amount of the contract price for the work naming Sublessor and Sublessee (and any other person designated by Sublessor) as co-obligees. Sublessee shall be responsible for performing, at its sole cost and expense, any additional alterations and improvements required by law to be made to or in the Building as a result of any Alterations. Sublessor itself does not warrant the cost of the Alterations, the timeliness of performance or the quality of the contractor's work. (c) In the event Sublessor or the contractor is instructed by Sublessee to proceed with any changes to the Alterations without a prior determination of any increased costs resulting from such changes and without approval of such increases by Sublessee, or in the event Sublessee is responsible for increased costs attributable to a delay or acceleration in the time for construction, the amount of any increased costs shall be as reasonably determined by Sublessor upon completion of the Alterations. subject only to Sublessor's reasonable efforts in causing the contractor to furnish Sublessee appropriate back-up information concerning increased costs, if any. (d) The cost of the Alterations shall include the cost of performing work at other than normal business hours to the extent such work affects adjoining space and would unreasonably interfere with the ability of the tenant or sublessee of the adjoining space to conduct its business therein during normal business hours. In consideration of the administration by Sublessor or its agent of the constriction or installation of the Alterations, including, without limitation, the supervision of the general contractor, architect, engineers, and subcontractors, Sublessee shall pay to Sublessor a fee equal to 5% of the total cost of the Alterations (the "Construction Management ----------------------- Fee". - --- (e) Sublessee shall pay to Sublessor all amounts payable by Sublessee pursuant to this Paragraph 12 within 10 days after billing by ------------ Sublessor. Bills may be rendered in advance of the Alterations so as to enable Sublessor to pay the contractor, architect or engineer without advancing Sublessor's own funds. (f) Subject to Sublessor's agreement to minimize any disturbance of Sublessee's use of the Premises, Sublessor reserves the right at any time and from time to time (without the same constituting an actual or constructive eviction and without incurring any liability to Sublessee therefor or otherwise affecting Sublessee's obligations under this Sublease) to make such changes, alterations, additions, improvements, repairs or replacements in or to the Project or the Building (including the Premises if required so to do by any law or regulation) and the fixtures and equipment thereof, as well as in or to the street entrances, halls, passages and stairways thereof, and to change the name by which the Building is commonly known, as Sublessor may deem necessary or desirable. Nothing contained in this Paragraph 12 should be deemed to relieve ------------ Sublessee of any duty, obligation or liability of Sublessee with respect to making any repair, replacement or improvement or complying with any law, order or requirement of any government or other authority and nothing contained in this Paragraph 12 shall be deemed or construed to impose upon Sublessor any ------------ obligation, responsibility or liability whatsoever, for the care, supervision or repair of the Project or any part thereof other than as otherwise provided in this Sublease. 13. Repairs. -------- By entry hereunder Sublessee accepts the Premises as being in the condition in which Sublessor is obligated to deliver the Premises. Sublessee shall, at all times during the term hereof, and at Sublessee's sole cost and expense, keep the Premises (including without limitation any and all exposed plumbing and electrical facilities situated in the Premises) in good condition and repair, ordinary wear and tear, damage thereto by fire, earthquake, act of God or the elements excepted. Sublessee shall have no obligation to maintain and repair the roof, structural components, exterior walls, bearing walls, foundation and windows of the Building except as provided in Paragraph 7 of this ----------- Lease. Sublessee hereby waives all rights to make repairs at the expense of Sublessor or in lieu thereof to vacate the Premises. Sublessee shall at the end of the term hereof surrender to Sublessor the Premises and all Alterations thereto in the same condition as when received, ordinary wear and tear and damage by fire, earthquake, act of God or the elements excepted. Sublessor has no obligation and has made no promise to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof, except as specifically herein set forth. No representations respecting the condition of the Premises or the Building have been made by Sublessor to Sublessee, except as specifically herein set forth. 14. Liens. ----- Sublessee shall keep the Premises and the Building free from any liens arising out of any work performed, materials furnished or obligations incurred by Sublessee. Sublessor and Master Lessor shall have the right to post and keep posted on the Premises any notices that may be provided by law or which Sublessor or Master Lessor may deem to be proper for the protection of Sublessor and Master Lessor, the Premises and the Building from such liens. Sublessee shall indemnify, defend, protect and hold harmless Sublessor and Master Lessor from and against any and all liability, losses, damages, costs, claims and all other expenses (including without limitation attorneys' fees) arising out of claims of lien for work performed or materials or supplies furnished to or for the benefit of Sublessee, or persons having an interest in the Premises through Sublessee. If Sublessee contests any claim of lien and such claim interferes with any proposed sale, financing, or other transaction affecting the Premises, which either Master Lessor or Sublessor, or the' respective successors and assigns, has either commenced or is about to commence, then upon the written request of Master Lessor or Sublessor, or their respective successors or assigns, Sublessee shall either (i) post cash or cash equivalent security (such as a letter of credit or certificate of deposit) in the amount of 150% of the claim, plus estimated costs, penalties and interest, or (ii) record a bond from a responsible corporate surety of such kind and in such amount as may be required by statute or any responsible title company to release the lien from the Premises; in addition, Sublessee shall do and perform any and all additional commercially reasonable acts which any lender of Master Lessor or Sublessor, or their respective successors or assigns, may require in order that Master Lessor or Sublessor, or their respective successors or assigns, will remain in compliance with any loan secured by the Building or Sublessor's leasehold interest therein, so long as Sublessee receives written notice of such required act from such lender. Nothing herein contained shall be so construed to allow such items to remain unpaid for such length of time as would permit the Premises, or any part of thereof, to be foreclosed upon for the non-payment of same. 15. Entry by Sublessor. ------------------ Sublessor and Master Lessor, and their successors and assigns, may enter the Premises at reasonable hours to (a) inspect the same; (b) exhibit the same to prospective purchasers, lenders or tenants or sublessees; and (c) post notices of non-responsibility. Sublessor shall have the additional right to enter the Premises at reasonable hours to (1) determine whether Sublessee is complying with all its obligations hereunder; (2) supply Janitor service and any other service to be provided by Sublessor to Sublessee hereunder; and (3) make repairs or perform maintenance required of Sublessor under the terms hereof, make repairs to any adjoining space or utility services, or make repairs, alterations or improvements to any other portion of the Building; provided, however, that all such work shall be done so as to cause as little interference to Sublessee as reasonably possible. Sublessee hereby waives any claim for damages for any inconvenience to or interference with Sublessee's business or any loss of occupancy or quiet enjoyment of the Premises occasioned by such entry. Notwithstanding the immediately preceding sentence to the contrary, in the event Sublessor's entry shall render all or a part of the Premises unusable for ten (10) consecutive business days, then, as Sublessee's sole and exclusive remedy, Sublessee shall be entitled to an abatement of rent in proportion to the percentage of the Premises rendered unusable as a result of such entry commencing as of the eleventh (11th) business day following such entry and ending on the date that Sublessee's use of the entire Premises is restored. Sublessor and Master Lessor shall each at all times have and retain a key with which to unlock all of the doors in, on or about the Premises (excluding Sublessee's vaults, safes and similar areas designated in writing by Sublessee in advance); and Sublessor and Master Lessor shall each have the right to use any and all means which Sublessor or Master Lessor may deem proper to open Sublessee's doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Sublessor or by Master Lessor in an emergency shall not be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Sublessee from the Premises or any portion thereof 16. Services. -------- (a) Sublessor shall maintain the Common Area and the public areas of the Premises, including lobbies, stairs, elevators, corridors and restrooms, all exterior landscaping, the mechanical, plumbing and electrical equipment serving the Building, and any unexposed plumbing and electrical facilities located in the Premises, in reasonably good order and condition consistent with comparable office buildings in the Downtown San Francisco Financial District, except for (1) ordinary wear and tear, damage or destruction to the Project, or any portion there of (including, without limitation, the premises), or a taking by eminent domain of the project or any portion thereof, and (2) damage occasioned by the act of Sublessee, its employees, contractors, agents or invitees which damage shall be repaired by Sublessor at Sublessee's expense. Sublessee acknowledges that Master Lessor is responsible for keeping the roof, structural components, exterior walls, bearing walls, foundations, and exterior windows of the Building in good and sanitary order, condition and repair, at master Lessor's sole cost and expense, except to the extent provided in Paragraph 7(a) and to the extent -------------- the same are damaged due to the gross negligence or willful misconduct of Sublessor or Sublessee. Sublessee further acknowledges and agrees that to the extent the roof, structural Components, exterior walls, bearing walls, foundations and windows are damaged due to the gross negligence or willful misconduct of Sublessee, then Sublessee shall be responsible for any and all costs and expenses that Master Lessor or Sublessor incurs in repairing such damage. Sublessor shall commence any maintenance or repair work required under this Paragraph 16(a) within a reasonable time after its receipt of written --------------- notice from Sublessee describing the need therefor. Except for such periods when entry is prevented or controlled as a result of damage or destruction to the Project, or any portion thereof, or on account of a taking by eminent domain of the Project, or any portion thereof, and subject to the Rules and Regulations in effect from time to time pursuant to Paragraph 32 below and Sublessor's then ------------ security program in effect for the Project, Sublessee shall have access to the Premises 24 hours a day, 365 days a year. (b) Sublessor shall cause to be furnished (1) electricity for lighting to the Common Area on a 24 hour basis, (2) heat and air conditioning to the extent reasonably required for the comfortable occupancy by Sublessee in its use of the Premises during the period from 8:00 a.m. to 6:00 p.m. on weekdays (except legal holidays), or as set forth in the Rules and Regulations attached hereto as Exhibit D, which may --------- be changed from time to time, or such shorter periods as may be prescribed by any applicable policies or regulations adopted by any utility or governmental agency (or during, such other hours as may be reasonably requested by Sublessee, so long as Sublessee reimburses Sublessor for the cost thereof pursuant to Paragraph 6(d) below), (3)elevator service, (4) lighting replacement (for - -------------- building standard lights), (5) restroom supplies, and (6) window washing with reasonable frequency, provided, however, that Sublessor may elect to require Sublessee to provide its own refuse pickup and janitorial service, at Sublessee's sole cost and expense. Sublessor may establish reasonable measures to conserve energy, including but not limited to, automatic switching of lights after hours and more efficient forms of lighting, so long as such measures do not unreasonably interfere with Sublessee's use of the Premises. Sublessor shall not be in default hereunder or be liable for any damages directly or indirectly resulting from, nor shall the rental herein reserved be abated by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing services, (ii) failure to furnish or delay in furnishing any such services when such failure or delay is caused by accident or any condition beyond the reasonable control of Sublessor or by the making of necessary repairs or improvements to the Premises or to the Building, or (iii) the limitation, curtailment, rationing or on use of water, electricity, gas or any other form of energy serving the Premises or the Building. (c) Sublessee shall be solely responsible for contracting for, and shall promptly pay to either Sublessor or the supplier thereof, as applicable, as the same become due and payable, all bills, charges, assessments, and exactions for all water, gas, electricity, heat sewer service, telephone, and any other utilities, materials and services furnished to or used by Sublessee in, on or about the Premises, and (if Sublessor so requires) for refuse pickup and janitorial service for the Premises. If any utility, material or service is not separately charged to the Premises, Sublessee shall pay to Sublessor, within ten (10) days after written demand therefor, Sublessor's pro rata share of the total cost thereof as may be determined by Sublessor. Sublessor hereby confirms that the Premises are separately metered. Sublessee shall not, without Sublessor's prior consent given or withheld in Sublessor's sole discretion, install in the Premises (i) lighting and equipment, the aggregate average daily power usage of which exceeds 3 watts per square foot, or which requires a voltage other than 110 volts single-phase, (fi) heat generating equipment or lighting other than Building standard lights, or (iii) supplementary air conditioning facilities. Sublessor shall have no responsibility for providing water, gas, electricity, sewer service, telephone, or any other utilities to the Premises, and may in its sole discretion require Sublessee to contract for and Provide its own refuse pickup and janitorial service for the Premises, at Sublessee's sole cost and expense. (d) If heat-generating equipment or lighting other than building standard lights are installed or used in the Premises and such equipment or lighting affects the temperature otherwise maintained by the air conditioning system, or if equipment is installed in the Premises which requires a separate temperature-controlled room, on Sublessee's request, or at Sublessor's election after notice to Sublessee, Sublessor shall install supplementary air conditioning facilities in the Premises or otherwise modify the ventilating and air conditioning system serving the Premises, and the capital and maintenance costs of such facilities and modifications shall be borne by Sublessee. (e) Sublessee shall reimburse Sublessor, upon billing therefor, for the cost of (1) all heat or air conditioning provided to the Premises during hours requested by sublessee when such services are not otherwise furnished by Sublessor pursuant to Paragraph16(b)(2) above, and (2) all power and cooling ----------------- energy provided for supplementary air conditioning facilities in or serving the Premises. Sublessee shall also pay the cost of any transformers, additional risers, panel boards and other facilities if and to the extent required to furnishing power for supplementary air conditioning facilities in or serving the Premises. The cost of item (1) above, shall be a per-hour charge reflecting the electrical energy, labor and fixed plant costs of running the heating and air conditioning system, and to the extent one or more Sublessees served by the same system requests heat or air conditioning services during the hours requested by Sublessee, the charge shall be divided among the Sublessees requesting the services in proportion to the areas served. (f) In the event that Sublessor, at Sublessee's request provides services to Sublessee that are not otherwise provided for in this Sublease, Sublessee shall Pay Sublessor's reasonable charges for such services upon receipt of billing therefor. 17. Indemnification, Limitation of Liability. ---------------------------------------- (a) Sublessee hereby waives all claims against Sublessor and Master Lessor for damage to any property or injury or death of any Person in, upon or about the Premises arising at any time and from any cause, and Sublessee shall indemnify, defend, protect and hold Sublessor and Master Lessor harmless from and against any and all claims. demands, actions, suits, losses, damages, costs, expenses and liabilities whenever arising on or after the date hereof, that may be based upon or may be assessed or alleged to be based upon injury, damage or loss of any nature whatsoever to persons or property (whether of Sublessee or any other Person) arising out of or due to, or asserted or alleged to arise out of or be due to, any act (whether of commission or omission), of Sublessee or any of its, agents, employees, representatives, visitors or guests with respect to the Premises, including the use or storage in the Premises of any hazardous or toxic substance, or in the exercise of Sublessee's rights or the performance of Sublessee's covenants and obligation, under this Sublease or the use or occupancy of the Premises or the Building by Sublessee or any of its agents, employees, visitors or guests, whether or not any such claim, demand, action, suits, loss, damage, costs, expense or liability is asserted by any agent, employee or representative of Sublessee, or by any visitor, guest or other third party, and whether or not any such claim, demand, action, suit, loss, damage, cost, expense or liability is based upon or asserted or alleged to be based upon negligence. In the event any action or proceeding is brought against Sublessor or Master Lessor with respect to any matter covered by Sublessee's aforesaid indemnity obligation, Sublessee, upon notice by Sublessor or Master Lessor, shall resist and defend the same at Sublessee's expense with counsel satisfactory to Sublessor or Master Lessor, as the case may be. The foregoing indemnity obligations shall include reasonable attorney's fees, investigation costs, court costs and all other reasonable costs and expenses incurred by Sublessor or Master Lessor from the first notice that any claim or demand is to be made or may be made. The provisions of this Paragraph 17(a) shall survive --------------- the termination of this Sublease with respect to any event occurring prior to such termination. (b) In addition to all other indemnities under this Sublease, Sublessee hereby assumes for itself and for its successors and assigns any and all environmental, health and safety liabilities or obligations relating to the Premises and/or Sublessee's use of the Premises, including but not limited to any liabilities or obligations imposed by Paragraph --------- 7 above upon Sublessee and its successors and assigns. Sublessee for itself and - - its successors and assignees shall indemnify defend, protect and hold Sublessor and Master Lessor, and their respective successors, assigns, owners and affiliates harmless from and against any and all claims, demands, losses, costs, expenses, liabilities and damages (including but not limited to attorney's fees, investigation costs, court costs and all other reasonable costs and expenses incurred by Sublessor and Master Lessor) arising out of or in connection with any environmental contamination or pollution of the Premises, or the existence on, or removal from, the Premises of any hazardous substance. The provisions of this paragraph shall survive the termination of this Sublease with respect to any event occurring prior to such termination. (c) Sublessor shall not be liable at any time or in any event for any latent defect, deterioration or change in the condition of the Premises, nor for damage to the same or to any property contained therein, nor for injury to persons whether caused by any overflow or leakage upon or into the Premises of water, steam, gas or electricity, or by any breakage in pipes or plumbing, or breakage, leakage or obstruction of soil pipes, nor for damage, loss or injury from any other source, nor for loss of property by theft or otherwise, nor for consequential or special damages therefrom, unless said damage, loss or injury shall be caused by or due to the gross negligence of Sublessor or Sublessor's agent, servant or employee. 18. Insurance and Subrogation. ------------------------- (a) During the term hereof and any other period of occupancy, Sublessee, at its sole expense, shall obtain and keep in force the following insurance: (i) All Risk insurance upon property of every description and kind owned by Sublessee and located in the Building or for which Sublessee is legally liable or installed by or on behalf of Sublessee including, without limitation, the Tenant Improvements, furniture, fittings, installations, fixtures and any other personal property, in an amount not less than 100% of the full replacement cost thereof. All such insurance policies shall name Sublessee as named insured thereunder, shall name Sublessor as additional insured, and, at Sublessor's request shall name Sublessor's mortgagees, if any, as additional insured thereunder, all as their respective interests may appear. Sublessor will not be required to carry insurance of any kind on any of Sublessee's furniture or furnishings, or on any of Sublessee's fixtures, equipment, improvements, or appurtenances under this Sublease, and Sublessor shall not be obligated to repair. any damage thereto or replace the same. (ii) Commercial general liability insurance coverage written on an occurrence form, including but not limited to personal injury, premises/operations, blanket contractual liability, liability, and owned/non- owned auto liability, in an amount not less than $1,000,000 combined single limit bodily injury and property damage and $1,000,000 personal injury per occurrence and a general aggregate of $2,000,000 per location inclusive. All such insurance policies shall name Sublessee as named insured thereunder and shall name Sublessor, Sublessor's management agent, and Sublessor's mortgagees, if any, as additional insureds thereunder. (iii) Workers Compensation and Employer's Liability insurance, with a limit of no less than $1,000,000 per occurrence. Such coverage shall be endorsed to waive the insurer's right of subrogation against Sublessor and its management agent. (iv) Loss of income and extra expense insurance in such amounts as will reimburse Sublessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent tenants or attributable to prevention of access to the Premises or to the Building as a result of such perils. (v) Host liquor liability insurance coverage in an amount of not less than $1,000,000 combined single limit bodily injury and property damage per occurrence, if at any time during the term hereof any alcoholic beverages of any nature are served on the Premises. (vi) Any other form or forms of insurance (or any increase in the coverage required above) as Sublessor may reasonably require from time to time in form, in amounts and for insurance risks against which a prudent landlord of a comparable building would require of a comparable tenant. (b) All policies required to be obtained by Sublessee hereunder shall be issued by insurers that are acceptable to Sublessor and in form satisfactory to Sublessor, and each such policy shall contain provisions (i) that the insurance afforded thereby shall be primary and noncontributing with any other insurance obtained by or available to Sublessor, and (ii) that the Sublessor shall have no liability for premium payment or other obligation under the policy. Sublessee will deliver to Sublessor certificates of insurance (and, if required by Sublessor, the mortgagees of Sublessor, certified copies of each such insurance policy) as soon as practicable after the placing of the required insurance, but not later than 10 days prior to the date Sublessee takes possession of all or any part of the Premises. All policies shall contain an undertaking by the insurers to notify Sublessor and Sublessor's mortgagees, if any, in writing, by registered or certified U.S. mail, return receipt requested, not less than 30 days before any material change, reduction in coverage, cancellation, or other termination thereof Sublessee shall, within I 0 days prior to the expiration of such policies, furnish Sublessor with renewals or "binders" thereof, or Sublessor may order such insurance and charge the cost thereof to Sublessee as additional rent. (c) During the term of this Sublease, Sublessor shall insure the Building (excluding any property which Sublessee is obligated to insure under Paragraph18(a) above against damage with All Risk insurance and public liability - -------------- insurance, all in such amounts, and with such deductions as Sublessor considers appropriate. Sublessor may, but shall not be obligated to, obtain and carry any other form or forms of insurance as it or Sublessor's mortgagees, if any, may determine advisable. Notwithstanding any contribution by Sublessee to the cost of insurance premiums, as provided herein, Sublessee acknowledges that it has no right to receive any proceed from any insurance policies carried by Sublessor. (d) Sublessee shall not keep, use, sell, or offer for sale in, or upon, the Premises any article which may be prohibited by any insurance policy in force covering the Building. If Sublessee's occupancy or business in, or on, the Premises, whether or not Sublessor has consented to the same, results in any increase in premiums for the insurance periodically carried by Sublessor or Master Lessor with respect to the Building, Sublessee shall pay any such increase in premiums as additional rent within 10 days after being billed therefor by Sublessor. In determining whether increased premiums are a result of Sublessee's use of the Premises, a schedule issued by the organization computing the insurance rate on the Building showing the various components of such rate, shall be conclusive evidence of the several items and charges which make up such rate. Sublessee shall promptly comply with all reasonable requirements of the insurance authority or any present or future insurer relating to the Premises. (e) If any of Sublessor's or Master Lessor's insurance policies shall be canceled or cancellation shall be threatened or the coverage thereunder reduced or threatened to be reduced in any way because of the use of the Premises or any part thereof by Sublessee or any assignee or subtenant of Sublessee or by anyone Sublessee permits on the Premises, and if Sublessee fails to remedy the condition giving rise to such cancellation threatened cancellatior4 reduction of coverage, threatened reduction of coverage, increase in premiums, or threatened increase in premiums, within 48 hours after notice thereof, Sublessor may, at its option, either terminate this Sublease or enter upon the Premises and attempt to remedy such condition, and Sublessee shall promptly pay the cost thereof to Sublessor as additional rent. Sublessor shall not be liable for any damage or injury caused to any property of Sublessee or of others located on the Premises resulting from such entry. If Sublessor is unable, or elects not to remedy such condition, then Sublessor shall have all of the remedies provided for in this Sublease 'in the event of a default by Sublessee. Notwithstanding the foregoing provisions of this Paragraph 18(e) if --------------- Sublessee fails to remedy such condition as aforesaid, Sublessee shall be in default of its obligation hereunder and Sublessor shall have no obligation to remedy such default. (f) All policies covering real or personal property which either party obtains affecting the Project, the Building, the Premises, the contents of the same or any operation therein, shall include a clause or endorsement denying the insurer any rights of subrogation against the other party and Master Lessor, to the extent rights have been waived by the insured before the occurrence of injury or loss, if the same are obtainable without unreasonable cost. 19. Damage or Destruction. --------------------- (a) In the event the Premises, or any part thereof, or the portion of the Building necessary for Sublessee's occupancy are damaged by fire or other casualty insured against by Sublessor's fire and extended coverage insurance policy covering the Building, Sublessor shall notify Sublessee of the estimated time required for repair or restoration, If such damage can be repaired within 120 days from the date of the casualty, Sublessor shall forthwith repair or restore the Premises or the portion of the Building necessary for Sublessee's occupancy. Notwithstanding the preceding sentence, in the event damage to the Premises can be repaired within 120 days from the date of the casualty, but the damage to the Building cannot be repaired within such time, or existing law does not permit repair of such damage and destruction, Sublessor shall have the right to terminate this Sublease. (b) If during the Term, the Premises, or any Part thereof, are damaged or destroyed and Paragraph 19(a) does not apply, or if at any time during the --------------- Term, the Premises or the Building are totally destroyed from any cause (including any total destruction required by any authorized pubic authority), then Sublessor may either elect to (i) repair the damage and destruction, in which case this Sublease shall continue in full force and effect, or (ii) terminate this Sublease as of the date of the damage or destruction provided, however, that if existing law does not permit the repair of such damage or destruction, this Sublease shall terminate. (c) If the Premises, or any part thereof, are destroyed and damaged and Us Sublease remains in full force and effect under the provisions of this Paragraph 19, Sublessee - ------------ shall continue the operation of its business on the Premises to the extent reasonable practicable from the standpoint of 'prudent business management, and all Base Rent and other amounts due by Sublessee hereunder shall be reduced for the period during which such damage, repair or restoration continues based on the extent to which such destruction or damage interferes with the effective or economical use or operation of, or the conduct of any business in, the Premises by Sublessee or by any permitted assignee or sublessee holding under Sublessee. Sublessee shall have no claim against Sublessor or Master Lessor for any damage suffered by Sublessee by reason of any such damages destruction, repair or restoration. (d) For purposes of this Paragraph 19, the Premises or the Building ------------ shall be deemed totally destroyed if, in the reasonable judgment of an experienced claims adjuster or other insurance professional retained by Sublessor or Sublessor's insurer, the cost to repair such damage would exceed fifty percent (50%) of the then replacement value of the Premises or Building, as the case may be. (e) If the Premises or the Building are to be repaired or restored under this Paragraph 19, Sublessor shall repair or restore at its cost the ------------ Building and all leasehold improvements in the Premises other than Alterations made by a Sublessee. Sublessee shall pay the cost of repairing or restoring all such Alterations and the cost of repairing or replacing Sublessee's fixtures and personal property in the Premises. (f) Notwithstanding anything to the contrary set forth above in this Paragraph 19, if Sublessor elects to terminate the Master Lease or the Master - ------------ Lease terminates as a result of damage or destruction to the Premises or the Building, or any portions thereof, then this Sublease shall terminate as of the day the Master Lease terminates and the Base Rent and all other amounts payable by Sublessee hereunder shall be prorated as of and payable to such date. Notwithstanding anything to the contrary stated in Paragraph 12, upon such ------------ termination Sublessee shall not be required to remove any improvements, including without limitation alterations or additions thereto, from the Premises, except to the extent that it is feasible and commercially reasonable for Sublessee to remove such improvements. (g) Notwithstanding anything to the contrary set forth above in this Paragraph 19, if the Premises or the Building, or any portions thereof, are - ------------ damaged or destroyed within the last two (2) years of the Term, Sublessor shall have the right to terminate this Sublease as of the date of the damage or destruction. (h) Sublessee has no right to rebuild its Premises or the Building, or any portions thereof, in the event of damage or destruction to the Premises or Building. (i) Sublessor and Sublessee acknowledge that their respective rights and obligations in the event of damage or destruction of the Premises or the Building are to be governed by this Sublease. 20. Eminent Domain. -------------- If all of the Premises or the Building shall be taken as a result of the exercise of the power of eminent domain, this Sublease shall terminate as of the date of the taking and the Base Rent and all other amounts due by Sublessee hereunder shall be prorated as of the date of the taking. In the event of partial taking of the Premises or the Building so that it is impossible or impracticable for Sublessee to continue the effective or economical use or operation of the Premises or the conduct of business therein, or if a partial taking of the Premises or Building occurs during the last two (2) years of the Term, then Sublessor shall have a right to terminate this Sublease as of the date of the taking. Notwithstanding the foregoing, if as a result of any taking of the Premises or the Building, the Master Lease terminates, then this Sublease shall also terminate, effective as of the date of termination of the Master Lease. In the event of any taking, Sublessee shall have no claim against Sublessor or Master Lessor for the value of any unexpired term of this Sublease or otherwise. In the event of a partial taking of the Premises which does not result in a termination of this Sublease, the monthly rental thereafter to be paid shall be equitably reduced. 21. Events of Default. ----------------- The following events shall constitute Events of Default under this Sublease: (a) a default by Sublessee in the payment when due of any rent or other sum payable hereunder; (b) a default by Sublessee in the performance of any of the other terms, covenants, agreements or conditions contained herein and, if the default is curable, the continuation of such default for a period of 5 days after notice by Sublessor, provided that Sublessee shall have 90 days to cure such breach if (i) it is not susceptible to cure within 5 days, and (ii) within such 5-day period, Sublessee commences with due diligence and dispatch the curing of such default and the prosecution of such cure to completion. (c) the bankruptcy or insolvency of Sublessee, a transfer by Sublessee in fraud of creditors, an assignment by Sublessee for the benefit of creditors, or the commencement of any proceedings of any kind by or against Sublessee under any provision of the Federal Bankruptcy Act or under any other insolvency, bankruptcy or reorganization act unless, in the event any such proceedings are involuntary, Sublessee is discharged from the same within 60 days thereafter; (d) the appointment of a receiver for a substantial part of the assets of Sublessee; (e) the abandonment of the Premises; and (f) the levy upon this Sublease or any estate of Sublessee hereunder by any attachment or execution and the failure to have such attachment or execution vacated within 30 days thereafter. 22. Termination Upon Default. ------------------------ Upon the occurrence of any Event of Default by Sublessee hereunder, Sublessor may, at its option and without any further notice or demand, in addition to any other rights and remedies given hereunder or by law, terminate this Sublease and exercise its remedies relating thereto in accordance with the following provisions: (a) Sublessor shall have the right, so long as the Event of Default remains uncured, to give notice of termination to Sublessee, and on the date specified in such notice this Sublease shall terminate. (b) In the event of any such termination of this Sublease, Sublessor may then, or at any time thereafter by judicial proms, reenter the Premises and remove therefrom all persons and property and again repossesses and enjoy the Premises, without prejudice to any other remedies that Sublessor may have by reason of Sublessee's default or of such termination. (c) In the event of any such termination of this Sublease, and in addition to any Other rights and remedies Sublessor may have, Sublessor shall have all of the rights and remedies of a landlord provided by Section 1951.2 of the California Civil Code. The amount of damages which Sublessor may recover in event of such termination shall include, without limitation, (1) the worth at the time of award (computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus (1%) one percent of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of rental loss that Sublessee proves could be reasonably avoided, (2) all legal expenses and other related costs incurred by Sublessor following Sublessee's default, (3) all reasonable costs incurred by Sublessor in restoring the Premises to good order and condition, or in remodeling, renovating or otherwise preparing the Premises for reletting, and (4) all reasonable costs (including, without limitation, any brokerage commissions) incurred by Sublessor in reletting the Premises. 23. Continuation after Default. -------------------------- Sublessor has the remedy described in California Civil Code Section 1551.4 (Sublessor may continue 24. Other Relief. ------------ The remedies provided for in this Sublease are in addition to any other remedies available to Sublessor at law or in equity by statute or otherwise. 25. Sublessor's Right to Cure Defaults. ---------------------------------- All agreements and provisions to be performed by Sublessee under any of the terms of this Sublease shall be at its sole cost and expense and without any abatement of rental. If Sublessee shall fail to pay any sum of money, other than rental, required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder and such failure shall continue for 10 days after notice thereof by Sublessor, or such longer period as may be allowed hereunder, Sublessor may, but shall not be obligated so to do, and without waiving or releasing Sublessee from any obligations of Sublessee, make any such payment or perform any such other act on Sublessee's part to be made or performed as in this Sublease provided. All sums paid by Sublessor and all necessary incidental costs shall be payable to Sublessor on demand. 26. Assignment and Subletting. ------------------------- (a) Sublessee shall not assign this Sublease or further sublet all or any part of the Premises without the prior written consent of Sublessor (which shall not be unreasonably withheld) and Master Lessor, as required under the Master Lease, or permit the use of the Premises by any party other than Sublessee. This Sublease shall not, nor shall any interest herein, be assignable as to the interest of Sublessee by operation of law. A consent to any assignment or sublease shall not be deemed to be a consent to any subsequent assignment or sublease. Any assignment or sublease without the consent of Sublessor and Master Lessor, as required by the Master Lease, shall be void and shall, at the option of Sublessor, terminate this Sublease. In connection with each consent requested by Sublessee, Sublessee shall submit to Sublessor the terms of the proposed transaction, the identity of the parties to the transaction, the proposed documentation for the transaction, and all other information reasonably requested by Sublessor concerning the proposed transaction and the parties involved therein. If Sublessor does not, within thirty (30) days after receiving Sublessee's request and all the information described in this Paragraph 26(a), give Sublessee written notice -------------- that Sublessor consents to the proposed assignment or subletting, Sublessor shall be deemed to have withheld its consent to such assignment or subletting. As a condition of granting its consent to any assignment or subletting, Sublessor may require that Sublessee pay to Sublessor all rent and other charges payable by the assignee or sublessee, to the extent that such amounts exceed the amounts required to be paid to Sublessor by Sublessee hereunder. No assignment or subletting shall relieve Sublessee of any of its obligations under this Sublease. (b) Without limiting the other instances in which it may be reasonable for Sublessor to withhold its consent to an assignment or subletting. Sublessor and Sublessee acknowledge that it shall be reasonable for Sublessor to withhold its consent in the following instances: (1) if at the time consent is requested or at any time prior to the granting of consent, Sublessee is in default under this Sublease or would be in default under this Sublease but for the pendency of any cure Period under Paragraph 21 above; - ------------ (2) if the proposed assignee or sublessee is a governmental agency; (3) if, in Sublessor's reasonable judgment, the use of the Premises by the proposed assignee or sublessee would not be comparable to the types of use by other sublessees in the Building, would entail any alterations which would lessen the value of the leasehold improvements in the Premises, would result in more than a reasonable number of occupants per floor or would require substantially increased services by Sublessor or would alter the tenant mix in the Building so as to adversely affect the economic viability, marketability or reputation of the Building (Sublessee acknowledging that Sublessor's leasing policy for the Building is based, in material part, on Sublessor's determination of a successful mix of Sublessee uses, density of use of space by and methods of operation of Sublessees); (4) if, in Sublessor's reasonable judgment, the financial worth of the proposed assignee or sublessee does not meet the credit standards applied by Sublessor for other sublessees under subleases with comparable terms, or the character, reputation, or business of the proposed assignee or sublessee is not consistent with the quality of the other tenancies in the Building; (5) if, in case of a subletting, such subletting is of less than the entire Premises; (6) if Sublessor has received from any Prior lessor to the proposed assignee or sublessee a negative report concerning such prior lessor's experience with the proposed assignee or sublessee, assignee or sublessee; (7) if Sublessor has experienced previous default,; by or is in litigation with the proposed (8) if, in Sublessees reasonable judgment, the Premises or the relevant part thereof will be used in a manner that will violate any negative covenant as to use contained in any other lease of space in the Building; (9) if the use of the Premises by the proposed assignee or sublessee will violate any applicable law, ordinance or regulation; (10) if the proposed assignment or sublease will create a vacancy elsewhere in the Building; (11) if the proposed assignee or sublessee is a person with whom Sublessor is negotiating to lease space in the Building; (12) if the proposed assignment or sublease fails to include all of the terms and provisions required to be included therein pursuant to this Paragraph26; and - ----------- (13) if, in the case of a subletting of less than the entire Premises, the subletting would (i) result in the division of the Premises into more than two (2) subparcels, (ii) require access to be provided through space leased or held for lease to another Sublessee or improvements to be made outside of the Premises, or (iii) result in a division of the Premises which would violate any building, health, safety or other applicable law, ordinance or regulation. (c) If at any time or from time to time during the term of this Sublease, Sublessee desires to sublet all or any part of the Premises, Sublessee shall give notice to Sublessor setting forth the terms of the proposed subletting and the space so proposed to be sublet. Sublessor shall have the option, exercisable by notice given to Sublessee, within 25 days after Sublessee's notice is given, to sublet from Sublessee such space at the rental and other terms set forth in Sublessee's Notice, or, if the proposed subletting is for the entire Premises for a sublet term ending within the last year of the term of this Sublease, to terminate this Sublease. If Sublessor does not exercise such option, Sublessee shall be free to sublet such space to any third party, on the same terms set forth in the notice given to Sublessor, subject to obtaining Sublessor's prior written consent as hereinabove provided. If at any time, or from time to time, during the ter7n of this Sublease, Sublessee desires to assign this Sublease, Sublessee shall give notice to Sublessor and within ten (10) days of Sublessor's receipt of such notice, Sublessor may at its election terminate this Sublease effective as of the effective date for the assignment described in Sublessee's notice. Sublessor's right to terminate this Sublease in connection with an assignment or subletting shall not apply to any assignment of this Sublease or subletting of the Premises to an Affiliate. (d) For purposes hereof, if Sublessee is a partnership, a withdrawal or change of partners, or a change of ownership of partners, owning more than 49% interest in the partnership, or its Sublessee is a corporation, any transfer of 50% or more of its stock, shall constitute a voluntary assignment and shall be subject to this Paragraph 26. ------------ (e) No sublessee (other than Sublessor if it exercises its option pursuant to Paragraph 26(c) above) shall have a right further to sublet --------------- without Sublessor's prior consent, which Sublessee acknowledges may be withheld in Sublessees absolute discretion and any assignment by a sublessee of its sublease shall be subject to Sublessees prior consent in the same manner as if Sublessee were entering into a new sublease. No sublease, once consented to by Sublessor, shall be modified or terminated by Sublessee without Sublessor's prior consent which consent shall not be unreasonably withheld. (f) In the case of an assignment any sums or other economic consideration received by Sublessee as a result of such assignment shall be paid to Sublessor after first deducting the unamortized cost of leasehold improvements paid for by Sublessee, and the cost of any real estate commissions incurred by Sublessee in connection with such assignment. (g) in the case of a subletting, any sums or economic consideration received by Sublessee as a result of such subletting shall be paid to Sublessor after first deducting (1) the rental due hereunder, prorated to reflect only rental allocable to the sublet portion of the Premises, (2) the cost of leasehold improvements made to the sublet portion of the Premises at Sublessee's cost, amortized over the term of this Sublease except for leasehold improvements made for the specific benefit of the new sublessee. which shall be amortized over the term of the new sublease, and (3) the cost of any real estate commission incurred by Sublessee in connection with such subletting, amortized over the term of the new sublease. (h) Regardless of Sublessor's consent, no subletting or assignment shall release Sublessee of Sublessee's obligation or alter the primary liability Of Sublessee to pay the rental and to perform all other obligations to be performed by Sublessee hereunder. The acceptance of rental by Sublessor from any other person shall not be deemed to be a waiver by Sublessor of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by any assignee of Sublessee or any successor of Sublessee in the performance of any of the terms hereof, Sublessor may proceed directly against Sublessee without the necessity of exhausting remedies against such assignee or successor. (i) In the event Sublessee shall assign this Sublease or sublet the Premise or request the consent of Sublessor to any assignment, subletting, hypothecation or other action requiring Sublessor's consent hereunder, then sublessee shall pay Sublessor's reasonable attorney's fees incurred in connection therewith. (j) Notwithstanding anything to the contrary set forth above in this Paragraph 26, Sublessor shall not withhold its consent to a proposed sublease - ------------ or assignment to Euniverse, so long as the financial condition and net worth of Euniverse as of the effective date of such sublease or assignment is at least equivalent or equal to the financial condition and net worth of the original Sublessee under this Sublease as of the Commencement Date. In addition, the provisions of subparagraphs (c), (f), and (g) of this Paragraph 26 shall not ------------ apply to any such sublease or assignment by Sublessee to Euniverse. 27. Subordination. -------------- (a) This Sublease shall be subordinate to the Master Lease and to any mortgage, deed of trust, or any other hypothecation for security now or hereafter placed upon the Building and to any and all advances made on the security thereof, or Sublessor's or Master Lessor's interest therein, and to all renewals, modifications, consolidations, replacements and extensions thereof Notwithstanding the foregoing, if any mortgagee or trustee shall elect to have this Sublease prior to the lien of its mortgage, leasehold mortgage or deed of trust, and shall give notice thereof to Sublessee, this Sublease shall be deemed prior to the mortgage or deed of trust, whether this Sublease is dated prior or subsequent to the date of the mortgage, leasehold mortgage or deed of trust or the date of recording thereof. In the event any mortgage or deed of trust to which this Sublease is subordinate is foreclosed or a deed in lieu of foreclosure is given to the mortgagee or beneficiary, or the Master Lease is terminated, Sublessee shall attorn to the purchaser at the foreclosure sale or to the grantee under the deed in lieu of foreclosure, or to the Master Lessor, as appropriate. Sublessee agrees to execute any documents required to effectuate such subordination, to make this Sublease prior to the lien of any mortgage or deed of trust, or to evidence such attornment. (b) In the event any mortgage or deed of trust to which this Sublease is subordinate is foreclosed or a deed in lieu of foreclosure is given to the mortgagee or beneficiary, this Sublease shall not be barred, terminated, cut off or foreclosed nor shall the rights and possession of Sublessee hereunder be disturbed if Sublessee shall not then be in default in the payment of rental and other sums due hereunder or otherwise be in default under the terms of this Sublease and if Sublessee shall attorn to the purchaser or grantee as provided in Paragraph 27(a) above or, if requested, enter into a new lease or sublease, --------------- as appropriate, for the balance of the term hereof upon the same terms and provisions its are contained in this Sublease. Sublessee's covenant under Paragraph 27(a) above to subordinate this Sublease to any mortgage, leasehold - --------------- mortgage, deed of trust or other hypothecation hereafter executed is conditioned upon each such senior, instrument containing the commitments specified in this Paragraph 27(b). - --------------- 28. Relation Between Sublease and Lease: Sublessor's Obligations. ------------------------------------------------------------------ This Sublease is and at all times shall be subject and subordinate to the Master Lease. Sublessee hereby expressly assumes and agrees to comply with all of the provisions of the Master Lease, to the extent applicable to Sublessee, and to perform all the obligations on the part of the "Tenant" to be performed under the terms of the Master Lease except as varied by this Sublease. Sublessee shall have no right whatsoever to exercise any right or election of Sublessor arising under the Master Lease, including without limitation Sublessor's right to terminate the Master Lease under Section 3.3 thereof, and ----------- Sublessor's right to acquire the Project under Article 21 of the Master Lease. 29. Condition Precedent. ------------------- This Sublease may be expressly conditioned upon the prior written consent of Master Lessor under the Master Lease. If Sublessor fails to obtain Master Lessor's consent on or before the Master Lessor Consent Date set forth in the Basic Sublease Information, then Sublessor may terminate this Sublease by giving Sublessee written notice of its failure to obtain Master Lessor's consent and returning all consideration previously paid by Sublessee to Sublessor. 30. Estoppel Certificate. -------------------- At any time and from time to time but on not less than 5 days' prior notice by Sublessor or Master Lessor, Sublessee shall execute, acknowledge, and deliver to Sublessor or Master Lessor, as applicable, promptly upon request a certificate in the form attached hereto as Exhibit E, or such other certificate --------- as Sublessor or Master Lessor may require. Any such certificate may be relied upon by any prospective purchaser, mortgagee or beneficiary under any mortgage or deed of trust on the Building or any part thereof or interest therein. 31. Building Planning. ----------------- In the event Sublessor requires the Premises for use in conjunction with another suite or for other reasons connected with the Building planning program, upon notifying Sublessee in writing, Sublessor shall have the right to move Sublessee to other space in the Building, at Sublessor's sole cost and expense, including all of Sublessee's reasonable out-of-pocket moving expenses, telephone installation and stationary reprinting charges; provided, however, that Sublessor may only exercise its rights under this Paragraph 29 up to a ------------ maximum of two (2) times during the term of this Sublease. In the event of such a move, the terms and conditions of this Sublease shall remain in full force and effect; provided that (i) the Rentable Area of the Premises and Sublessee's Percentage Share, as set forth in the Basic Sublease Information, and (ii) the floor plan attached hereto as Exhibit B, shall be amended so as to correctly --------- reflect the new space. 32. Rules. ----- Sublessee shall faithfully observe and comply with the Rules and Regulations attached as Exhibit D to this Sublease, and after notice thereof, --------- all reasonable modifications thereof and additions thereto from time -to time promulgated in writing by Sublessor. Sublessor shall not be responsible to Sublessee for the nonperformance by any Other Sublessee or occupant of the Building of any of the Rules and Regulations. 33. Attorneys' Fees. --------------- If as a result of any breach or default in the performance of any of the provisions of this Sublease, Sublessor uses the services of an attorney in order to secure compliance with such provision," or recover damages therefor, or to terminate this Sublease or evict Sublessee, Sublessee shall reimburse Sublessor upon demand for any and all reasonable attorneys' fees and expenses incurred by Sublessor; provided that if Sublessee shall be the prevailing party in any legal action brought by Sublessor against Sublessee, Sublessee shall be entitled to recover from Sublessor reasonable attorneys' fees and expenses incurred by Sublessee. 34. Waiver. ------ The waiver by Sublessor of any agreement, condition or provision herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other agreement, condition or provision herein contained, nor shall any custom or practice which may grow up between the parties in the administration of the terms hereof be construed to waive or to lessen the right of Sublessor to insist upon the performance by Sublessee in strict accordance with such terms. The subsequent acceptance of rental hereunder by Sublessor shall not be deemed to be a waiver of any Preceding breach by Sublessee of any agreement condition or provision of this Sublease, other than the failure of Sublessee to pay the particular rental so accepted, regardless of Sublessor's knowledge of the preceding breach at the time of acceptance or payment of the rental. 35. Parking and Transportation Management. ------------------------------------- Sublessee agrees that it will use its best efforts to cooperate in programs which may be undertaken by Sublessor independently, or in cooperation with local municipalities or governmental agencies or other property owners in the vicinity of the Building, to reduce peak levels of commuter traffic. Such programs may include, but shall not be limited to, carpools, vanpools and other ride sharing or transportation system management programs, public and private transit, and flexible work hours. Sublessee agrees to cooperate with Sublessor in Sublessor's administration of a transportation management program (if any) required by the City and County of San Francisco. Sublessee acknowledges that as a part of this program, Sublessee may be required to distribute employee transportation information, participate in annual employee transportation surveys, allow employees to participate in commuter activities, designate a liaison for commuter transportation related activities, distribute commuter information to all employees prior to relocation and to new employees when hired, and otherwise participate in other programs or services initiated under the transportation management program. 36. Complete Agreement. ------------------ There are no oral agreements between Sublessor and Sublease affecting this Sublease, and this and cancels any and all previous negotiations, arrangements, brochures, agreements, and understandings if any, between Sublessor and Sublessee or displayed by Sublessor to Sublessee with respect to the subject matter of this Sublease or the Project. There are no representations between Sublessor and Sublessee other than those contained in this Sublease and all reliance with respect to any representations is solely upon the representations contained in this Sublease. AR implied warranties, including implied warranties of merchantability and fitness, are excluded. 37. Limitations of Liability. ------------------------ The liability of Sublessor under this Sublease shall be and is hereby limited to Sublessor's interest in the Project, and no other assets of Sublessor shall be affected by reason of any liability which Sublessor may have to Sublessee or to any other person by reason of this Sublease. 38. No Merger. --------- The voluntary or other surrender of this Sublease by Sublessee, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Sublessor, terminate all or any existing subleases or subtenancies, or operate as an assignment to it of any or all such subleases or subtenancies. 39. Transfer. -------- Sublessee acknowledges that in the event the original Sublessor hereunder, or any successor tenant under the Master Lease, shall assign or otherwise transfer its interest in the Master Lease, all liabilities and obligations on the part of the original Sublessor, or tenant under the Master Lease, under this Sublease accruing thereafter shall terminate (so long &-, the new tenant under the Master Lease agrees in writing to assume all of such obligations and thereupon all such liabilities and obligations shall be binding upon the new tenant under the Master Lease. Sublessee agrees to attorn to any new tenant under the Master Lease. Sublessee further acknowledges that Sublessor has an option and right of first refusal to purchase the Building under the Master Lease. Sublessee acknowledges that if Sublessor does purchase the Building, and Sublessor, or any successor owner of the Building, shall sell or convey the Building, all liabilities and obligations on the part of the original Sublessor, or such successor owner, under this Sublease accruing thereafter shall terminate (so long as the new owner agrees in writing to assume all of such obligations), and thereupon all such liabilities and obligations shall be binding upon the new owner. If such event occurs, Sublessee agrees to attorn to any new owner of the Building. 40. No Light, Air or View Easement. -------------------------------- Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to the Building shall in no way affect this Sublease or impose any liability on Sublessor. 41. Corporate Authority. ------------------- If Sublessee signs as a corporation, each of the persons executing this Sublease on behalf of Sublessee warrants that Sublessee is a duly authorized and existing corporation, that Sublessee has and is qualified to do business in California, that the corporation has full right and authority to enter into this Sublease, and that each and both of the persons signing on behalf of the corporation were authorized to do so. 42. Abandonment. ----------- If Sublessee shall abandon or surrender the Premises, or be dispossessed by process of law or otherwise, any personal property belonging to Sublessee and left on the Premises shall be deemed to be abandoned, at the option of the Sublessor. 43. Waiver of Jury Trial. -------------------- Sublessor and Sublessee shall and do hereby waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Sublease, the relationship of Sublessor and Sublessee, Sublessee's use or occupancy of the Premises, or any statutory remedy. 44. Telephone Service. ----------------- (a) Sublessor shall have no responsibility for providing to Sublessee any telephone equipment, including wiring, within the Premises or for Providing telephone service or connections from the utility to the Premises, except as required by law. (b) Sublessee shall not alter, modify, add to or disturb any telephone wiring in the Premises or elsewhere in the Building without the Sublessor's prior written consent. Sublessee shall be liable to Sublessor for any damage to the telephone wiring in the Building due to the act, negligent or otherwise, of Sublessee or any employee, contractor or other agent of Sublessee. Sublessee shall have no access to the telephone closets within the Building, Sublessee shall promptly notify Sublessor of any actual or suspected failure of telephone service to the Premises. (c) All costs incurred by Sublessor for the installation, maintenance, repair and replacement of telephone wiring within the Building shall be an Operating Expense, as otherwise defined in Section 1(d) of this Sublease, unless ------------ Sublessor is reimbursed for such costs by other Sublessees of the Building. (d) Sublessor shall not be liable to Sublessee and Sublessee waives all claims against Sublessor whatsoever, whether for personal injury, property damage, loss of use of the Premises, or otherwise, due to the interruption or failure of telephone services to the Premises. Sublessee hereby holds Sublessor harmless and agrees to indemnify, protect and defend Sublessor from and against any liability for any damage, loss or expense due to any failure or interruption of telephone service to the Premises for any reason. Sublessee agrees to obtain loss of rental insurance adequate to cover any damage, loss or expense occasioned by the interruption of telephone service. 45. Miscellaneous. ------------- The words "Sublessor" and "Sublessee" as used herein shall include the plural as well as the singular. If there be more than one Sublessee, the obligations hereunder imposed upon Sublessee shall be joint and several. Time is of the essence of this Sublease and each and all of its provisions. Submission of this instrument for examination or signature by Sublessee does not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until execution and delivery by both Sublessor and Sublessee. The agreements, conditions and provisions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, executors, administrators, successors and assigns of the parties hereto. Sublessee shall not, without the consent of Sublessor, use the name of the Building for any purpose other than as the address of the business to be conducted by Sublessee in the Premises. If any other provision of this Sublease shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Sublease and all such other provisions shall remain in full force and effect. This Sublease shall be governed by and construed pursuant to the laws of the State of California. Sublessor represents and warrants that to its actual knowledge, as of the Commencement Date, the Premises in its then- existing condition, but without regard to the use Sublessee will make of the Premises, shall not violate any applicable zoning ordinances and any municipal, county, state and federal laws and regulations governing and regulating the Premises and the Building. 46. Exhibits. -------- The exhibits and addendum, if any, specified in the Basic Sublease Information are attached to this Sublease and by this reference made a part hereof. _____________________________________________________________________ IN WITNESS WHEREOF, the parties have executed this Sublease on the respective dates indicated below: SUBLESSEE: SUBLESSOR: THE BIG NETWORK, GOLDEN GATE UNIVERSITY, a Delaware corporation a California non-profit public benefit corporation By: ____________________________ By: _________________________________ Its: ___________________________ Its: _________________________________ By:_____________________________ Dated: __________ Its: ___________________________ Dated: _____________ EX-10.23 10 GERARD KLAUER ENGAGEMNT LTR. AGREE. EXHIBIT 10.23 February 24, 1999 CONFIDENTIAL ------------ Brad Greenspan c/o Palisades Capital, Inc. 264 South La Cienega Beverly Hills, CA 90211 Entertainment Universe, Inc 264 South La Cienega Beverly Hills, CA 90211 Attention: Brad Greenspan Gentlemen: This letter shall confirm the engagement of Gerard Klauer Mattison & Co., Inc. ("GKM") by Entertainment Universe, Inc. and Brad Greenspan (collectively, "Palisades") as their exclusive placement agent to arrange and negotiate a private placement the "Private Placement") of securities (the "Securities") to finance the proposed acquisition (the "CD Acquisition) of CD Universe (including its successors and assigns, the "Company"). It is anticipated that the CD Acquisition will be made through a reverse merger (the "Reverse Merger') of the Company into a public "shell" corporation and that the Company, as the surviving corporation in such merger, will become a party to this agreement and issue the Securities simultaneously with the closing of the CD Acquisition (the "CD Closing"). The Private Placement shall be made pursuant to one or more exemptions from registration under the Securities Act of 1933, as amended (the "Securities Act"), and any applicable securities laws of any state or other jurisdiction (the "Blue Sky Laws"). The Private Placement will have estimated aggregate gross proceeds of between $2.0 and $8.0 million and will be subject to the following terms and conditions: I . Retention. Subject to the terms and conditions of this Agreement, --------- Palisades hereby appoints (and, at the time of the. CD Closing, the Company shall appoint) GKM to act on a best efforts basis as its exclusive agent during the Authorization Period (as hereinafter defined) (i) to privately place the Securities in an amount and on terms and conditions satisfactory to Palisades and the Company, and (ii) to render financial advisory services to Palisades and, effective as of the CD Closing, the Company regarding any Transaction (as hereinafter defined) involving the Company. GKM hereby accepts such agency and Entertainment Universe, Inc. February 24, 1999 Page 2 agrees, subject to the terms and conditions of this Agreement, to use its best efforts during the Authorization Period to arrange the sale of the Securities through the Private Placement. For purposes of this Agreement, a Transaction shall mean (x) the CD Acquisition and the Reverse Merger, (y) any transaction or series or combination of transactions, whereby, directly or indirectly, control of or a material interest in a company or other entity (an "Acquisition Candidate") or any of its businesses, product lines or assets is transferred to the Company or any of its affiliates, including, without limitation, (i) a sale or exchange of capital stock or assets, (ii) a merger, consolidation or reorganization or other business combination pursuant to which the Acquisition Candidate or the business of the Acquisition Candidate or a subsidiary of the Acquisition Candidate is acquired or combined with the Company, (iii) the acquisition, directly or indirectly, by the Company of more than 50% of the capital stock outstanding or a portion of the assets of an Acquisition Candidate by way of tender or exchange offer, negotiated purchase or otherwise, (iv) the acquisition, directly or indirectly, by the Company of control of an Acquisition Candidate or the ability to effect such control, through proxy contest or otherwise, or (v) the formation of a joint venture, minority investment or partnership, or any similar transaction with an Acquisition Candidate, or (z) any transaction or series or combination of transactions, whereby, directly or indirectly, control of or a material interest in the Company or any of its businesses, product lines or assets is transferred to another party (a "Purchaser"), including, without limitation, (i) a sale or exchange of capital stock or assets, (ii) a merger, consolidation or reorganization or other business combination pursuant to which the Company or its business or a subsidiary of the Company is acquired or combined with a Purchaser, (iii) the acquisition, directly or indirectly, by a Purchaser of more than 50% of the capital stock outstanding or a portion of the assets of a Company by way of tender or exchange offer, negotiated purchase or otherwise, (iv) the acquisition, directly or indirectly, by a Purchaser of control of the Company or the ability to effect such control, through proxy contest or otherwise, or (v) the formation of a joint venture, minority investment or partnership, or any similar transaction between the Company and a Purchaser. GKM will assist in analyzing, structuring, negotiating and effecting the Transaction, as more fully described below, after it has met with management of the Company and its outside counsel and accountants and analyzed, among other things, the Company's business, operations and prospects, the trading market for the Company's Entertainment Universe, Inc. February 24, 1999 Page 3 common stock and the other securities of the Company. As appropriate, Gerard Klauer will: A. assist in the development of appropriate acquisition criteria and identify Acquisition Candidates and prospective Purchasers; B. provide advisory services, including company screening and general business and financial analysis, transaction feasibility analysis and valuation of prospective acquisitions; C. advise the Company with respect to the structure, terms and timing of a Transaction; D. at the Company's request, assist in negotiations and related strategy; E. assist the Company in preparing the required Transaction documents (including a letter of intent and definitive agreement) to the extent such documents relate to the terms of the Transaction or the terms of securities being offered in the Transaction; F. act as dealer/manager in a tender offer, subject to entering into a dealer/manager agreement in customary form, which includes additional compensation to be paid to GKM; G. provide brokerage services on customary terms to the Company in connection with its accumulation, if any, of the stock of an Acquisition Candidate; H. assist in corporate capital planning, including the identification of available financing; and I. render such other financial advisory services as may from time to time be agreed upon by the Company and GKM. If requested by the Company, Gerard Klauer will render an opinion (the "Opinion") as to whether or not the consideration to be paid in the Transaction is fair, from a financial point of view, to the Company. It is understood that the Opinion, if rendered, will be prepared solely for the confidential use of the Board of Directors of the Company and will Entertainment Universe, Inc. February 24, 1999 Page 4 not be reproduced, summarized, described or referred to or given to any other person or otherwise made public without Gerard Klauer's prior written consent unless subpoenaed to be disclosed in a legal proceeding, provided Gerard Klauer is given prior written notice in advance of such disclosure. If the Opinion is included in a proxy statement, the Opinion letter will be reproduced in full, and any description of or reference to Gerard Klauer or summary of the Opinion will be in a form acceptable to Gerard Klauer and its counsel. Each of Palisades and the Company understand and agree that, in soliciting offers to purchase Securities pursuant to this Agreement and in assuming its other obligations hereunder, GKM is acting solely as agent and not as principal, and that, except as otherwise expressly agreed in writing, GKM's responsibility in respect of its engagement hereunder is limited to a "best efforts" basis in placing the Securities, with no understanding, expressed or implied, on GKM's part of a commitment to underwrite, purchase or place the Securities or any other securities of the Company. GKM agrees that it may not bind or obligate the Company to sell the Securities. The Company is not obligated or required to accept any offer to purchase Securities by any prospective investor identified by GKM, and the Company may refuse in its sole discretion to sell any Securities to such prospective investor without any liability to GKM. If the Company should fail to deliver Securities to a purchaser whose offer the Company has accepted by execution of a subscription agreement in respect thereof, the Company (i) shall hold GKM harmless against loss, claim or damage arising from or as a result of such failure by the Company and (ii) shall pay to GKM any fee to which GKM would be entitled hereunder in connection with such sale as if such sale had been consummated. During the Authorization Period, Palisades and the Company shall be prohibited from (i) directly or indirectly offering any of the Securities (or securities substantially similar to the Securities) for sale to, or soliciting any offer to purchase any of the Securities from, or otherwise contacting, approaching or negotiating with respect thereto with, any person, (ii) authorizing anyone other than GKM to act on its behalf to place the Securities (or securities substantially similar to the Securities), or (iii) having any discussions or negotiations with any person other than representatives from GKM with respect to engaging such person (or entity represented by such person) as a finder, broker, dealer or financial advisor in connection with the sale by the Company of any securities. The Company shall promptly refer to GKM all offers, inquiries and proposals relating to any placement of the Securities made to the Company at any time during the Authorization Period. Entertainment Universe, Inc. February 24, 1999 Page 5 It is understood that GKM is being engaged hereunder solely to provide the services described in this Agreement and that GKM is not acting as an agent or fiduciary of, and shall have no duties or liabilities to, the equity holders of Palisades or Company or any third party in connection with its engagement hereunder. 2. Authorization Period. GKM's engagement hereunder shall become -------------------- effective on the date hereof and, unless extended in writing by Palisades or the Company and GKM, shall expire on the earlier of (i) the final closing date of the Private Placement, and (ii) September 30, 1999 (in either case, the "Termination Date"; the period from the date hereof through the Termination Date being hereinafter referred to as the "Authorization Period"). 3. Offering Documents. GKM shall prepare a Confidential Offering ------------------ Memorandum, and such amendments or supplements to each as GKM may reasonably deem to be necessary, to effectuate the sale of the Securities (the Confidential Offering Memorandum, and any such amendments or supplements, are collectively referred to herein as the "Offering Materials"). The Company shall cooperate with, and assist, GKM in the preparation of the Offering Materials, and prior to any distribution thereof by GKM, the Offering Materials shall be subject to the Company's review and approval, which approval shall not be unreasonably withheld or delayed. The Company authorizes GKM to transmit the Offering Materials to potential purchasers of the Securities, and shall furnish to GKM copies of the Offering Materials in such quantities as GKM may from time to time request. The Company shall prepare forms of purchase agreements or subscription agreements containing terms and conditions customary for private placement transactions, to be entered into by the Company and each purchaser of Securities, which forms shall be provided to offerees only upon the review and approval of both the Company and GKM. 4. Compensation. ------------ (a) As cash compensation for GKM's services hereunder, the Company shall pay GKM the fees set forth in Annex A hereto. (b) On the date of the CD Closing, the Company shall issue (and Palisades shall cause the Company to issue) to GKM warrants to purchase 300,000 shares of common stock at an exercise price of $3.00 per share (the "Retention Warrants"), assuming that the pre-money valuation of the Company is not less than $37.5 million. In Entertainment Universe, Inc. February 24, 1999 Page 6 the event the Securities are issued at a pre-money valuation less than $37.5 million, the exercise price shall be proportionately and equitably adjusted. The Retention Warrants shall be immediately exercisable and shall expire five years after issuance. The Company shall file a registration statement with respect to the common stock underlying the Retention Warrants within six months following the CD closing. On each closing date of the sale of Securities, the Company shall issue to GKM warrants (the "Financing Warrants") to purchase shares of common stock of the Company in an amount equal to 10% of the amount of common stock (assuming full conversion or exchange of all Securities convertible or exchangeable into or for common stock) issued by the Company on such closing date, at an exercise price equal to the average of ( i) the lowest price at which any shares of common stock are sold in the Private Placement (or in the event no shares are sold, the lowest price at which Securities are convertible into or exchangeable for common stock) and (ii) the lowest price at which any shares of common stock are sold in the anticipated Rule 504 offering pursuant to Regulation D promulgated under the Securities Act of 1933, as amended; provided that the number of Financing Warrants to be issued shall be reduced by one-half in respect of any Securities sold to any person listed in Amex A on or prior to March 31, 1999. The Financing Warrants shall not be exercisable until one year after the date of issuance and shall expire five years after issuance. The Retention Warrants and the Financing Warrants shall include customary anti- dilution protection. The Retention Warrants and the Financing Warrants shall also include provisions for tag-along rights with respect to the underlying common stock, one demand registration right exercisable following the first anniversary of the CD Closing, and unlimited piggyback registration rights customary in transactions of this type. (c) Regardless of whether the sale of any Securities is consummated, Palisades will pay or cause the Company to pay the following expenses in connection herewith: (i) the fees and disbursements of the Company's counsel and other representatives and advisers; (ii) the expenses in connection with the preparation and printing of the Offering Materials and amendments and supplements thereto and the mailing and delivering of copies thereof, (iii) the cost of printing the purchase agreements or subscription agreements, if any, and any other documents in connection with the offering, purchase, sale and delivery of the Securities; (iv) the expenses in connection with the qualification of the Securities for offering and sale under state securities laws, if any, including any and all filing fees and the fees and disbursements of counsel for GKM in connection with reviewing applicable state securities laws and preparing any filings thereunder; (v) the costs of preparing certificates representing the Securities; (vi) the costs and charges of any transfer agent or registrar; and (vii) all other costs and expenses incident Entertainment Universe, Inc. February 24, 1999 Page 7 to the performance of the Company's obligations hereunder and under the purchase agreements or subscription agreements (including, without limitation, any taxes payable in connection with the issuance, sale and delivery of the Securities). (d) In addition to the compensation payable to GKM hereunder and regardless of whether the sale of any of the Securities is consummated, Palisades shall reimburse (or cause the Company to reimburse) GKM, upon request made from time to time, for all of its reasonable out-of-pocket expenses incurred in connection with its engagement hereunder, including the fees, disbursements and other charges of its legal counsel, provided, however, that any individual expenses in excess of $1,000 (or $3,000 in the case of travel expenses) must be approved by the Company in advance, and reimbursement of expenses shall not exceed a total of $40,000. (e) In addition, Palisades shall pay or cause the Company to pay to GKM all compensation described in this Section 4 of this Agreement with respect to any Securities (or securities substantially similar to the Securities) sold to any party at any time prior to the expiration of 24 months after the Termination Date if such party (i) is one identified to the Company by GKM during the Authorization Period, or (ii) is one with whom the Company, during the Authorization Period, had material discussions regarding the sale of Securities or securities substantially similar to the Securities. (f) In addition, Palisades shall pay GKM additional compensation in the form of I 00,000 shares of the Company's common stock if the Private Placement closes on or before March 15, 1999. 5. Representations, Warranties and Covenants of Palisades and the Company. ---------------------------------------------------------------------- Palisades and the Company represent and warrant to, and covenant with, GKM as follows: (a) During the Authorization Period, neither Palisades nor the Company shall not use, disseminate, publish, distribute or refer to any materials in connection with any offering of Securities, including without limitation, any Offering Materials, without GKM's prior consent except for internal use among the Company's personnel and representatives. (b) Neither Palisades nor the Company has taken, or will take, any action, directly or indirectly, so as to cause any of the transactions contemplated by this Agreement to fail to be entitled to exemption from registration under all applicable Entertainment Universe, Inc. February 24, 1999 Page 8 securities laws. Palisades and the Company shall ensure that neither they, nor any of their affiliates, nor any person (other than GKM) acting on behalf of Palisades or Company or any such affiliates, has engaged or will engage in any general advertising or general solicitation (as those terms are used in Regulation D under the Securities Act) with respect to the Securities. (c) Palisades and the Company shall, from time to time, take such action as GKM may reasonably request to qualify the Securities for offering and sale as a private placement under the securities laws of such states or other jurisdictions as GKM may reasonably request and to comply with such laws so as to permit such offers and sales. (d) Palisades and the Company shall make available to GKM and/or shall agree to have professionally prepared at their expense, all financial statements, projections, appraisals, surveys and other information which in GKM's reasonable judgment shall be necessary or appropriate for the proper marketing of the Securities. Palisades and the Company shall, upon reasonable request, cause their respective directors, officers, personnel, counsel, accountants, and other representatives to meet with GKM or its representatives to discuss all information relevant for disclosure in any Offering Materials. Palisades and the Company shall cooperate in any reasonable investigation requested by GKM or its representatives (including the production of information at their offices or copies of such information at the offices of GKM) for the purpose of confirming the accuracy and completeness of the statements contained in the Offering Materials. (e) The Offering Materials as of the date thereof and as of the closing date of each sale of Securities, will be true, complete and correct in all material respects and do not, and will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. Palisades and the Company shall advise GKM immediately of the occurrence of any event or other change which results in the Offering Materials containing an untrue statement of a material fact or omitting to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading, and shall furnish to GKM copies of amended or supplemented Offering Materials that correct such statement or omission in such quantities as GKM may from time to time request upon being so advised. With respect to any financial or other projections included or to be included in the Offering Materials, the Company represents and warrants that they have been, or will be, prepared in good faith on the basis of Entertainment Universe, Inc. February 24, 1999 Page 9 reasonable assumptions. Palisades and the Company recognize and confirm that GKM (i) will be using and relying primarily on the information in the Offering Materials and information available from generally recognized public sources in performing the services contemplated hereunder without having independently verified the same, (ii) does not assume responsibility for the accuracy or completeness of such information or of the Offering Materials and (iii) will not make any appraisal of any assets of the Company. (f) (i) At the time of the CD Closing, the Company will have full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder, and all consents, authorizations, approvals and orders required in connection with the execution, delivery and performance hereof have been obtained; (ii) this Agreement will be valid and binding obligation of the Company, enforceable in accordance with its terms, except to the extent that the enforceability hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors generally and general principles of equity; and (iii) the execution, delivery and performance of this Agreement will not conflict with, result in a breach of any of the terms or provisions of, or constitute a violation or a default under, any material agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound. (g) For a period of five years after the final closing date or until GKM no longer owns common stock or warrants in the Company, the Company shall furnish to GKM or shall cause to be furnished to GKM (i) copies of the Company's annual reports and other financial reports at the earliest time that such reports are made available to others, (ii) notice of any material development affecting the Company, (iii) any filings made with the Securities and Exchange Commission or any exchange on which any class of the Company's securities may be or become listed or quoted and (iv) such other information concerning the business and financial condition of the Company as GKM may from time to time reasonably request or which is sent to the holders of the Securities. (h) The Company shall cause its counsel to deliver, at each closing of the sale of Securities, an opinion addressed to GKM and to each of the purchasers, covering such matters as are typically covered in opinions delivered in connection with private placements (including, without limitation, an opinion to the effect that the placement of the Securities is exempt from registration under the Securities Act), in form and substance reasonably acceptable to both GKM and its counsel. The Company shall also cause to be furnished to GKM, at each closing of the sale of the Securities, (i) copies Entertainment Universe, Inc. February 24, 1999 Page 10 of other legal opinions, "comfort" letters, certificates, agreements, and other documents furnished to the purchasers of the Securities on such closing date and (ii) copies of all filings made by the Company with the Securities and Exchange Commission or state securities commissions, in each case, in form and substance reasonably satisfactory to GKM. 6. Indemnification. Palisades agrees (and at the time of the CD Closing --------------- the Company shall agree) to the indemnification and other agreements set forth in the Indemnification Agreement attached hereto, the provisions of which are incorporated herein by reference. 7. Right of First Refusal. In the event the Company raises $2.0 million or ---------------------- more in the Private Placement, the Company agrees that GKM shall have the right, for a period of twelve months following the termination of GKM's engagement pursuant to this Agreement, to act as the exclusive underwriter, placement agent and financial advisor to the Company in connection with any equity or debt financing, any merger or acquisition activity or any other investment banking services for the Company, to the extent that the Company decides to engage an investment bank or other financial advisor for such services; provided however, that GKM shall agree to become a co-managing underwriter or co-placement agent if the Company elects to retain and does retain a nationally recognized "bulge bracket" investment banking firm to act as lead underwriter or agent, so long as (i) GKM's percentage of the gross underwriters' spread or placement fee shall not be less than that of any other co-manager or co-placement agent (other than the lead underwriter or agent), and (ii) if there are no other co-managers or co-placement agents (other than the lead underwriter or agent), GKM shall not receive less than 40% of such gross spread or placement fees. Except as otherwise provided herein, the Company agrees to compensate GKM for such services in amounts that reflect GKM's normal an customary compensation for such services, negotiated by the Company and GKM in good faith. 8. Survival of Certain Provisions. The expense, indemnification, ------------------------------ reimbursement and contribution obligations of Palisades and the Company provided herein and their obligation to pay GKM any compensation earned pursuant hereto shall remain operative and in full force and effect regardless of (i) any withdrawal, termination or consummation of or failure to initiate or consummate any transaction referred to in this Agreement, (ii) any investigation made by or on behalf of GKM and (iii) any termination or the completion or expiration of this Agreement or GKM's engagement hereunder. Entertainment Universe, Inc. February 24, 1999 Page 11 9. Notices. Notice given pursuant to any of the provisions of this ------- Agreement shall be in writing and shall be mailed or delivered (a) if to Palisades, at its principal office at 264 South La Cienega, Suite 305, Beverly Hills, CA 9021 1, Attn: Brad Greenspan, (b) if to the Company, at its principal office at 101 North Plains Industrial Road, Wallingford, CT 06492 and (c) if to GKM, at the office of Gerard Klauer Mattison & Co., Inc., 529 Fifth Avenue, New York, New York 100 1 7, Attention: Dominic A. Petito. 10. Future Advertisements. The parties hereto acknowledge and agree that ------ GKM has the right, subject to the Company's approval, to place advertisements describing its services to the Company under this Agreement in financial and other newspapers and journals at its own expense following the date upon which the Private Placement closes. 11. Miscellaneous. ------------- (a) This Agreement (including the attached Indemnification Agreement) sets forth the entire agreement between the parties, supersedes and merges all prior written or oral agreements with respect to the subject matter hereof, may only be amended in writing and shall be governed by the laws of the State of New York applicable to agreements made and to be performed entirely within such State. Any controversy arising between the parties hereto, or any person claiming under either of them, relating to this Agreement or the performance or breach thereof, shall be settled and determined by arbitration in New York, New York, before a single arbitrator in accordance with the commercial arbitration rules of the American Arbitration Association and the provisions of the New York Code of Civil Procedure governing such arbitrations, and judgement upon the reward rendered by the arbitrator may be entered in any court having jurisdiction thereof. (b) Each of Palisades and the Company (for itself, anyone claiming through it or in its name, and on behalf of its equity holders) and GKM hereby irrevocably waives any right they may have to a trial by jury in respect of any claim based upon or arising out of this Agreement or the transactions contemplated hereby. (c) This Agreement may not be assigned by either party without the prior written consent of the other parties hereto. Entertainment Universe, Inc. February 24, 1999 Page 12 (d) If any provision of this Agreement is determined to be invalid or unenforceable in any respect, such determination will not effect such provision in any other respect or any other provision of this Agreement, which will remain in full force and effect. Please confirm that the foregoing correctly sets forth our agreement by signing and returning to GKM the enclosed duplicate copy of this Agreement. Very truly yours, GERARD KLAUER MATTISON & CO., INC. By: ---------------------------------- Name: Dominic A. Petito Title: Senior Managing Director Accepted and Agreed to as of the date first written above ENTERTAINMENT UNIVERSE, INC. By: -------------------------- Name: Brad Greenspan Title: President - ----------------------------- Entertainment Universe, Inc. February 24, 1999 Page 13 ANNEX A ------- This Annex A is part of and incorporated into the letter agreement (the "Agreement"), dated February [221, 1999, between Entertainment Universe, Inc. and Brad Greenspan (collectively, "Palisades") and Gerard Klauer Mattison & Co., Inc. ("GKM"). Defined terms not defined herein have the meanings ascribed thereto in the Agreement. 1. Fees with respect to Private Placement 6.0% of the Aggregate Consideration (as defined below) received or receivable by the Company in connection with the Private Placement, payable in cash promptly on the closing date on which such Aggregate Consideration is paid or becomes payable; provided that such feel shall be reduced by one-half if the Securities sold to any of the following persons on or before March 31, 1999: Lehman Brothers ABS Capital Partners West End Capital SouthRidge Capital Eisenberg Partners Isosceles Fund SBC Dillon Read Mark Rice Fund Pioneer Ventures RoseGlen Capital Victory Ventures Louis Marx Jr. Pacific Capital Group Gulfstream Capital Group Apollo Capital Bruce Klein Dancing Bear Investments Brand Equity Ventures MSD Capital (Michael Dell) Promethean Inv. Group Palladin Group Castle Creek Partners GE Pension Trust Robert London Soros Fund Management Special Situations Fund Retail & Restaurant Capital Nightangle Capital HBK Capital Ronald Burkle Forrest Binkley Brown The Aggregate Consideration, for purposes of calculating GKM's fee above, shall include the total value of Securities sold by the Company to Entertainment Universe, Inc. February 24, 1999 Page 14 purchasers including any amounts paid in escrow, any amounts payable in the future, whether or not subject to any contingency in connection therewith, and any amounts payable upon conversion or exchange of any Securities sold in the Private Placement. If the Aggregate Consideration is paid in whole or in part in the form of securities or other noncash consideration, the value thereof, for purposes of calculating GKM's fee, shall be the fair market value thereof on the day prior to the closing date for such investment, as determined in good faith by the Company and GKM; provided, however, that to the extent that it consists of securities with an existing public trading market, the value thereof shall be determined by the average of the last sales price for such securities on the five trading days prior to the closing date for such investment. 2. Financial Advisory Fees If during the term of GKM's engagement hereunder, or within a period of twenty-four (24) months following the effective date of termination of GKM's engagement hereunder, the Company enters into one or more definitive agreements which subsequently result in one or more Transactions and (x) the party or parties to the Transactions were identified by GKM, or (y) GKM rendered advice concerning the Transactions, then GKM shall be paid a cash fee at the closing of each such Transaction as determined by multiplying the appropriate percentage by the Aggregate Consideration (as defined below) of the Transaction set forth below: (i) For Transactions up to $50 million Purchase Price Percentage Up to the first $5 million 5.00% Plus on the next $1 0 million 3.00% Plus on the amount over $15 million 1.50% Entertainment Universe, Inc. February 24, 1999 Page 15 (ii) For Transactions Above $50 million Purchase Price Percentage Up to the first $50 million 2.00% Plus on the next $200 million 1.00% Plus on the amount over $250 million 0.50% The term "Purchase Price" means the sum of the aggregate amount of cash and the fair market value of any securities or assets received by the target company or its shareholders in connection with a Transaction including, without limitation, (i) the aggregate principal amount of any indebtedness of the target company assumed, satisfied or otherwise discharged by the acquiring company at the time of closing of the Transaction, (ii) amounts paid by the acquiring company to holders of any warrants, stock purchase rights, convertible securities or similar rights of the target company and to holders of any options or stock appreciation rights issued by the target company, whether or not vested, and (iii) if the Transaction involves the acquisition of all or a substantial part of the operating assets of the target company, the excess, if any, of (x) the value of any current assets not sold, minus the (y) the value of any current liabilities not assumed by the acquiring company. If the Purchase Price is paid in whole or in part in the form of securities or other noncash consideration, the value thereof, for purposes of calculating GKM's fee, shall be the fair market value thereof on the day prior to the closing date for such investment, as determined in good faith by the Company and GKM; provided, however, that to the extent that it consists of securities with an existing public trading market, the value thereof shall be determined by the average of the last sales price for such securities on the five trading days prior to the closing date for such investment. In connection with a Transaction involving a tender offer or other purchase or sale of stock, the transaction fee will be payable and calculated based on the Purchase Price as through I 00% of the outstanding stock on a fully diluted basis had been acquired for the same per share amount paid in the transaction Entertainment Universe, Inc. February 24, 1999 Page 16 or series of transactions in which 50% or more of the target company's outstanding stock is acquired by the Company. Nevertheless, GKM's services pursuant to this Agreement will continue after such first step is accomplished to assist the Company with a second step merger or similar transaction. 2. Fee for Opinion As compensation for Gerard Klauer's services in rendering an Opinion, the Company agrees to pay Gerard Klauer a separate fee to be mutually agreed upon at the time an opinion is requested, said fee to be payable in cash on the date Gerard Klauer delivers the Opinion. The obligations of the Company to pay Gerard Klauer's compensation and fees and expenses as set forth in this Annex A shall be irrespective of the conclusions set forth in the Opinion. EX-10.24 11 GERARD KLAUER INDEM. LTR. AGREE. EXHIBIT 10.24 February 24, 1999 CONFIDENTIAL - ------------ Gerard Klauer Mattison & Co., Inc. 529 Fifth Avenue NewYork, NY 10017 Attention: Dominic A. Petito Senior Managing Director Ladies and Gentlemen: In connection with the engagement of Gerard Klauer Mattison & Co., Inc. ("Gerard Klauer") by Entertainment Universe, Inc. and Brad Greenspan (collectively the "Company"), as more fully set forth in the engagement agreement dated February 24, 1999 (the "Financial Services Agreement"), and further recognizing that Gerard Klauer's, role is as agent, the Company agrees to indemnify and hold harmless Gerard Klauer and its affiliates, the respective officers, directors, agents, representatives and employees of each of the foregoing, and each other person controlling Gerard Klauer or any of its affiliates, within the meaning of either Section 15 of the Securities Act of 1933, as amended, or Section 20 of the Securities Exchange Act of 1934, as amended (collectively, the "Indemnified Parties"), from and against any losses, claims, damages, expenses and liabilities (or actions in respect thereof), joint or several, relating to, arising in any manner from, or based upon, any transaction contemplated by the Financial Services Agreement or Gerard Klauer's engagement thereunder, as they are incurred. The Company will also promptly reimburse any Indemnified Party for all expenses (including the fees, disbursements and other charges of legal counsel) as incurred in connection with the investigation of, preparation for or defense of any pending or threatened claim relating to, arising in any manner from, or based upon, any transaction contemplated by the Financial Services Agreement or Gerard Klauer's engagement thereunder, or any investigation or proceeding arising therefrom, whether or not such claim, investigation or proceeding is brought or initiated by the Company or a third party. Notwithstanding the foregoing, the Company shall not be liable hereunder for any losses, claims, damages, liabilities or expenses to the extent the same are determined, in a final judgment by a court having competent jurisdiction, to have resulted primarily from the gross negligence or willful misconduct of an Indemnified Party. The Company further agrees that no Indemnified Party shall have any liability (whether direct or Gerard Klauer Mattison & Co., Inc. February 24, 1999 Page 2 indirect, in contract or tort or otherwise) to the Company for or in connection with Gerard Klauer's engagement under the Financial Services Agreement except for the portion or share of any losses, claims, damages, liabilities or expenses that a court of competent jurisdiction shall have determined by final judgment resulted solely from the gross negligence or willful misconduct of such Indemnified Party. In no event shall the Indemnified Parties' aggregate liability to the Company exceed the fees actually received by Gerard Klauer from the Company pursuant to the Financial Services Agreement unless there is a final judicial determination of willful misconduct (as described in the prior sentence) by an Indemnified Party. The Company agrees that the indemnification and reimbursement obligations set forth in this Agreement shall apply whether or not such Indemnified Party is a formal party to any such claim, action, suit or proceeding. The Company further agrees that it will not without the prior written consent of Gerard Klauer, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not Gerard Klauer or any Indemnified Party is a named party or potential party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes the unconditional release of Gerard Klauer and each other, Indemnified Party hereunder from all liability I arising from such claim, action, suit or proceeding. If multiple claims are brought against Gerard Klauer an arbitration proceeding, and indemnification is permitted under applicable law and is provided for under this Agreement with respect to at least one such claim, the Company agrees that any arbitration award shall be conclusively deemed to be based on claims as to which indemnification is permitted and provided for, except to the extent the arbitration award expressly states that the award, or any portion thereof, is based solely on a claim as to which indemnification is not available. Promptly after receipt by an Indemnified Party of notice of its involvement in any claim, action, suit, proceeding or investigation (a "Claim"), such Indemnified Party shall, if a Claim in respect thereof is to be made against the Company for indemnification, notify the Company in writing of such involvement. Failure by such Indemnified Party to so notify the Company shall not relieve the Company from its obligation to indemnify any Indemnified Parties under this Agreement, except to the extent that such failure to notify results in the forfeiture by the Company of substantive rights or defenses, and shall not relieve the Company from its obligation to provide reimbursement and contribution to the Indemnified Parties. If an Indemnified Party seeks indemnification hereunder with respect to any Claim brought by a third party, the Company shall be entitled to assume the defense of any such Claim with counsel satisfactory to such Indemnified Party. Upon assumption by the Company of the defense of any such Claim, such Indemnified Party shall have the right to participate in the defense of such Claim and to retain its own Gerard Klauer Mattison & Co., Inc. February 24, 1999 Page 3 counsel but the Company shall not be liable for any legal fees or expenses subsequently incurred by such Indemnified Party in connection with the defense thereof, unless (i) the Company has agreed to pay such fees and expenses, (ii) the Company shall have failed to employ counsel satisfactory to such Indemnified Party in a timely manner or (iii) such Indemnified Party shall have reasonably determined that representation of such Indemnified Party by counsel provided by the Company pursuant to the foregoing would be inappropriate due to actual or potential conflicting interests between the Company and such Indemnified Party, including, without limitation, situations in which there are one or more legal defenses available to such Indemnified Party that are different from or additional to those available to the Company. The Company shall not be liable for any settlement of any Claim effected without its written consent (which consent shall not be unreasonably withheld or delayed). The Company agrees that, except as provided in the last sentence of this paragraph, if any indemnification or reimbursement sought pursuant to this Agreement were for any reason not to be available to any Indemnified Party or were insufficient to hold it harmless, then the Company shall contribute to the amount paid or payable by the Indemnified Party as a result of the losses, claims, damages, liabilities and expenses in such proportion as is appropriate to reflect the relative benefits to the Company on the one hand, and Gerard Klauer on the other hand, in connection with any transaction to which such indemnification or reimbursement relates. The Company and Gerard Klauer hereby agree that the relative benefits to the Company on the one hand and Gerard Klauer the other hand, with respect to Gerard Klauer's engagement, shall be deemed to be in the same proportion as (i) the total amount or value paid or proposed to be paid to the Company in connection with the transaction contemplated by the Financial Services Agreement (before deducting expenses), whether or not consummated, bear to (ii) the fees actually paid to Gerard Klauer in connection With the transaction to which such contribution relates. If, however, the allocation provided by the first sentence of this paragraph is not permitted by applicable law, then the Company shall contribute to such amount paid or payable by Gerard Klauer in such proportion as is appropriate to reflect not only such relative benefits, but also the relative fault of the Company on the one hand and Gerard Klauer on the other hand in connection with the matters as to which such losses, claims, damages, liabilities or expenses relate and other equitable considerations. In no event shall the aggregate amount payable by the Indemnified Parties exceed the amount of fees actually received by Gerard Klauer pursuant to the Financial Services Agreement (excluding any amounts received as reimbursement of expenses incurred by Gerard Klauer.) The parties hereby agree that it would not be just or equitable if the contribution governed by this paragraph were determined by pro rata allocation or any other method that does not take into account the considerations taken into account by this paragraph. Notwithstanding the foregoing, the Company shall not be liable for any losses, claims, damages, liabilities or expenses to the extent the same are determined, in a final judgment by a court having competent jurisdiction, to have resulted primarily from Gerard Klauer Mattison & Co., Inc. February 24, 1999 Page 4 the gross negligence or willful misconduct of an Indemnified Party or from a breach on the part of Gerard Klauer under the Financial Services Agreement. The rights accorded to Indemnified Parties hereunder shall be in addition to any rights that any Indemnified Parties may have at common law, by separate agreement or otherwise, and shall be binding upon and inure to the benefit of any successors, heirs and personal representatives of the Company or any Indemnified Party, as the case may be. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY IN SUCH STATE. Any controversy arising between the parties hereto, or any person claiming under either of them, relating to this Agreement or the performance or breach thereof, shall be settled and determined by arbitration in New York, New York, before a single arbitrator in accordance with the commercial arbitration rules of the American Arbitration Association and the provisions of the New York Code of Civil Procedure governing such arbitrations, and judgment upon the reward rendered by the arbitrator may be entered in any court having jurisdiction thereof. The Company and Gerard Klauer each hereby irrevocably waives any right they may have to a trial by jury in respect of any claim based upon or arising out of this Agreement or the transactions contemplated hereby. This Agreement may not be amended or otherwise modified except by an instrument signed by both the Company and Gerard Klauer.. If any provision hereof shall be determined to be invalid or unenforceable in any respect, such determination shall not affect such provision in any other respect or any other provision of this Agreement, which shall remain in full force and effect. If there are more indemnitors than one hereunder, each indemnifying person agrees that its liabilities hereunder shall be joint and several. Gerard Klauer Mattison & Co., Inc. February 24, 1999 Page 5 This Agreement, and the indemnification, reimbursement and contribution obligations hereunder, shall remain operative and in full force and effect, notwithstanding (i) any withdrawal, termination or consummation of or failure to initiate or consummate any transaction referred to in the Financial Service Agreement, (ii) any investigation made by or on behalf of any Indemnified Party or (iii) any termination, completion or expiration of the Financial Services Agreement or Gerard Klauer's engagement thereunder. Very truly yours, ENTERTAINMENT UNIVERSE, INC. By________________________________ Name: Brad Greenspan Title: President __________________________________ Brad Greenspan Acknowledged and Agreed to GERARD KLAUER MATTISON & CO., INC. By_________________________________ Name: Dominic A. Petito Title: Senior Managing Director EX-10.25 12 STOCK AWARDS PLAN EXHIBIT 10.25 eUNIVERSE, INC. 1999 Stock Awards Plan 1. Purpose. The purpose of the eUniverse, Inc. 1999 Stock Awards Plan (the "Plan") is to promote the long term financial interests and growth of eUniverse, Inc. (the "Company") by (a) attracting and retaining executive personnel and other Participants, (b) motivating executive personnel and other Participants by means of growth-related incentives, (c) providing incentive compensation opportunities that are competitive with those of other major corporations; and (d) furthering the identity of interests of Participants with those of the stockholders of the Company. 2. Definitions. The following definitions are applicable to the Plan: "Affiliate" means any entity in which the Company has a direct or indirect equity interest which is so designated by the Committee. "Award Limit" means that number of shares of Common Stock as determined by the Committee. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute. "Committee" means, as to a Participant who is not a Director, a committee of two or more Directors of the Company who are "outside Directors" as such term is used in Section 162(m) of the Code and Non-Employee Directors for purposes of Rule 16b-3, or such other committee of the Board of Directors as it shall duly appoint and delegate authority to administer, and make awards under, the Plan. With respect to a Director who is a Participant, the Committee shall be the Board of Directors of the Company. "Common Stock" means the common stock, $0.001 par value, of the Company or such other securities as may be substituted therefor pursuant to paragraph 6(e). "Consultant" means any person who renders bone fide consultation or advisory services to the Company, provided that such services shall not be in connection with the offer or sale of securities in a capital-raising transaction. "Director" means any person who is a member of the Board of Directors of the Company and is not also an Employee. "Employee" means any officer or other employee (as defined in accordance with Section 3401(c) of the Code) of the Company, or of any Affiliate. The "Fair Market Value" of a share of Common Stock means the average between the highest and lowest quoted selling prices of the Common Stock on the NASDAQ National Market, or in the event the Common Stock is not listed on such exchange, then on the 1 exchange where the Common Stock is traded, on the pertinent option grant date or exercise date. "Participant" means any Director, Employee or Consultant of the Company or an Affiliate, who is selected by the Committee. "QDRO" means a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. "Rule 16b-3" means such rule adopted under the Securities Exchange Act of 1934, as such rule is amended from time to time, or any successor rule. 3. Limitation on Aggregate Shares. The number of shares of Common Stock with respect to which awards may be granted under the Plan shall not exceed 5,000,000 shares. Such 5,000,000 shares of Common Stock may be either previously authorized but unissued shares, treasury shares, or a combination thereof, as the Committee shall determine. The maximum number of shares of Common Stock with respect to which awards may be granted under the Plan during any calendar year to a single Participant may not exceed the Award Limit. To the extent required by Section 162(m) of the Code, shares subject to Options (as defined in Section 5 below) which are canceled continue to be counted against the Award Limit and if, after grant of an Option, the price of shares subject to such Option is reduced, the transaction is treated as a cancellation of the Option and a grant of a new Option and both the Option deemed to be canceled and the Option deemed to be granted are counted against the Award Limit. Furthermore, to the extent required by Section 162(m) of the Code, if, after grant of a Stock Appreciation Right ("SAR"), the base amount on which stock appreciation is calculated is reduced to reflect a reduction in the Fair Market Value of the Company's Common Stock, the transaction is treated as a cancellation of the SAR and a grant of a new SAR and both the SAR deemed to be canceled and the SAR deemed to be granted are counted against the Award Limit. 4. Add-back of Options and Other Rights. If any Option, other right to acquire shares of Common Stock under this Plan, or any other award, expires or is canceled without having been fully exercised, or is exercised in whole or in part for cash as permitted by this Plan, the number of shares subject to such Option or other right but as to which such Option or other right was not exercised prior to its expiration, cancellation or exercise may again be optioned, granted or awarded hereunder, subject to the limitations of Section 3. Furthermore, any shares subject to Options or other awards which are adjusted pursuant to Section 6(e) and become exercisable with respect to shares of stock of another corporation shall be considered canceled and may again be optioned, granted or awarded hereunder, subject to the limitations of Section 3. Shares of Common Stock which are delivered by the Participant or withheld by the Company upon the exercise of any Option or other award under this Plan, in payment of the exercise price thereof, may again be optioned, granted or awarded hereunder, subject to the limitations of Section 3. If any share of Restricted Stock is forfeited by the Participant or repurchased by the Company pursuant to Section 5(c)(iii) hereof, such share may again be optioned, granted or awarded hereunder, subject to the limitations of Section 3. Notwithstanding the provisions of this Section 4, no shares of Common Stock may again be optioned, granted or awarded if such 2 action would cause an Incentive Stock Option to fail to qualify as an incentive stock option under Section 422 of the Code. 5. Awards. The Committee may grant stock options ("Options"), to Participants, in accordance with this Section 5 and the other provisions of the Plan. (a) Options. (i) Option Grants. Options granted under the Plan may be incentive stock options ("ISOs") within the meaning of Section 422 of the Code or any successor provision, or in such other form, consistent with the Plan, as the Committee may determine. (ii) Option Exercise Price. The exercise price of an Option shall be fixed by the Committee in its discretion; provided, however, that in the case of ISO's, the exercise price shall be not less than 100% of the Fair Market Value of a share of Common Stock on the date of grant. (iii) Option Term. The term of an Option shall be set by the Committee in its discretion; provided, however, that in the case of ISOs, the term shall not be more than ten (10) years from the date the ISO is granted. (iv) Exercisability. Options shall be exercisable at such time or times as the Committee shall determine at or subsequent to grant. (v) Exercise of Options. An exercisable Option may be exercised in whole or in part. However, an Option shall not be exercisable with respect to fractional shares and the Committee may require that, by the terms of the Option, a partial exercise be with respect to a minimum number of shares. Options shall be exercised in whole or in part by providing (A) written notice to the Company (to the attention of the Secretary) complying with the applicable rules established by the Committee; (B) such representations and documents as the Committee deems necessary or advisable to effect compliance with all applicable laws or regulations; (C) in the event that the Option shall be exercised pursuant to Section 6(d) by any person or persons other than the optionee, appropriate proof of the right of such person or persons to exercise the Option; and (D) payment in full of the option price. Payment of the option price may be made, at the discretion of the optionee, and to the extent permitted by the Committee, (1) in cash (including check, bank draft, or money order), (2) in Common Stock with a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof, (3) by a combination of cash and Common Stock, or (4) with any other good and valuable consideration. (vi) Rights as Stockholders. The holders of Options shall not be, nor have any of the rights or privileges of, stockholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until 3 certificates representing such shares have been issued by the Company to such holders. (vii) Ownership and Transfer Restrictions. The Committee may impose such restrictions on the ownership and transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such restriction shall be set forth in the respective Stock Option Agreement and may be referred to on the certificates evidencing such shares. The Committee may require the Participant to give the company prompt notice of any disposition of shares of Common Stock acquired by exercise of an ISO within (i) two years from the date of granting such Option to such Participant or (ii) one year after the transfer of such shares to such Participant. The Committee may direct that the certificates evidencing shares acquired by exercise of an Option refer to such requirement to give prompt notice of disposition. (b) Stock Appreciation Rights. (i) Grant and Price of SAR. Subject to such terms and conditions not inconsistent with this Plan as the Committee shall impose and shall be evidenced by a written Stock Appreciation Right Agreement, an SAR shall entitle its holder to receive from the Company, at the time of exercise of such right, an amount equal to the excess of the Fair Market Value (at the date of exercise) of a share of Common Stock over the SAR price multiplied by the number of shares as to which the holder is exercising the SAR. The SAR price shall be fixed by the Committee at not less than 100% of the Fair Market Value of a share of Common Stock on the date of grant. SARs may be in tandem with any previously or contemporaneously granted Option or independent of any Option. (ii) Tandem SARs. An SAR in tandem with an Option shall be related to a particular Option and shall be exercisable only when and to the extent the related Option is exercisable. An SAR in tandem with an Option may be granted to the Participant for no more than the number of shares subject to the simultaneously or previously granted Option to which it is coupled. (iii) Amount Payable by Company. The amount payable may be paid by the Company in Common Stock (valued at its Fair Market Value on the date of exercise), cash or a combination thereof, as the Committee may determine, which determination shall be made after considering any preference expressed by the holder. (c) Restricted Stock. (i) Restricted Stock Award. The Committee may award to any Participant shares of Common Stock, including shares earned under any of the Company's compensation plans, subject to this Section 5(c) and such other terms and conditions as the Committee may prescribe (such shares being called "Restricted 4 Stock"), which restrictions may include, without limitation, restrictions concerning voting rights and transferability and restrictions based on duration of employment with the Company, Company performance and individual performance. Each certificate for Restricted Stock shall be registered in the name of the Participant and deposited, together with a stock power endorsed in blank, with the Company. (ii) Restrictions. There shall be established for each Restricted Stock award a restriction period (the "Restriction Period") of such length as shall be determined by the Committee. Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as hereinafter provided, during the Restriction Period. Unless otherwise provided by the Committee, except for such restrictions on transfer and such other restrictions as the Committee may impose, the Participant shall have all the rights of a holder of Common Stock as to such Restricted Stock. The Committee, in its sole discretion, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested in additional Restricted Stock or otherwise invested. At the expiration of the Restriction Period, the Corporation shall redeliver to the Participant (or the Participant's designated beneficiary under Section 6(h), or, if none, the Participant's legal representative) the certificates deposited pursuant to this paragraph. (iii) Forfeiture/Repurchase of Restricted Stock. Except as provided by the Committee at the time of grant or otherwise, upon a termination of employment for any reason during the Restriction Period all shares still subject to restriction shall be forfeited by the Participant or at the discretion of the Committee may be repurchased by the Company at a price to be determined by the Committee. 6. Miscellaneous Provisions. (a) Administration. The Plan shall be administered by the Committee. Subject to the limitations of the Plan, the Committee shall have the sole and complete authority to: (i) select Participants in the plan; (ii) subject to Section 3, to make awards in such forms and amounts as it shall determine, including the determination as to whether such Options are to be ISOs; (iii) to impose such limitations, restrictions and conditions upon such awards as it shall deem appropriate, (iv) to interpret the Plan and the agreements pursuant to which Options, Restricted Stock or SARs are granted or awarded, and to adopt, amend and rescind administrative guidelines and other rules and regulations relating to the Plan, (v) to correct any defect or omission or to reconcile any inconsistency in the Plan or in any award granted hereunder and (vi) to make all other determinations and to take all other actions necessary or advisable for the implementation and administration of the Plan. Any such interpretations and rules with respect to ISOs shall be consistent with the provisions of Section 422 of the Code. The actions and determinations of the Committee or its delegates on matters within its authority shall be conclusive and binding upon the Company, all the Participants and all other interested persons, subject to such allocation to its Affiliates and operating units as it deems appropriate. The Committee may, to the extent that any such action will not prevent the Plan from complying with 5 the Rule 16b-3 or Section 162(m) of the Code, delegate any of its authority hereunder to such persons as it deems appropriate. (b) Professional Assistance; Good Faith Actions. All expenses and liabilities which members of the Committee incur in connection with the administration of this Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants, appraisers, brokers, or other persons. The Committee, the Company and the Company's officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. No members of the Committee or Board shall be personally liable for any action, determination or interpretation made in good faith with respect to this Plan, Options, awards of Restricted Stock or SARs; and all members of the Committee and the Board shall be fully protected by the Company in respect of any such action, determination or interpretation. (c) Written Agreement. Each award shall be evidenced by a written agreement, which shall be executed by the Participant and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. Stock Option Agreements evidencing Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. Stock Option Agreements evidencing ISOs shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 422 of the Code. (d) Non-Transferability. Subject to the provisions of paragraph 6(h) , no award under the Plan and no interest therein, shall be transferable by the Participant otherwise than (i) by will or the laws of descent and distribution, (ii) pursuant to a QDRO or (iii) as expressly permitted under the applicable option agreement including, if so permitted, pursuant to a gift to such optionee's family, whether directly or indirectly or by means of a trust or partnership or otherwise, unless and until such rights or awards have been exercised, or the shares underlying such rights or awards have been issued, and all restrictions applicable to such shares have lapsed. All awards shall be exercisable or received during the Participant's lifetime only by the Participant or the Participant's legal representative. Any purported transfer contrary to this provision will nullify the award. During the lifetime of the Participant, only he may exercise an Option or other right or award (or any portion thereof) granted to him under the Plan, unless it has been disposed of pursuant to a QDRO. After the death of the Participant, any exercisable portion of an Option or other right or award may, prior to the time when such portion becomes unexercisable under the Plan or the applicable Stock Option Agreement or other agreement, be exercised by his beneficiary designated under 6(h) or, if none, his personal representative or by any person empowered to do so under the deceased Participant's will or under the then applicable laws of descent and distribution. (e) Adjustments Upon Certain Changes. In the event of a reorganization, recapitalization, spin-off, stock dividend, stock split, combination, reclassification, reverse stock split, merger, consolidation, split-up, spin- off, repurchase, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company, or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate 6 transaction or event or other increase or reduction in the number of issued shares of Common Stock, the Committee may, in order to prevent the dilution or enlargement of rights under awards, make such adjustments in the number and type of shares authorized by the Plan, the number and type of shares covered by, or with respect to which payments are measured under, outstanding awards and the exercise prices specified therein as may be determined to be appropriate and equitable. In the event of any of the events or transactions described in the preceding sentence, a change in control, or similar transaction by the Company or any unusual or nonrecurring transactions or events affecting the Company, any affiliate of the Company, or the financial statements of the Company or any affiliate, or of changes in applicable laws, regulations, or accounting principles, if the Committee determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any option, right or other award under this Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles, the Committee in its discretion is hereby authorized to provide in the agreement evidencing any award or by action taken prior to the occurrence of such transaction or event: (i) for adjustments to such award in order to prevent the dilution or enlargement of rights thereunder or to provide for acceleration of benefits thereunder; (ii) for either the purchase of any such Option, SAR, or any Restricted Stock for an amount of cash equal to the amount that could have been attained upon the exercise of such option, right or award or realization of the Participant's rights had such option, right or award been currently exercisable or payable or fully vested or the replacement of such option, right or award with other rights or property selected by the Committee in its sole discretion; (iii) that it cannot be exercised after such event; (iv) that upon such event, such option, right or award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; and (v) that the restrictions imposed under a Restricted Stock Agreement upon some or all shares of Restricted Stock may be terminated, and some or all shares of such Restricted Stock may cease to be subject to repurchase or forfeiture under Section 5(c)(iv) after such event. With respect to Options and SARs intended to qualify as performance- based compensation under Section162(m), no adjustment or action described in this Section 6(e) or in any other provision of the Plan shall be authorized to the extent that such adjustment or action would cause the Plan to violate Section 422(b)(1) of the Code or would cause such Option or SAR to fail to so qualify under Section 162(m), as the case may be, or any successor provisions thereto. Furthermore, no such adjustment or action shall be authorized to the extent such adjustment or action would result in short-swing profits liability under Section 16 or violate the exemptive conditions of Rule 16b-3 unless the Committee determines that the option or other award is not to comply with such exemptive conditions. (f) Tax Withholding. The Committee shall have the power to withhold, or require a Participant to remit to the Company, an amount to satisfy any withholding or other tax due with respect to any amount payable and/or shares issuable under the Plan, and the Committee may defer such payment or issuance unless indemnified to its satisfaction. Subject to the consent of the Committee, a Participant may make an irrevocable election to have shares of Common Stock otherwise issuable under an award withheld, tender back to the Company shares of Common Stock received pursuant to an award or deliver to the Company previously-acquired shares of 7 Common Stock having a fair market value sufficient to satisfy all or part of the Participant's estimated tax obligations associated with the transaction. Such election must be made by a Participant prior to the date on which the relevant tax obligation arises. The Committee may disapprove of any election and may limit, suspend or terminate the right to make such elections. (g) Listing and Legal Compliance. The Committee may suspend the exercise or payment of any award so long as it determines that securities exchange listing or registration or qualification under any securities laws is required in connection therewith and has not been completed on terms acceptable to the Committee. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (i) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; (ii) The completion of any registration or other qualification of such shares under any state or federal law, or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body which the Committee or Board shall, in its absolute discretion, deem necessary or advisable; (iii) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; (iv) The lapse of such reasonable period of time following the exercise of the Option as the Committee may establish from time to time for reasons of administrative convenience; and (v) The receipt by the Company of full payment for such shares, including payment of any applicable withholding tax. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer notices to agents and registrars. (h) Beneficiary Designation. Subject to paragraph 6(d), Participants may name, from time to time, beneficiaries (who may be named contingently or successively) to whom benefits under the Plan are to be paid in the event of their death before they receive any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. (i) Rights of Participants. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time, nor confer upon 8 any Participant any right to continue in the employ of the Company for any period of time or to continue his or her present or any other rate of compensation. No employee or director shall have the right to be selected as a Participant, or, having been so selected, to be selected again as a Participant. (j) Amendment, Suspension and Termination of Plan. This Plan will terminate on, and no Options, SARs or Restricted Stock may be granted after, the tenth anniversary of the Effective Date of the Plan. The Board of Directors or the Committee may amend the Plan from time to time in such respects as the Board of Directors or the Committee may deem advisable; provided, however, that no such amendment shall be made without stockholder approval to the extent such approval is required by law, agreement or the rules of any exchange upon which the Common Stock is listed. No such amendment, suspension or termination shall impair the rights of Participants under outstanding awards without the consent of the Participants affected thereby or make any change that would disqualify the Plan, or any other plan of the Company intended to be so qualified, from the exemption provided by Rule 16b-3. No such amendment shall be made that would cause the options and the SARs from qualifying as performance based compensation as that term is used Section 162(m) of the Code. The Committee may amend or modify any award in any manner to the extent that the Committee would have had the authority under the Plan to initially grant such award. No such amendment or modification shall impair the rights of any Participant under any award without the consent of such Participant. (k) Effective Date of Plan. The Plan shall become effective on April 15, 1999. (l) Governing Law. This Plan and any agreements hereunder shall be administered, interpreted and enforced under the internal laws of the State of Connecticut without regard to conflicts of laws thereof. (m) Limitations Applicable to Section 16 Persons and Performance-Based Compensation. Notwithstanding any other provision of this Plan, any Option, SAR, or Restricted Stock granted to any individual who is then subject to Section 16 of the Exchange Act shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan, Options, SARs and Restricted Stock granted hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule. Furthermore, notwithstanding any other provision of this Plan, any Option or SAR intended to qualify as performance- based compensation as described in Section 162(m)(4)(C) of the Code shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the extent necessary to conform to such requirements. 9 (n) Consideration. In all cases, legal consideration shall be required for each issuance of Options, Restricted Stock and SARs. 10 EX-23.02 13 CONSENT OF JOHNATHAN P. REUBEN EXHIBIT 23.02 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS JONATHON P. REUBEN, CPA An Accountancy Corporation [LOGO]-------------------------------------------------------------------------- 23440 Hawthorne Blvd. Suite 270 Torrance CA 90505 (310) 378-3609 * FAX (310) 378-3709 eUNIVERSE, INC. 101 North Plains Industrial Road Wallingford, Connecticut 06492 The undersigned consents to the use of its opinion dated April 9, 1999, relating to the financial statements of Cases Ladder, Inc. and to the reference to the firm under "Experts," all as included in Form SB-2. Date: September 10, 1999 /s/ Jonathon P. Reuben CPA Jonathon P. Reuben, C.P.A. EX-23.03 14 CONSENT OF CORDOVAN EXHIBIT 23.03 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of eUniverse, Inc. on Form SB2 - of our report dated June 3, 1999, appearing in the Prospectus, which is part of this Registration Statement, and of our report dated June 3, 1999 relating to the financial statement schedules appearing elsewhere in this Registration Statement. We also consent to the reference to us under the headings "Selected Financial Data" and "Experts" in such Prospectus. Cordovano and Harvey, P.C. Denver, Colorado September 10, 1999 EX-23.04 15 CONSENT OF MERDINGER EXHIBIT 23.04 INDEPENDENT AUDITOR'S CONSENT We hereby consent to the use in this Registration Statement of eUniverse, Inc. on Form SB-2 of our report dated May 14, 1999 appearing in the Prospectus, which is a part of such Registration Statement, relating to the financial statements of CD Universe, Inc., and to the reference to our Firm under the caption "Experts" in such Prospectus. MERDINGER, FRUCHTER, ROSEN & CORSO, P.C. Certified Public Accountants New York, New York September 10, 1999 -----END PRIVACY-ENHANCED MESSAGE-----