Section 240.14a-101 Schedule 14A.
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240.14a-12
eUniverse, Inc.
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eUNIVERSE, INC.
6300 Wilshire Boulevard, Suite 1700
Los Angeles, California 90048
---------------------------
NOTICE OF 2001 ANNUAL MEETING OF STOCKHOLDERS
---------------------------
__________, September __, 2001
At 10:00 a.m.
To the Stockholders:
NOTICE IS HEREBY GIVEN that the 2001 Annual Meeting of Stockholders of
eUNIVERSE, INC. will be held on September __, 2001, at 10:00 a.m., at
eUniverse's headquarters located at 6300 Wilshire Boulevard, Suite #1700, Los
Angeles, California 90048, for the following purposes:
1. To approve the Stock Purchase Agreement by and between eUniverse,
Inc. and 550 Digital Media Ventures Inc. and the Share Purchase
Agreement by and among eUniverse, Inc., Indimi, L.L.C., Indimi
Inc., 550 Digital Media Ventures Inc. and Sony Music
Entertainment Inc.
2. To elect four directors to serve for a term of one year.
3. To ratify the appointment of Merdinger, Fruchter, Corso & Rosen,
P.C., as independent auditors for eUniverse for the fiscal year
2001.
4. To consider and act upon such other matters as may properly come
before the meeting or any continuation or adjournment thereof.
These items are more fully described in the Proxy Statement
accompanying this Notice. Only stockholders of record at the close of business
on August 16, 2001 are entitled to receive notice of, attend and vote at the
meeting. Stockholders are reminded that shares cannot be voted unless the signed
Proxy Card is returned or other arrangements are made to have the shares
represented at the meeting.
Sincerely,
Christopher S. Lipp
Secretary, Vice President and General Counsel
Los Angeles, California
August , 2001
eUNIVERSE, INC.
---------------------------
PROXY STATEMENT
FOR
2001 ANNUAL MEETING OF STOCKHOLDERS
---------------------------
This proxy statement is furnished to stockholders of eUniverse, Inc., a
Nevada corporation (the "Company" or "eUniverse"), in connection with the
solicitation of proxies by the Board of Directors of the Company to be voted at
the 2001 Annual Meeting of Stockholders (the "Annual Meeting") and at any
adjournment thereof. The Annual Meeting is being held for the purposes set forth
in the accompanying Notice of Annual Meeting of Stockholders. This proxy
statement and the accompanying proxy card(s) and Notice of Annual Meeting are
being provided to stockholders beginning on or about ___________, 2001. The
Company, a Nevada corporation, is headquartered at 6300 Wilshire Boulevard,
Suite #1700, Los Angeles, California 90048.
Solicitation of Proxies
The enclosed proxy is solicited on behalf of the Board of Directors of
the Company (the "Board"). The costs of this solicitation will be borne by the
Company. Proxy solicitations will be made by mail and also may be made by
personal interview, telephone and telefax by Company personnel. Brokerage houses
and nominees will be requested to forward the proxy soliciting material to
beneficial owners and to obtain authorization for the execution of proxies. The
Company will, upon request, reimburse such brokerage houses and nominees for
their reasonable expenses in forwarding proxy materials to beneficial owners.
The Company has retained Corporate Stock Transfer, Inc. to assist in the
solicitation of proxies for a fee of approximately $600 plus reimbursement of
out-of-pocket expenses.
VOTING SECURITIES
Description of Capital Stock
We have authorized capital stock consisting of 250,000,000 shares of
common stock, $0.001 par value per share, and 40,000,000 shares of preferred
stock, $0.10 par value per share. As of August 16, 2001, the record date for
determining shareholders entitled to vote at the Annual Meeting, our issued and
outstanding capital stock consisted of 19,294,696 shares of common stock and
1,278,383 shares of Series A 6% Convertible Preferred Stock, $0.10 par value.
The following is a summary description of eUniverse's capital stock. For a
complete description of our capital stock, you should read our Articles of
Incorporation, Amended and Restated Bylaws, and the Registration Rights
Agreements that are included as exhibits to our Form 10 filed with the
Securities and Exchange Commission ("SEC") on June 14, 1999, and Warrants and
Registration Rights Agreements included as exhibits to our Form 10-K filed with
the SEC on July 16, 2001.
Common Stock
Holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders.
Preferred Stock
Holders of preferred stock are entitled to vote, on an as-converted
basis, on all matters to be voted upon by the stockholders. The current
conversion rate for the preferred stock is at a one-for-one basis plus 6%
accretion from April 14, 1999. Accordingly, each holder of preferred stock as of
August 16, 2001 will be entitled to 2.013 votes per share of preferred stock.
In the aggregate, holders of preferred stock will be entitled to cast 2,573,385
votes at the Annual Meeting, and all holders of common and preferred shares will
be entitled to cast 21,868,081 votes at the Annual Meeting.
ITEM 1. APPROVAL OF THE SONY AGREEMENTS
Summary Term Sheet
A more detailed description of the transactions summarized below is set
forth under the caption "Description of the Transactions" below.
Stock Purchase Agreement
o Pursuant to a Stock Purchase Agreement, 550 Digital Media
Ventures Inc. (the "Investor"), an affiliate of Sony Broadband
Entertainment Inc., has agreed to invest $5 million in the
Company in exchange for shares of a new series of preferred
stock, Series B Senior Convertible Preferred Stock (the "Series B
Preferred")
o The purchase price of the Series B Preferred will be $2.60 per
share
o The Series B Preferred will be convertible, at the option of the
holder, into shares of the Company's common stock at any time on
a one-for-one basis, subject to standard anti-dilution
adjustments
o The Series B Preferred will receive non-cumulative annual
dividends of $0.208 per share, when, as and if declared by the
Board and any dividends paid on the common stock on an
as-converted basis
o Upon any liquidation or change in control of the Company, the
Series B Preferred will receive a liquidation preference equal to
the aggregate original issue price plus accrued and unpaid
dividends, and thereafter will participate with the common shares
on an as-converted basis
o The Series B Preferred will vote with the common shares on an
as-converted basis
o The Series B Preferred may designate one to three directors,
depending on the size of the Board
o Certain material transactions by the Company will require
approval by two-thirds of the Board, until the Investor owns 50%
or less of its original Series B preferred shares
o The Company must comply with a use of proceeds plan with respect
to the $5 million investment, as outlined in the Stock Purchase
Agreement
o As a condition to the closing of the transactions contemplated
under the Stock Purchase Agreement, the Company must obtain the
consent of (i) at least 75% of holders of the Company's Series A
6% Convertible Preferred Stock (the "Series A Preferred") and
(ii) stockholders holding at least 75% of the Series A Preferred,
for subordination by the Series A Preferred to the Series B
Preferred with respect to dividends and distributions. The
Company has solicited this consent in a letter agreement with the
Series A Preferred stockholders that also provides for the delay
of the conversion rights with respect to certain of the Series A
Preferred and the amendment of the conversion price of the Series
A Preferred. The letter agreement provides that in the event that
the required consents are obtained from the Series A Preferred
holders, the Company will issue each Series A Preferred holder
warrants with a cashless exercise price to purchase the number of
shares of the Company's common stock equal to 10% of the number
of shares of Series A Preferred held by the stockholder, at an
exercise price of $1.75 per share, exercisable for a two-year
period beginning twelve months after the filing of the amendment
to the Series A Preferred Certificate of Designations called for
by the letter agreement. As further consideration for the Series
A Preferred holders' consent, the conversion price of the Series
A Preferred shares will be subject to a weighted average
adjustment to reduce dilution in the event that the Company
issues additional equity securities at a purchase price below the
applicable conversion price for the Series A Preferred shares.
2
Indimi Purchase Agreement
o The Company has also agreed to purchase all of the membership
interests in Indimi, L.L.C, which owns and operates InfoBeat, a
permission-based e-mail publishing business that operates as a
news and e-mail content delivery service from the Investor. As a
result, the Company anticipates gaining a closer working
relationship with Sony and integrating the operations of InfoBeat
to gain additional subscribers and economies of scale. The
purchase includes a database of subscriber names and related
contact and/or demographic information, rights to InfoBeat
content, and use of the InfoBeat trade name and service mark. The
Company will not acquire the InfoBeat delivery service or other
technology or the any of the workforce of InfoBeat or Indimi.
(See subsequent events section of the notes to the InfoBeat
financial statements found on page F-10 regarding certain
severance payments by 550 DMV made to InfoBeat employees.)
o The purchase price will be $9,940,000 to be paid by the Company
through the issuance of 3,058,461 shares of its common stock,
representing a price of $3.25 per common share
o The Company will also issue a further 307,692 shares of common
stock to the Investor in redemption of certain warrants held by
the Investor
Other Matters
o The Series B Preferred and common shares issued to the Investor
will not be registered with the SEC and will be subject to an
18-month lock-up
o The Investor will have certain demand registration rights not
exercisable until two and a half years after the closing
o The Investor has agreed to extend the maturity date of the
outstanding principal amount of $2,289,764 on its promissory note
of the Company ("principal amount"), until March 31, 2003 and
allow the Company to convert such note to Series B Preferred
shares or common stock, as applicable.
o The Company has agreed to discharge or restructure certain of its
outstanding third party liabilities in a manner provided in the
Stock Purchase Agreement and to make available to the Investor
and its affiliates between 1 and 5 percent of various types of
the Company's advertising inventory, such as "banner" or "pop-up"
advertising, for up to three years from the closing
o In anticipation of the acquisition of Infobeat by the Company,
the Company agreed to provide editorial services for the Infobeat
newsletters beginning on July 30, 2001. As a result, the
editorial services previously provided by Infobeat employees were
no longer required, and accordingly, such staff's employment was
terminated. Infobeat took a charge to earnings for severance and
related costs of $186,000.
Description of the Transactions
The Stock Purchase Agreement
On July 13, 2001, the Company entered into a Stock Purchase Agreement
(the "Stock Purchase Agreement") by which the Investor agreed to invest $5
million in the Company in exchange for issuance by the Company of shares of
Series B Preferred, at a purchase price of $2.60 per share. As a condition to
closing under the Stock Purchase Agreement, the Company must comply with a "Use
of Proceeds Plan," against which the $5 million to be invested shall be applied.
As further conditions to closing, the Company shall discharge certain of its
outstanding obligations and liabilities to third parties, or otherwise
restructure such obligations and liabilities, in a manner to be approved by the
Investor and obtain the consent of the Series A Preferred stockholders to the
consummation of the transactions contemplated under the Stock Purchase
Agreement.
The principal executive offices of the Investor are located at 550
Madison Avenue, New York, NY 10022. Telephone: 212-833-5392
3
The holders of the Series B Preferred shall be entitled to participate
pro rata in any dividends paid on the Company's common stock on an
as-if-converted basis. In addition, the holders of the Series B Preferred shall
be entitled to receive noncumulative dividends in preference to any dividend on
the Company's common stock of $0.208 per annum, when, as and if declared by the
Board. In the event of any liquidation or winding up of the Company, the holders
of the Series B Preferred shall be entitled to liquidating distributions up to
the aggregate original issue price of the Series B Preferred plus any accrued
but unpaid dividends and then pro rata with common shareholders on an
as-converted basis following payment of the liquidation preference of the Series
A Preferred holders. A merger, acquisition, sale of voting control or sale of
substantially all of the assets of the Company in which the shareholders of the
Company do not own a majority of the outstanding shares of the surviving
corporation shall be deemed to be a liquidation.
The Series B Preferred may be converted, at any time, into the
Company's common stock at the then applicable conversion price at the election
of the holders of at least a majority of the outstanding Series B Preferred. The
initial conversion rate shall be 1:1, subject to a weighted average adjustment
(based on all outstanding shares of the Company's preferred stock and common
stock) to reduce dilution in the event that the Company issues additional equity
securities (other than the shares reserved as employee shares pursuant to any
employee stock option plan) at a purchase price less than the applicable
conversion price. The conversion price will also be subject to proportional
adjustment for stock splits, stock dividends, recapitalization and the like. The
Company shall have the right to convert the Series B Preferred into shares of
the Company's common stock within 60 days of the public filing of its Form 10-Q
or 10-K report, as applicable, evidencing the Company's achievement of four
consecutive post-closing quarters of operating profits equal to or greater than
$750,000 for each applicable quarter.
Each share of Series B Preferred shall have a number of votes equal to
the number of shares of the Company's common stock then issuable upon conversion
of such share of Series B Preferred. Additionally, the holders of Series B
Preferred shall be entitled to designate at least one and not more than three
members of the Board, depending on the size of the Board. Certain material
transactions by the Company shall require a two-thirds consent of the Board,
until such time as the Investor no longer owns more than 50% of its original
Series B Preferred shares. The Company will also grant preemptive rights to the
Investor to participate in any private sales of equity by the Company on the
same terms as offered to other investors.
The InfoBeat Purchase Agreement
Simultaneously with the execution of the Stock Purchase Agreement, the
Company entered into a Share Purchase Agreement (the "InfoBeat Purchase
Agreement", and together with the Stock Purchase Agreement, the "Sony
Agreements") with the Investor for the purchase of all the membership interests
in Indimi, L.L.C., which owns and operates InfoBeat, a permission-based e-mail
publishing business that operates as a news and content email delivery service.
Under the InfoBeat Purchase Agreement, the Company will acquire
InfoBeat for a total purchase price of $9.94 million, to be paid through
issuance of the Company's common stock. The common stock to be issued as
consideration under the Indimi Purchase Agreement shall be valued at $3.25 per
share.
Both the Company's common stock and Series B Preferred shares issued to
the Investor shall be subject to restrictions on resale and may not be resold
other than pursuant to an effective registration statement covering the shares
or an exemption from the registration requirements of the Securities Act of 1933
(the "Act"). Additionally, the Investor has agreed not to sell its shares of the
Company's common stock or Series B Preferred for a period of 18 months from the
date of closing (the "Lock-up Period"), except through a piggyback registration
or private sale. After the Lock-up Period, the Investor may sell its shares of
the Company's common stock or Series B Preferred pursuant to Rule 144 under the
Act. The Company will grant to the Investor certain piggyback and demand
registration rights, but the demand rights may not be exercised prior to 2 1/2
years after the closing.
In connection with the Stock Purchase Agreement, the Company agreed to
redeem a warrant issued to the Investor that provided for the purchase of up to
1,101,260 shares of the Company's common stock in exchange for (i) $1 million of
the Company's common stock at a price of $3.25 per share, determined in
accordance with the formula set forth under the Share Purchase Agreement; and
(ii) the Company shall make available to the Investor and its affiliates between
1% and 5% of various categories of the Company's advertising inventory, such as
"banner" and "pop-up" advertising for a period of up to 36 months following the
closing.
4
In connection with the transactions described above, the maturity of a
promissory note of the Company with an outstanding principal balance of
$2,289,674 in favor of the Investor shall be extended until March 31, 2003 (the
"Extended Demand Date"), subject to acceleration in certain events. The Company
shall have the option, exercisable within 30 days following the Extended Demand
Date, to convert the outstanding principal and interest to Series B Preferred
shares, at a price per share equal to the 20-day trailing average closing price
of the Company's common stock immediately prior to such conversion; provided
that if the Company previously converts the Investor's Series B Preferred shares
into common stock, then the outstanding principal and interest shall then be
converted into Company common stock, at the above-described price per-share
otherwise applicable to the Series B Preferred.
As a result of the contemplated Stock Purchase Agreement and the
InfoBeat Purchase Agreement, the number of votes to which the issued and
outstanding shares of capital stock of the Company shall be entitled will
increase from 21,868,081 as of August 16, 2001 to 27,157,310, representing an
increase of 24 percent, and corresponding dilution of the voting power of the
Company's existing shareholders.
No federal or state regulatory requirements must be complied with or
approvals obtained in connection with the Contemplated Transactions.
Accounting Treatment
In accordance with United States generally accepted accounting
principles, eUniverse intends to account for the acquisition of InfoBeat using
the purchase method of accounting for business combinations. As a result,
InfoBeat will be treated as a separate entity for periods prior to the
completion of the acquisition and as a wholly owned subsidiary of eUniverse for
subsequent periods. In addition, eUniverse will record the excess of the
purchase price of InfoBeat over the fair value of InfoBeat's identifiable
assets, including intangible assets and liabilities, as goodwill.
Transition Services Agreement
During the transition from the date of the agreement on July 13, 2001
to the closing of the transaction, the Company and the Investor entered into a
transition services agreement to provide for the continuation of InfoBeat
operations. The Investor will pay to the Company 110% of certain editorial,
bandwidth and other third party costs, ("Monthly Service Fee"), incurred to
operate InfoBeat net of applicable revenues with the net reimbursement not to
exceed $150,000 during the period of the transition services agreement. The
Company will share 50% of any net profits in a given month, which are defined as
total applicable revenues less the Monthly Service Fee. The Company has agreed
to operate InfoBeat within certain minimum performance standards and certain
privacy and security policies. The agreement terminates upon the earlier of the
closing of the Stock Purchase Agreement and Indimi Purchase Agreement described
elsewhere in this proxy statement, or upon five days' prior written notice by
Investor to the Company.
Background of the Stock Purchase Agreement and the Indimi Purchase
Agreement
Brad D. Greenspan, Chairman and Chief Executive Officer of eUniverse,
Inc., routinely meets with other executives of other media and Internet
companies to discuss potential business opportunities.
During the fall and winter of 2000 through February 2001,
representatives of eUniverse, Inc., including Mr. Greenspan, and representatives
of the Investor, including Fred Ehrlich, President and CEO of the Investor,
Robert Wiesenthal, Vice Chairman of the Investor, Mark Eisenberg, Senior Vice
President and General Counsel of the Investor and Mark Wachen, CEO of Indimi
Inc. (an affiliate of the Investor), discussed from time to time ways in which
the companies could potentially form a strategic alliance, including a potential
merger of one of the Investor's portfolio companies with eUniverse. During this
time, eUniverse and the Investor had an ongoing business relationship including,
but not limited to, a note payable to the Investor by eUniverse, Inc.
5
In late February 2001, Mr. Greenspan and Mr. Joseph L. Varraveto,
Executive Vice President and Chief Financial Officer of eUniverse, Inc., met
with Mr. Wiesenthal in Los Angeles to discuss a potential strategic transaction
between the Investor and eUniverse. A broad understanding was reached at that
meeting to develop a general outline of a potential transaction between the two
parties.
On February 28, 2001, Mr. Tom Connolly, CFO of the Investor, met with
Mr. Greenspan, Mr. Varraveto and Mr. Brett C. Brewer, Co-President of eUniverse,
at eUniverse's offices to review and discuss general business matters of
eUniverse and Indimi Inc.
On March 6, 2001, Mr. Ehrlich, Mr. Eisenberg, Mr. Wachen, Mr. Connolly
and Mr. Thomas Gewecke, Executive Vice President of the Investor, met with
Messrs. Greenspan, Varraveto and Brewer to discuss a strategic transaction
outline that included the potential purchase of certain Indimi properties by
eUniverse, the purchase of eUniverse stock by the Investor and the restructuring
of an existing note payable to the Investor by eUniverse. No definitive
agreement was reached on any of the points in the outline. Both parties
adjourned the meeting to deliberate on the potential transaction in further
detail. Mr. Wiesenthal participated in portions of this meeting via conference
call.
During the period March 9, 2001 through mid April 2001, Mr. Greenspan
met or spoke with Mr. Eisenberg on several occasions to discuss the general
transaction points from the March 6, 2001 meeting. Mr. Greenspan later discussed
the contents of these meetings with Messrs. Brewer and Varraveto and Mr.
Christopher S. Lipp, Secretary, Vice President and General Counsel of eUniverse.
Mr. Eisenberg communicated the contents of these discussions to Messrs. Ehrlich
and Wiesenthal and others at the Investor. In mid April 2001, a broad verbal
understanding was reached on a general template for a strategic transaction. It
was agreed that due diligence by each party would be performed within the next
few weeks and that a transaction timetable would be developed.
During the week of April 23, 2001, Mr. Eisenberg, Melissa Cole,
Director of Business Affairs the Investor, and representatives from
PricewaterhouseCoopers and Skadden, Arps, Slate, Meagher & Flom, LLP performed
due diligence on eUniverse on behalf of the Investor at eUniverse's offices.
From April 30, 2001 through to May 11, 2001, Messrs. Brewer and
Varraveto and other representatives from eUniverse performed due diligence on
certain Indimi properties, primarily the InfoBeat business.
During the week of May 14, 2001, Mr. Greenspan communicated with
Messrs. Eisenberg and/or Ehrlich in New York, including an in-person meeting, to
discuss a term sheet that would cover the purchase of InfoBeat Business by
eUniverse from the Investor, the purchase of a yet to be determined amount of
common stock of eUniverse by the Investor and the restructuring of a note
payable by eUniverse to the Investor. Several versions of the proposed term
sheet were exchanged between the parties during these meetings.
On or about May 22, 2001, Mr. Greenspan reached an understanding with
Mr. Eisenberg and other members of the Investor on the principal terms for the
strategic transaction, and they agreed to move forward with the drafting of
definitive documents to incorporate these general terms while negotiating the
requisite particulars. At this time, early July was the estimated signing date.
During late May 2001, Mr. Greenspan advised the Board of the status of
the potential transaction with the Investor.
During the first three weeks of June 2001, Messrs. Lipp and Eisenberg,
Ms. Cole and representatives from Skadden, Arps, Slate, Meagher & Flom, LLP and
Martin, Lucas, Chioffi, LLP, outside legal counsel for eUniverse, prepared
definitive agreements for the strategic transaction between the two parties.
Several versions of the agreements were exchanged during this period of time.
During the last week of June and the first week of July, several
teleconference calls were held by and among Messrs. Greenspan, Brewer,
Varraveto, Lipp and Eisenberg, Ms. Cole and representatives of Skadden, Arps,
Slate Meagher & Flom, LLP and Martin, Lucas & Chioffi, LLP to discuss matters
arising from the drafting of the definitive agreements. During this same
timeframe, Mr. Greenspan advised the Board of the status of the negotiations
with the Investor.
During the week of July 2, 2001, Mr. Greenspan had several discussions,
both in person and via telephone, with Messrs. Eisenberg and Ehrlich regarding
certain matters relating to the transaction.
6
During the week of July 9, 2001, Messrs. Greenspan, Brewer, Varraveto
and. Lipp and representatives of Martin, Lucas & Chioffi, LLP held several
teleconference calls with Mr. Eisenberg, Ms. Cole and representatives of
Skadden, Arps, Slate, Meagher & Flom, LLP to discuss matters arising from the
definitive documents.
Early on July 12, 2001, Messrs. Greenspan and Eisenberg communicated
their satisfaction with the most recent draft of the definitive documents.
On July 12, 2001, eUniverse convened a meeting of the Board to present
the proposed transaction between eUniverse and the Investor at which the Board
approved the transaction.
During the evening of July 12, 2001, the definitive documents were
executed by Messrs. Greenspan and Brewer on behalf of eUniverse and by Mr.
Eisenberg on behalf the Investor.
On July 13, 2001, eUniverse and the Investor issued a joint press
release announcing the signing of the definitive agreements relating to the
strategic transaction.
Reasons for the Stock Purchase Agreement and the InfoBeat Purchase Agreement
The Board consulted with the management of eUniverse, its legal
counsel, financial advisors, and independent accountants in reaching its
decision to approve the Sony Agreements. The Board considered the following
factors in reaching this decision:
o InfoBeat is a permission-based, branded email publishing asset that
provides eUniverse with approximately 9 million new subscribers and a
database of related demographic information. The InfoBeat portfolio of
publications currently includes entertainment, internet/technology,
finance, news, and sports. eUniverse believes that combining the InfoBeat
publications with its existing newsletter portfolio will result in
significant economies of scale and lower operating costs relative to sales.
Additionally, eUniverse believes that marketing InfoBeat to its user base
will increase InfoBeat newsletter subscriptions and lead to enhanced
revenue opportunities.
o eUniverse will receive a $5 million cash investment from the Investor in
exchange for shares of Series B Preferred, convertible on a 1:1 basis into
shares of the eUniverse common stock. Approximately $1.6 million will be
used to reduce certain aged payables and accrued expenses. The balance will
be used for working capital.
o The maturity date of the existing eUniverse debt held by the Investor of
approximately $2.3 million will be extended to March 31, 2003 (the
"Extended Demand Date"), subject to acceleration in certain events. The
Company shall have the option, exercisable within 30 days following the
Extended Demand Date, to convert the outstanding principal and interest to
Series B preferred shares or common shares, as applicable.
o eUniverse will benefit from a closer relationship with Sony Music
Entertainment Inc. and its affiliates (the "Sony Group") that may result in
increased revenues from the Sony Group, and possibly from other Internet or
traditional media companies.
o The transactions contemplated by the Agreements may facilitate an advisory
relationship with the Sony Group. The Investor will obtain one Board seat,
increasing the number of board members from four to five.
o eUniverse will substantially improve its working capital and debt ratios.
This is anticipated to increase its access to traditional debt financing
and reduce its cost of capital.
The Board also identified and considered some potentially negative
factors in its deliberations regarding the transactions, including:
o the risk that the potential benefits sought in the acquisition of Indimi,
L.L.C. or the closer relationship with the Sony Group might not be fully
realized
o the dilution of ownership of existing eUniverse shareholders
o the risk that the operations of InfoBeat might not be integrated as quickly
as anticipated
7
In considering the factors above, the Board concluded that the
potential benefit of the investment by the Investor and the purchase of the
Infobeat business outweighed the potential costs that would accrue to eUniverse
shareholders.
The foregoing discussion of factors considered by Board is not intended
to be exhaustive but is believed to include all material factors considered by
the Board. The Board did not rank or assign weights to the various factors given
the complexity of the issues but considered the factors as a whole in reaching
its decision.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" APPROVAL OF THE SONY AGREEMENTS AND THE TRANSACTIONS CONTEMPLATED
THEREUNDER.
Pro Forma Selected Financial Data
The following pro forma selected financial data are derived from our
audited financial statements presented as of June 30, 2001 and 2000 and the
audited financial statements of InfoBeat for the year ended December 31, 2000.
The unaudited pro forma consolidated statement of operations for the year ended
June 30, 2001 gives effect to the Stock Purchase Agreement and the InfoBeat
Purchase Agreement as if they had occurred on April 1, 2001. The effect of the
transactions is presented separately in pro forma statements elsewhere within
this proxy statement.
The data below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and the related notes to the financial
statements included in our Form 10-K incorporated herein by reference, the
"Unaudited Pro Forma Condensed Combined Financial Information" and the
"Information Concerning InfoBeat" located elsewhere in this proxy statement. The
historical results are not necessarily indicative of results to be expected for
any future period.
8
eUNIVERSE, INC. and Subsidiaries
Unaudited Consolidated Statements of Operations
eUniverse, Inc.
Pro Forma Three Months Ended
3 Months Ended June 30,
June 30, ----------------------------
2001 2001 2000
-------------- ------------ -----------
REVENUE $ 5,141,193 $ 5,049,613 $ 2,770,836
COST OF GOODS SOLD 942,727 204,194 574,500
-------------- ------------ -----------
GROSS PROFIT 4,198,466 4,845,419 2,196,336
-------------- ------------ -----------
OPERATING EXPENSES:
Marketing and sales (excludes stock-based
compensation of $0, $0 and ($2,935), respectively)................... 1,858,482 1,806,601 1,703,081
Product development (excludes stock-based
compensation of $0, $0 and ($19,656), respectively).................. 1,039,255 1,039,255 656,600
General and administrative (excludes
stock-based compensation of $0, $0, and ($164,598), respectively..... 3,689,578 1,482,671 936,333
Amoritzation of goodwill and other intangibles......................... 30,000 - 585,189
Stock-based compensation............................................... - - (187,189)
-------------- ------------ -----------
TOTAL OPERATING EXPENSES................................................... 6,617,316 4,328,527 3,694,014
-------------- ------------ -----------
OPERATING INCOME/(LOSS) (2,418,850) 516,892 (1,497,678)
NONOPERATING INCOME (EXPENSE)
Interest income........................................................ - 148 5,303
Interest and other financing expenses.................................. (121,984) (122,132) (14,790)
-------------- ------------ -----------
INCOME/(LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (2,540,833) 394,908 (1,507,165)
INCOME TAXES .............................................................. - - -
-------------- ------------ -----------
INCOME/(LOSS) FROM CONTINUING OPERATIONS $(2,540,833) $ 394,908 $(1,507,165)
DISCONTINUED OPERATIONS:
Loss from operations of discontinued segment
(net of applicable income taxes of $0)................................ N/A - (2,102,411)
-------------- ------------ -----------
NET INCOME/(LOSS) N/A $ 394,908 $(3,609,576)
============== ============ ===========
Continuing operations income/(loss) per common share..................... $ (0.11) $ 0.02 $ (0.08)
Discontinued operations income/(loss) per common share................... N/A $ - $ (0.12)
-------------- ------------ -----------
Basic income/(loss) per common share..................................... N/A $ 0.02 $ (0.20)
-------------- ------------ -----------
Diluted income/(loss) per common share................................... N/A $ 0.01 $ (0.20)
-------------- ------------ -----------
Basic weighted average common
shares outstanding........................................................ 22,299,234 18,933,081 17,744,336
-------------- ------------ -----------
Shares outstanding for diluted earnings per share.......................... 22,299,234 30,981,323 17,744,336
-------------- ------------ -----------
Balance Sheet Data
Unaudited Pro Unaudited Unaudited
Forma as of eUniverse as of eUniverse as of
June 30, 2001 June 30, 2001 March 31, 2001
-------------- ------------ -----------
Cash and cash equivalents $ 3,401,159 $ 1,159 $ 218,841
Working capital (deficit) 1,691,270 (5,598,494) (6,569,061)
Total assets 26,632,996 13,292,996 11,879,131
Total shareholders' equity (deficit) 14,875,604 (64,396) (1,558,489)
9
eUNIVERSE, INC. and Subsidiaries
Unaudited Pro Forma Combined Financial Information
Three Months Ended,
June 30, 2001 June 30, 2001
Pro Forma Consolidated eUniverse, Inc.
---------------------- ---------------
Book value per share........................................ $ 0.67 $ (0.00)
======= =======
Cash dividends per share................................... $ - $ -
======= =======
Continuing operations income / (loss) per common share..... $ (0.11) $ 0.02
======= =======
Unaudited Pro Forma Combined Condensed Financial Statements
The following unaudited pro forma combined condensed financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States to illustrate the effects of:
o the acquisition of InfoBeat by eUniverse in exchange for common shares
o the investment by 550 Digital Media Ventures Inc. ("550 DMV") in eUniverse
preferred stock
o the restructure of short term debt due the Investor
The unaudited pro forma combined condensed financial statements have
been derived from, and should be read in conjunction with, the historical
consolidated financial statements, including the notes thereto, of both
eUniverse and InfoBeat included elsewhere in this proxy statement.
The unaudited pro forma combined condensed balance sheet of eUniverse
at June 30, 2001 gives effect to the proposed transactions between eUniverse
Indimi, L.L.C. and the Investor as if they occurred at June 30, 2001. The
unaudited pro forma combined condensed income statements for the year ended June
30, 2001 give effect to the transactions between eUniverse Indimi, L.L.C. and
550 DMV as if they occurred at April 1, 2001.
10
eUNIVERSE, INC. and Subsidiaries
Unaudited Pro Forma Condensed Combined Balance Sheets
As of June 30, 2001
Pro Forma
Adjustment Other June 30,
June 30, 2001 June 30, 2001 Infobeat Pro Forma 2001
eUniverse Infobeat Net Assets (a) Adjustments Consolidated
------------- ------------- ------------- ----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ....................... $ 1,159 $ - $ - $ 3,400,000 $ 3,401,159
Accounts and notes receivable, net of
allowances for doubtful accounts of 494,694 .... 3,470,987 18,406 (18,406) - 3,470,987
Deferred charges ............................... 580,371 - - - 580,371
Prepaid expenses and other current assets ...... 544,951 - - - 544,951
------------ ------------ ------------ ----------- -----------
Total Current Assets 4,597,469 18,406 (18,406) 3,400,000 7,997,469
PROPERTY AND EQUIPMENT, less accumulated
depreciation of $320,923 ........................ 914,386 1,649,097 (1,649,097) - 914,386
CAPITALIZED INTERNAL USE SOFTWARE .................... - 2,795,193 (2,795,193) - -
GOODWILL, net of amortization of $7,404,624 .......... 4,939,981 - 9,580,000(b) 14,519,981
OTHER INTANGIBLES, net of amortization of $210,559 ... 1,829,699 1,088,726 (1,088,726) 360,000(b) 2,189,699
OTHER ASSETS ......................................... 1,011,461 - - - 1,011,461
------------ ------------ ------------ ----------- -----------
TOTAL ASSETS $ 13,292,996 $ 5,551,422 $ (5,551,422) $13,340,000 $26,632,996
============ ============ ============ =========== ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES
Accounts payable ................................ $ 2,689,740 $ 842,064 $ (842,064) $(1,500,000)(c) $ 1,189,740
Other current liabilities ....................... 2,806,014 1,261,180 (1,261,180) (100,000)(c) 2,706,014
Notes payable ................................... 3,760,209 - - (2,289,764)(d) 1,470,445
Current maturities of notes payable, affiliates.. 940,000 - - - 940,000
------------ ------------ ------------ ----------- -----------
Total Current Liabilities 10,195,963 2,103,244 (2,103,244) (3,889,764) 6,306,199
LONG-TERM DEBT 976,190 - - - 976,190
LONG-TERM DEBT, AFFILIATES, LESS CURRENT MATURITIES 2,185,239 - - 2,289,764(d) 4,475,003
------------ ------------ ------------ ----------- -----------
TOTAL LIABILITIES 13,357,392 2,103,244 (2,103,244) (1,600,000) 11,757,392
------------ ------------ ------------ ----------- -----------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.10 par value; 40,000,000
shares authorized; 1,454,572 and
3,377,648 shares issued and
outstanding, respectively ................... 136,257 - - 192,308(c) 328,565
Common stock, $.001 par value;
250,000,000 shares authorized;
18,817,502 and 22,183,655 issued 3,058 (b)
and outstanding, respectively ................. 19,181 - - 308 (e) 22,547
9,936,942 (b)
4,807,692 (c)
(308)(e)
Additional paid-in capital ...................... 51,492,230 - - 1,923,076 (f) 68,159,633
Net investment of Parent ........................ 38,979,727 (38,979,727)
Retained deficit ................................ (51,712,065) (35,531,549) 35,531,549 (1,923,076)(f) (53,635,141)
------------ ------------ ------------ ----------- ----------
Total Shareholders' (Deficit)/Equity (64,396) 3,448,178 (3,448,178) 14,940,000 14,875,604
------------ ------------ ------------ ----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
(DEFICIT) EQUITY $ 13,292,996 $ 5,551,422 $ (5,551,422) $13,340,000 $26,632,996
============ ============ ============ =========== ===========
11
Notes to Unaudited Pro Forma Combined Condensed Balance Sheet:
- --------------------------------------------------------------
Pro forma adjustments consist of the following, giving effect to the transaction
as if it had occurred on June 30, 2001:
(a) No tangible assets were acquired and no liabilities were assumed in the
acquisition of InfoBeat. Identifiable intangibles consist of the
subscriber database. Net book assets eliminated in calculating pro
forma combined balance sheet.
(b) The purchase price of InfoBeat for $9.94 million, allocated principally
to goodwill, for 3,058,461 shares at $3.25 per share. eUniverse has
allocated $360,000 for the value of the customer database with an
estimated useful life of three years.
(c) Increase in preferred stock of $5 million representing 1,923,076 shares
at $2.60; a reduction of aged payables and other obligations of $1.6
million as detailed in the Use of Proceeds Plan specified in the Stock
Purchase Agreement. This document identifies payments to be made to
certain suppliers and lenders upon receipt of investment; increase of
cash by the remaining $3.4 million.
(d) Extension of New Technology Holdings promissory note issued September
6, 2000 with an outstanding current balance of $2,289,764 to a new
maturity date of March 31, 2003.
(e) 1,101,260 warrants to purchase common stock exchanged for 307,692
shares of common stock at $3.25 per share, or $1,000,000, representing
an offsetting increase and decrease to paid-in capital.
(f) Decrease in retained earnings and increase to additional paid-in
capital for beneficial conversion of 1,923,076 shares of preferred
stock issued at $2.60 per share, compared to average closing price of
$3.60 per share for two trading days prior to and subsequent to date of
agreement on July 13, 2001.
12
eUNIVERSE, INC. and Subsidiaries
Unaudited Pro Forma Combined Condensed Statements of Operations
For the Three Months Ended June 30, 2001
June 30, 2001 June 30, 2001 Pro Forma Pro Forma
eUniverse, Inc. Infobeat Adjustments Consolidated
--------------- -------------- ------------- --------------
REVENUE $ 5,049,613 $ 91,580 $ - $ 5,141,193
COST OF GOODS SOLD 204,194 738,533 942,727
------------ ------------ ----------- -------------
GROSS PROFIT 4,845,419 (646,953) - 4,198,466
------------ ------------ ----------- -------------
OPERATING EXPENSES:
Marketing and sales........................................ 1,806,601 51,881 - 1,858,482
Product development........................................ 1,039,255 1,039,255
General and administrative................................. 1,482,671 2,553,269 (346,362)(a) 3,689,578
Amortization of goodwill
and other intangibles..................................... - - 30,000 (b) 30,000
Stock-based compensation................................... - - - -
------------ ------------ ----------- -------------
TOTAL OPERATING EXPENSES....................................... 4,328,527 2,605,150 (316,362) 6,617,316
------------ ------------ ----------- -------------
OPERATING INCOME/(LOSS) 516,892 (3,252,103) 316,362 (2,418,850)
NONOPERATING INCOME (EXPENSE)
Interest and other financing expenses...................... 121,984 - - 121,984
Loss on write-down of investments.......................... - - - -
Impairment of investment................................... - - - -
Impairment of goodwill - - - -
------------ ------------ ----------- -------------
INCOME/(LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 394,908 (3,252,103) 316,362 (2,540,833)
INCOME TAXES .................................................. - - - -
----------- ----------- ----------- ------------
INCOME/(LOSS) FROM CONTINUING OPERATIONS $ 394,908 $(3,252,103) $ 316,362 $ (2,540,833)
=========== =========== =========== ============
Continuing operations income per common share.................. $ 0.02
===========
Basic weighted average common
shares outstanding............................................ 18,933,081
===========
Unaudited pro forma basic and diluted loss per common share.... $ (0.11)
============
Pro forma weighted average shares used to calculate pro forma
basic and diluted net loss per common share................. 22,299,234(c)
============
13
Notes to Unaudited Pro Forma Combined Condensed Statement of Operations:
- ------------------------------------------------------------------------
Pro forma adjustments consist of the following, giving effect to the
transaction as if it had occurred on April, 1, 2001:
(a) Reduction of depreciation and amortization expense for fixed assets,
capitalized internal use software and intangible assets not acquired in
connection with the InfoBeat acquisition.
(b) Amortization in connection with the allocated value of intangible assets
with definite lives, consisting of a database of InfoBeat subscriber
names.
(c) Calculation of pro forma weighted average shares:
Calculation of pro forma weighted average shares as of June 30, 2001:
- ---------------------------------------------------------------------
Basic and diluted weighted average common
shares outstanding............................................................. 18,933,081(1)
Issuance of common shares to purchase Infobeat.................................. 3,058,461(2)
Issuance of common shares in exchange for warrants.............................. 307,692(3)
Pro forma weighted average shares used to calculate pro forma --------------
basic and diluted net loss per common share............................... 22,299,234(4)
==============
(1) Weighted average common shares outstanding eUniverse for June 30,
2001. Securities that could potentially dilute basic earnings per
share in the future were not included in the computation of pro
forma diluted earnings per share because their effect would have
been anti-dilutive.
(2) An additional 3,058,461 common shares priced at $3.25 per share for
purchase of InfoBeat at a cost of $9.94 million from 550 DMV.
(3) An additional 307,692 common shares priced at $3.25 per share, or
$1,000,000 in exchange for the redemption of 1,101,260 warrants held
by 550 DMV to purchase common shares.
(4) 550 DMV receives 1,923,076 preferred shares priced at $2.60 per
share for a $5 million investment in eUniverse. Given the net loss
for the period, had the additional 1,923,076 preferred shares been
issued April 1, 2000, the effect would have been anti-dilutive
effect and decreased the net loss per share if included. These
shares have been excluded from the pro forma weighted average shares
calculation.
Note: the Company adopted SFAS141 and 142 on April 1, 2001, which does not
allow for amortization of goodwill and intangible assets but requires an
assessment of impairment on an annual basis or upon a material adverse
change in the acquired business.
Amortization expense related to the goodwill acquired in connection with
the acquisition of InfoBeat using an estimated five year useful life, or
$479,000 for the quarter ended June 30, 2001, is not reflected in the pro
forma financial information. This adjustment would not be representative of
ongoing performance.
14
Information Concerning Indimi
Selected Financial Data
The selected financial data show below should be read in conjunction
with the financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" elsewhere in this
proxy statement. The statement of operations and balance sheet data for the
periods ended December 31, 1999 and 2000 have been derived from the audited
financial statements of InfoBeat. The consolidated statement of operations data
for the three months ended June 30, 2000 and 2001 have been derived from the
unaudited financial statements of InfoBeat.
The historical results are not necessarily indicative of results to be
expected for any future period. The effect of the acquisition of InfoBeat and
the Stock Purchase Agreement is presented separately in the pro forma
statements.
Infobeat Business
-----------------
(A division of Indimi Inc.)
Consolidated Statements of Operations
Year Ended Three Months Ended
December 31, June 30,
----------------------------------------------------------------------
(unaudited) (unaudited)
------------------ -------------------------------- ----------------
2000 1999 2001 2000
------------------ -------------------------------- ----------------
REVENUE $ 2,700,492 $ 2,821,930 $ 91,580 $ 1,030,472
COST OF GOODS SOLD 3,754,700 5,467,932 738,533 335,856
------------------ -------------------------------- ----------------
GROSS PROFIT (1,054,208) (2,646,002) (646,953) 694,616
------------------ -------------------------------- ----------------
OPERATING EXPENSES:
Sales and Marketing.......................... 9,019,526 1,264,107 51,881 1,264,999
General and Administrative.................... 6,085,433 3,611,752 2,553,269 1,540,095
Investment Impairment Loss.................... 650,000 - - -
------------------ -------------------------------- ----------------
TOTAL OPERATING EXPENSES.......................... 15,754,959 4,875,859 2,605,150 2,805,094
------------------ -------------------------------- ----------------
LOSS BEFORE INCOME TAXES (16,809,167) (7,521,861) (3,252,103) (2,110,478)
INCOME TAXES ..................................... - - - -
------------------ -------------------------------- ----------------
NET LOSS $ (16,809,167) $ (7,521,861) $ (3,252,103) $ (2,110,478)
================== ================================ ================
Balance Sheet Data
As of December 31,
--------------------------------
2000 1999 June 30, 2001
-------------------------------- ---------------
(unaudited)
Cash and cash equivalents $ - $ - $ -
Working capital (deficit) (5,284,079) 661,937 (1,265,473)
Total assets 7,524,769 5,777,878 5,551,422
Net investment of parent 653,325 2,167,754 3,448,178
15
Management's Discussion and Analysis of Financial Condition and Results of
Operations of InfoBeat
InfoBeat is a division of Indimi Inc. ("Indimi"), which is a majority
owned subsidiary of 550 DMV. 550 DMV is owned 55% by Sony Broadband
Entertainment and 45% by Sony Music Entertainment Inc., which are indirect
wholly-owned subsidiaries of Sony Corporation of America and ultimately of Sony
Corporation.
InfoBeat is a permission-based, branded e-mail publishing asset with a
proprietary email system, publishing technology and content licenses. InfoBeat
has approximately 9 million subscribers and a database of 1.8 million records
including certain demographic information such as income levels, geographic
location, age and gender. Revenues are principally derived from sales of
advertising space within newsletters. Revenues are recognized when newsletters
containing advertisements are delivered.
Results of Operations
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
InfoBeat is not a separate legal entity. The financial statements of
InfoBeat presented within this document have been derived from the historical
financial statements of Indimi Inc. InfoBeat has no employees and has contracted
for its workforce from Indimi, the Investor and Sony Music Entertainment Inc.
Associated salary and benefit costs, as well as facilities, general and
administrative costs, and internal advertising costs have been allocated to
InfoBeat. The allocations are reasonable in the opinion of management.
Revenues
Revenues for the year ended December 31, 2000 were $2.7 million
compared to the prior year of $2.8 million. These revenues consist principally
of advertising sales displayed in InfoBeat's newsletters. Advertising revenues
are recognized when the newsletters that contain the advertisements are
delivered.
Cost of Revenues
Cost of revenues for the year ended December 31, 2000 were $3.8 million
compared to $5.5 million for the prior period. Cost of revenues consist of
services provided under a three-year service agreement with Exactis.com, a
provider of permission-based email marketing and communications solutions of
$3.7 million and $5.1 million respectively for the years ended December 31, 2000
and 1999. The remainder of cost of revenues consists of editorial fees and
content licenses.
Sales and Marketing
Sales and marketing expenses for the year ended December 31, 2000 were
$9.0 million compared to the prior period of $1.2 million. For the year ended
December 31, 2000, sales and marketing expenses included subscriber acquisition
costs in obtaining new InfoBeat subscribers of $7.0 million; reimbursement of
third party costs to Sony Pictures Digital Entertainment ("SPDE") of $0.9
million; and other marketing and promotional expenses. Costs for the year ended
December 31, 1999 included subscriber acquisition costs of $0.2 million;
reimbursement of third party costs to SPDE of $0.3 million; and other marketing
and promotional expenses.
General and Administrative
General and Administrative expenses for the year ended December 31,
2000 were $6.1 million versus $3.6 million for the prior year. General and
Administrative expenses for the year ended December 31, 2000 included
amortization of intangibles of $2.3 million in connection with the purchase of
certain on-line publishing assets; workforce costs allocated from related
parties 550 DMV and Sony Music Entertainment Inc. (SMEI) of $1.3 million for
editorial, technology, management and ad sales staff; facilities and
administrative support charges by Indimi, 550 DMV and SMEI of $0.9 million; and
$1.6 million of other outside expenses. For the year ended December 31, 1999,
InfoBeat recorded intangible amortization of $2.2 million; 550 DMV and SMEI
charges for facility and administrative support of $0.6 million; and workforce
charges for editorial and other staff of $0.4 million.
16
Investment Impairment Loss
InfoBeat recognized a loss on its investment in the common stock of
LetsPlay, Inc. based on negative operating results for $650,000 in the year
ended December 31, 2000. InfoBeat did not incur any impairment of investments in
the year ended December 31, 1999.
Three Months Ended June 30, 2001 Compared to the Three Months Ended
June 30, 2000
InfoBeat reduced its investment in subscriber acquisition efforts and
in the development of a dedicated sales force during the quarter ended March 31,
2001 due to limited access to expansion capital. Consequently, the results of
operation for the three months ended March 31, 2001 do not bear any significant
relationship to the results for the three months ended March 31, 2000, primarily
due to the absence in 2001 of any sales force dedicated to the selling of
Infobeat advertising inventory.
Liquidity and Capital Resources
Since inception, InfoBeat has relied solely upon its parent, 550 DMV to
fund operating losses and investing activities.
Net cash used in operating activities was $9.5 million for the year
ended December 31, 2000 and consisted primarily of a net loss of $16.8 million;
partially offset by intangible amortization of $2.3 million; and an increase in
payables and accrued expenses of $4.7 million. For the year ended December 31,
1999, the company used $6.0 million in operating activities due to a net loss of
$7.5 million; and an increase in net working capital of $0.7 million; partially
offset by $2.2 million in intangible amortization.
Cash used in investing activities for the year ended December 31, 2000
was $5.8 million consisting of an investment of $3.4 million in capitalized
internal use software; an investment in LetsPlay, Inc. of $0.7 million; and
expenditures for computer equipment and other fixed assets of $1.8 million. For
the year ended December 31, 1999, the company used $0.2 million in investing
activities for the purchase of leasehold improvements and other fixed assets.
The parent 550 DMV committed to continue providing short term liquidity
until such time as the company could secure longer-term financing alternatives.
Quantitative and Qualitative Disclosures About Market Risk
InfoBeat's financial instruments consist principally of accounts
payable for which carrying amounts approximate fair value.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Financial Statements and Supplementary Data
Financial statements required pursuant to this item begin on page F-1
of this Proxy Statement. The supplementary financial information required
pursuant to this item is included under the subsection entitled "Quarterly
Results of Operations/Supplementary Financial Information" on page F-11 of this
Proxy Statement.
17
ITEM 2. ELECTION OF DIRECTORS
Nominees for Election of Directors
The Board proposes the election of the following individuals as
directors of the Company, each for a term of office that runs until the 2002
Annual Meeting of Stockholders and until his successor has been elected and has
qualified. Each of the nominees has served continuously on the Board since the
date indicated in the table below. The Board knows of no reason why any nominee
may be unable to serve as a director. If any nominee is unable to serve, the
shares represented by all valid proxies may be voted for the election of such
other person as the Board may recommend.
Directors of the Company are elected by a plurality of the votes cast
at the Annual Meeting. Plurality means that the nominees who receive the largest
number of votes cast "FOR" are elected as directors up to the maximum number of
directors to be chosen by each class of stockholders at the meeting, even though
not receiving a majority of the votes cast. Votes withheld and broker non-votes
will be counted in determining the presence of a quorum but will not be counted
in determining the outcome of the election.
The names and ages of the nominees, their principal occupations or
employment during the past five years and other data regarding them, based on
information received from the respective nominees, are set forth below:
Name Age Principal Occupation Director Since
- ---- --- -------------------- --------------
Brad D. Greenspan...............28 Chairman of the Board, eUniverse, Inc. April 14, 1999
Brett C. Brewer.................29 Co-President, eUniverse, Inc. August 29, 2000
Daniel L. Mosher................28 Director, Corp. Development, Verisign, Inc. December 7, 1999
Ryan A. Brant...................29 Chairman, Take-Two Interactive Software, Inc. January 22, 2001
Brad D. Greenspan, Chairman of the Board of Directors since April 14,
1999 and Chief Executive Officer since August 29, 2000. Mr. Greenspan is a
member of eUniverse's Executive and Compensation Committees. In 1997, he founded
Palisades Capital, Inc., a private Beverly Hills merchant bank, and served as
its President until March 1999. Mr. Greenspan received a B.A. degree in
political science/business from the University of California at Los Angeles in
1997.
Brett C. Brewer, Co-President and Director since August 29, 2000. Mr.
Brewer is a member of eUniverse's Executive and Compensation Committees. He
joined eUniverse in April 1999 and was named Vice President of its eCommerce
Division in December 1999 and elected President of CD Universe, Inc., a
subsidiary of eUniverse, in July 2000. Prior to joining eUniverse, Mr. Brewer
helped run the Southern California Retail Sales Division of CB Richard Ellis
between October 1996 and December 1998. Mr. Brewer received a B.A. degree in
business/economics from the University of California at Los Angeles.
Daniel L. Mosher, Director and a member of eUniverse's Audit Committee
since December 7, 1999. Mr. Mosher has been employed as Director of Corporate
Development of Verisign, Inc. since May 2001. Prior to that, he was employed by
Webvan Group, Inc. from May 1999 to May 2001, most recently as Director,
Business Development. From January 1998 to May 1999, Mr. Mosher served in the
Mergers and Acquisitions Department of Morgan Stanley Dean Witter Technology
Group, an investment banking firm. From February 1996 to January 1998, Mr.
Mosher held several positions in the Corporate Finance Group of Arthur Andersen,
focused on technology private placements. Mr. Mosher holds a B.S. in Business
Administration from the University of California at Berkeley.
Ryan A. Brant, Director since January 22, 2001 and a member of the
Audit Committee since March 30, 2001. Mr. Brant was the founder of Take-Two
Interactive Software, Inc. and has been Chairman and a director of the Take-Two
since its inception in 1993. He received a B.S. degree in Economics from the
University of Pennsylvania's Wharton School of Business.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE ELECTION
OF MESSRS. GREENSPAN, BREWER, MOSHER AND BRANT. UNLESS OTHERWISE DIRECTED BY A
STOCKHOLDER, PROXIES WILL BE VOTED "FOR" THE ELECTION OF SUCH NOMINEES.
18
INFORMATION RELATING TO DIRECTORS,
NOMINEES AND EXECUTIVE OFFICERS
Agreements Concerning the Election of Directors
In connection with the purchase by E. P. Opportunity Fund, LLC ("E.P.")
of 235,000 shares of preferred stock of Entertainment Universe, a letter
agreement dated April 6, 1999 was entered into between E. P., Entertainment
Universe and Brad D. Greenspan which, in effect, gave E. P. the right to select
one of the directors of Entertainment Universe during the period that E.P. owns
shares of Entertainment Universe preferred stock. On April 16, 1999, in
connection with the reorganization between Motorcycle Centers and Entertainment
Universe, the E. P. letter agreement was assigned by Entertainment Universe to
eUniverse, which assumed the obligations to E. P. of Entertainment Universe. As
a result, as long as it owns our preferred stock, E. P. has the right to appoint
a member of the Board of Directors of eUniverse. E. P. has not exercised this
right as of the date hereof.
In connection with the acquisition of Falcon Ventures by eUniverse, an
agreement dated December 16, 1999 was entered into by and between Brad D.
Greenspan and Take-Two Interactive Software, which gives Take-Two the right to
select an individual to serve as a member of the Board of Directors of eUniverse
for a period of three years from February 2, 2000. On January 22, 2001, Take-Two
exercised its right to select a director by selecting Ryan A. Brant.
Board of Directors Meetings and Board Committees
The Board held eight meetings in fiscal year 2001, and there was at
least 75% attendance at each Board meeting. All members of the Board during the
last full fiscal year attended at least 75 percent of the aggregate of:
(1) the total number of meetings of the board of directors (held during the
period for which he has been a director); and (2) the total number of meetings
held by all committees of the board on which he served (during the periods that
he served). There were no Board committee meetings during fiscal year 2001,
however the Board performed the functions of the Audit Committee at three of its
meetings in fiscal year 2001 and each of the Compensation and Executive
Committees unanimously consented to actions in lieu of a meeting in fiscal year
2001 as described in the chart below. The standing committees of the Board are
the Executive Committee, the Audit Committee, and the Compensation Committee.
Each committee is described as follows:
Number of Meetings or Actions by
Name of Committee and Written Consent in Lieu of
Members Functions of the Committees Meeting in Fiscal Year 2001
- --------------------------------------------------------------------------------------------------------------------------
Audit Oversees eUniverse's financial reporting process and 3*
Daniel L. Mosher internal controls. The Audit Committee consists solely of
Ryan A. Brant(1) independent directors. The functions of the Audit Committee
Gordon Landies(2) were performed by the Board of Directors as a whole during
fiscal 2001. See the Audit Committee's Charter attached
hereto as Appendix A for a detailed description of the Audit
Committee's authority and responsibilities.
Compensation Administers eUniverse's 1999 Stock Awards Plan and reviews 3
Brad D. Greenspan** and recommends to the Board of Directors the compensation
Daniel L. Mosher(3) and benefits of eUniverse's officers and other senior
Brett C. Brewer(4) executives. (See below for the committee's report on fiscal
Leland N. Silvas(5) year 2001 compensation of executive officers.)
Executive Exercises certain powers of the Board of Directors during the 13
Brad D. Greenspan** time periods between Board meetings.(6)
Brett C. Brewer(4)
Leland N. Silvas(5)
- ---------------
*Functions of the Audit Committee were performed by the Board during fiscal year
2001.
** Chairman
(1) Elected to such committee on January 22, 2001.
19
(2) Resigned as a director effective November 16, 2000.
(3) Elected to such committee on April 17, 2001.
(4) Elected to such committee on August 29, 2000.
(5) Resigned as a director effective August 22, 2000.
(6) The Executive Committee does not have the power to: (1) amend or repeal
any resolution of the Board of Directors that by its terms shall not be
subject to amendment or repeal by the Executive Committee; (2) take any
action that, by the statutes of eUniverse's state of incorporation
governing eUniverse, may be taken only by the Board of Directors or the
shareholders of eUniverse; (3) take any action to amend, alter or repeal
the Certificate of Incorporation or By-laws of eUniverse, as amended; (4)
elect any person to fill vacancies on the Board of Directors or any
Committee thereof or remove any person from the same; (5) fix the
compensation of any Director for services in any capacity; (6) adopt a
plan of merger or adopt a plan of consolidation with another entity or
entities; (7) recommend to the shareholders of eUniverse the sale, lease,
exchange, mortgage, pledge or other disposition of all or substantially
all of the property or assets of eUniverse or a voluntary dissolution of
eUniverse or a revocation thereof; (8) authorize any transaction
involving over $3 million of eUniverse's revenues; (9) authorize any
purchase over $1 million; or (10) take any action prohibited by
resolution of the Board of Directors.
Audit Committee Report
Due to changes in the composition of the Board of Directors, as
outlined above, the functions of the Audit Committee were performed by the Board
of Directors as a whole during fiscal 2001. The company is in the process of
reestablishing a formal audit committee by the end of August 2001.
The Board of Directors has reviewed and discussed the audited financial
statements with management.
The Board of Directors has discussed with the independent auditors the
matters required to be discussed by SAS 61 (Codification of Statements on
Auditing Standards, AU Section 380), as may be modified or supplemented.
The Board of Directors has received the written disclosures and the
letter from the independent accountants required by Independence Standards Board
Standard No. 1 (Independence Standards Board Standard No. 1, Independence
Discussions with Audit Committees), as may be modified or supplemented, and has
discussed with the independent accountant the independent accountant's
independence.
Based on the review and discussions referred to above, the audit
committee has recommended to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K for fiscal
year 2001 for filing with the Commission.
Daniel L. Mosher
Ryan A. Brant
Brad D. Greenspan
Brett C. Brewer
The information set forth above under the caption "Audit Committee
Report" shall not be deemed to be "soliciting material", or to be "filed" with
the Commission or subject to Regulation 14A or 14C, other than as provided in
Item 306 of Regulation S-K, or to the liabilities of Section 18 of the Exchange
Act.
Daniel L. Mosher, Ryan A. Brant and Gordon Landies are independent (as
independence is defined in or Rule 4200 (a)(15) of the National Association of
Securities Dealers' ("NASD") listing standards, as applicable and as may be
modified or supplemented), while Brad D. Greenspan, Brett C. Brewer and Leland
N. Silvas are not.
20
Compensation Committee Interlocks and Insider Participation
Prior to establishing the Compensation Committee in June 1999, the
Board of Directors as a whole performed the functions delegated to the
Compensation Committee. No member of the Board of Directors or the Compensation
Committee serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of
eUniverse's Board of Directors or Compensation Committee.
Director Compensation
Directors of eUniverse who are also employees or officers of eUniverse
do not receive any compensation specifically related to their activities as
directors, other than reimbursement for expenses incurred in connection with
their attendance at Board of Directors meetings. On April 17, 2000, Daniel L.
Mosher, for his first year of service as a non-employee director, received
options for 63,750 shares of the Company's common stock, at market price per
share, which vested on December 8, 2000, one year after the date that he became
a director, and expire ten years after the date that he became a director. On
January 22, 2001, for his second year of service as a non-employee director, Mr.
Mosher received options for 25,000 shares of the Company's common stock, at
market price per share, which vest one year after the date of grant and expire
ten years after the date of grant. On January 22, 2001, Ryan A. Brant, for his
first year of service as a non-employee director, received options for 73,750
shares of the Company's common stock, at market price per share, which vest one
year from the date of grant and expire ten years after the date of grant. For
each board meeting they attend, non-employee directors are reimbursed for their
expenses incurred in connection with their attendance at the meeting.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act ("Section 16(a)") requires
eUniverse's executive officers, directors, and persons who own more than ten
percent of a registered class of eUniverse's equity securities ("10%
Stockholders") to file reports of ownership on a Form 3 and changes in ownership
on a Form 4 or a Form 5 with the SEC.
Based solely on its review of the copies of such forms received by
eUniverse, or written representations from certain reporting persons, eUniverse
believes that during fiscal year 2001 its executive officers, directors and 10%
Stockholders complied with all applicable Section 16(a) filing requirements,
except that the Form 3's required to be filed by Brett C. Brewer, Shawn
Goldschein, Joseph L. Varraveto and Ryan A. Brant (each of whom was either a
director or executive officer of eUniverse during fiscal year 2001) were
inadvertently filed late and the Form 5's required to be filed by Messrs. Brewer
and Goldschein were inadvertently filed late.
Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of July 26, 2001
with respect to the beneficial ownership of the Company's voting securities by
the following individuals or groups: (a) each person who is known by eUniverse
to own beneficially more than 5% of our common stock, including our preferred
stock on an as-converted basis, (b) each Director of eUniverse, (c) each Named
Executive Officer (as defined below under the caption "Compensation of Executive
Officers") of eUniverse, and (d) all executive officers and Directors of
eUniverse as a group.
Shares Percentage
Beneficially Beneficially
Name of Beneficial Owner Owned(1) Owned(2)
Brad D. Greenspan (9) 8,077,000(3) 34.1%
Brett C. Brewer 506,250(4) 2.1%
Christopher S. Lipp 41,667(5) *
William R. Wagner 138,958(5) *
Daniel L. Mosher 66,250(6) *
Ryan A. Brant(10) 2,289,833(7) 9.7%
Leland N. Silvas 445,194(8) 1.9%
Directors and Executive Officers as a Group 11,565,152 48.8%
- ---------------------------
* less than one percent.
21
(1) Unless otherwise noted, all of the shares shown are held by individuals or
entities possessing sole voting and investment power with respect to the shares.
Shares not outstanding but deemed beneficially owned by virtue of the right of a
person to acquire them within 60 days, whether by the exercise of options or
warrants or the conversion of shares of preferred stock into shares of common
stock, are deemed outstanding in determining the number of shares beneficially
owned by the person or group. We are treating our Series A Preferred Stock and
common stock as one class of voting securities because the holders of our Series
A Preferred Stock have the right to vote their shares with the common stock on
an as-converted basis.
(2) The "Percentage Beneficially Owned" is calculated by dividing the "Number of
Shares Beneficially Owned" by the total outstanding shares of common stock and
preferred stock on an as-converted basis including shares beneficially owned by
the person with respect to whom the percentage is calculated.
(3) Includes 236,000 shares represented by options exercisable within 60 days.
(4) Includes 306,250 shares represented by options exercisable within 60 days.
(5) Consists entirely of shares represented by options exercisable within 60
days.
(6) Includes 63,750 shares represented by options exercisable within 60 days.
(7) Consists entirely of shares owned by Take-Two Interactive Software, Inc., of
which Mr. Brant is Chairman.
(8) Includes 428,335 shares represented by options exercisable within 60 days.
(9) Mr. Greenspan's business address is 6300 Wilshire Boulevard, Suite # 1700,
Los Angeles, CA 90048.
(10) Mr. Brant's business address is Take-Two Interactive Software, Inc., 575
Broadway, 3rd Floor, New York, NY 10012.
COMPENSATION OF EXECUTIVE OFFICERS
The compensation paid or awarded to the Company's Chief Executive
Officer and other executive officers during fiscal year 2001 is set forth and
discussed below.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General
Decisions as to certain compensation of eUniverse's executive officers
are made by the Compensation Committee of eUniverse's Board of Directors. During
eUniverse's fiscal year ending on March 31, 2001, the members of the
Compensation Committee were Brad D. Greenspan and Leland N. Silvas from April 1,
2000 until Mr. Silvas' resignation from the Board on August 22, 2000.
Thereafter, Brett C. Brewer was elected to the Compensation Committee on August
29, 2000 and Daniel L. Mosher was elected to the Committee on April 17, 2000.
Compensation Policies
The Compensation Committee's executive compensation policies are
designed to attract and retain executives capable of leading eUniverse in a
rapidly evolving Internet-based marketplace and to motivate such executives to
maximize profitability and stockholder value. The Compensation Committee has
designed eUniverse's executive compensation program with three components to
achieve this objective - base salary; equity participation under a stock awards
plan; and benefits. The philosophy and operation of each component is discussed
herein. The Compensation Committee does not use qualitative methods or
mathematical formulas in setting any element of compensation. In determining
each component of
22
compensation, the Compensation Committee considers all elements of an executive
officer's total compensation package, including insurance and other benefits.
Base Salary. Base salaries for its executive officers are designed to
attract and retain superior, high-performing individuals. As such, eUniverse
believes its base salaries for executive positions are, and should be, equal to
or greater than those of comparable Internet-based companies.
Stock Awards Plan. The Compensation Committee believes strongly that
stock ownership by management and stock-based performance compensation
arrangements are beneficial in aligning management's and stockholders' interests
in the enhancement of stockholders' return. To this end, the Compensation
Committee grants to key executives stock options under the Company's 1999 Stock
Awards Plan (the "1999 Plan") which generally vest (i.e., become exercisable)
over a three-year period following the date of grant as follows: 33 1/3% on the
first anniversary; and 1/12 each quarter thereafter. Options under the 1999 Plan
are granted at the current market price, have a term of ten years from the date
of grant, and subject to the above vesting restrictions, may be exercised at any
time during such term. The 1999 Plan, which is administered by the Compensation
Committee, was approved by the stockholders at the 2001 Annual Meeting. See
table entitled "Option Grants in Last Fiscal Year" below summarizing options
granted to each Named Executive Officer and vesting terms of such options.
Benefits. The benefits available to executive officers are the same as
those afforded to all full-time employees, including medical, dental and death
and disability coverage.
Chief Executive Officer Compensation
Leland N. Silvas served as eUniverse's chief executive officer from
April 1, 2000 until his resignation on July 21, 2001. Brad D. Greenspan
succeeded Mr. Silvas as chief executive officer of eUniverse, serving in such
position since August 29, 2000.
The Compensation Committee determined the components of Mr. Greenspan's
fiscal year 2001 compensation as follows:
Base Salary. Mr. Greenspan's base salary of $120,000 was increased to
$170,000 on September 29, 2000 to be comparable with salaries for executive
positions of other Internet-based companies.
Stock Awards Plan. As additional consideration for his employment, Mr.
Greenspan was granted options on September 29, 2000 to purchase 1,400,000 shares
of common stock of eUniverse at an exercise of $2.75 per share with vesting
subject to certain conditions. On May 2, 2001, this grant was amended to reduce
the number of options by 600,000 to a revised 800,000 options with the following
vesting: (i) 25% of the options shall vest according to the standard vesting
schedule whereby one-third vest and are exercisable one year from the date of
grant and thereafter, one-twelfth of the options vest and are exercisable every
three months until all optioned shares are vested; (ii) 25% shall vest upon the
date that both eUniverse and its web sites have been ranked in the top ten among
the most visited Web sites by either Nielsen//NetRatings and/or Media Metrix for
five consecutive months; (iii) 25% shall vest upon the date that eUniverse has
achieved earnings before taxes, interest depreciation and amortization (EBITDA)
of at least $1 million in each of three consecutive quarters; and (iv) the
remaining 25% shall vest upon the date that eUniverse (Nasdaq: EUNI) has had a
stock closing price of at least $7 for 60 consecutive days. In addition, upon a
50% or greater change in ownership control in eUniverse, 50% of the then
unvested stock options granted to Mr. Greenspan shall vest immediately.
Benefits. Mr. Greenspan was provided benefits under eUniverse's
medical, dental, and disability plans consistent with those provided to other
full-time employees.
As a member of the Compensation Committee, Mr. Greenspan participates
in reviewing his annual salary and setting his bonus, subject to the review and
approval of the Board of Directors.
The Compensation Committee determined the components of Mr. Silvas'
fiscal year 2001 compensation as follows:
Base Salary. Mr. Silvas's base salary of $200,000 was not increased
during fiscal year 2001.
Stock Awards Plan. No additional options were granted to Mr. Silvas
during fiscal year 2001.
23
Benefits. Mr. Silvas was provided benefits under eUniverse's medical,
dental, and disability plans consistent with those provided to other full-time
employees.
As a member of the Compensation Committee during fiscal year 2001, Mr.
Silvas participated in reviewing his annual salary and setting his bonus,
subject to the review and approval of the Board of Directors. Mr. Silvas
terminated his contract with eUniverse as Chief Executive Officer and President
as of July 21, 2000 and resigned as a Director and member of the Compensation
Committee as of August 22, 2000.
Other Executive Officers
The compensation plans of most of eUniverse's other executive officers,
including the persons listed in the Summary Compensation Table on page 25,
provide for a base salary, option grants under eUniverse's 1999 Stock Awards
Plan, and access to eUniverse's standard employee benefit plans.
Submitted by the Compensation Committee of eUniverse's Board of Directors:
Brad D. Greenspan, Daniel L. Mosher and Brett C. Brewer.
Employment Agreements
As of April 14, 1999, eUniverse entered into an employment agreement
(the "Silvas Employment Agreement") with Leland Silvas, Chief Executive Officer
and President. The contract with Mr. Silvas was for an initial term expiring
April 30, 2000 and automatically renewed for additional one-year periods unless
terminated on three months notice. The agreement provided that eUniverse could
terminate Mr. Silvas' employment for cause and upon death or disability. Mr.
Silvas could terminate his employment with eUniverse upon 45 days prior written
notice in the event (1) any duty assigned to Mr. Silvas was inconsistent with
his positions and the assignment continued for ten days; (2) eUniverse failed to
pay for a period of ten days after the due date any compensation owed to Mr.
Silvas; and (3) of any purported termination by eUniverse except for cause,
death or disability. The Silvas Employment Agreement stipulated an annual base
salary of $200,000, to be reviewed annually, with a bonus opportunity of up to
50% of base salary upon achievement of goals determined by the Compensation
Committee of the Board of Directors. As additional consideration for his
employment, commitment and consulting services, Mr. Silvas was granted options
to purchase 825,000 shares of common stock of eUniverse at an exercise price of
$3.00 per share, which options vest and become exercisable as follows: 91,667 of
the options were immediately vested and fully exercisable on April 14, 1999 and
66,667 options vest and become exercisable on the 22nd of each July, October,
January and April thereafter through January 22, 2002 or until Mr. Silvas is no
longer employed by eUniverse. Upon a 50% or greater change in ownership control
in eUniverse or a disposition of all or substantially all of the assets of
eUniverse, all of the unvested stock options granted to Mr. Silvas vest
immediately. Mr. Silvas resigned as Chief Executive Officer and President on
July 21, 2000, and upon his termination of employment with the Company, all his
unvested options immediately became vested.
As of April 5, 1999, eUniverse entered into an employment agreement
with William R. Wagner, employing him as Chief Financial Officer of eUniverse.
The contract with Mr. Wagner was for an indefinite term, subject to termination
on three months notice, and stipulates an annual salary of $125,000. As
additional consideration for his employment, Mr. Wagner was granted options to
purchase 100,000 shares of common stock at an exercise price of $3.00 per share
under the 1999 Stock Awards Plan. These options vested in 1/12 increments every
three months beginning July 5, 1999 until the earlier of April 6, 2002 or until
Mr. Wagner was no longer employed by eUniverse. On June 15, 1999, Mr. Wagner was
granted options to purchase 50,000 shares at an exercise price of $9.50 per
share. These options were canceled and repriced on September 15, 1999. On
September 15, 1999 Mr. Wagner was granted options to purchase 42,500 shares of
common stock at an exercise price of $6.00 under the 1999 Stock Awards Plan,
which vest and become exercisable as follows: 14,167 one year from September 15,
1999 and 1/12 of the remaining option shares each quarter thereafter until all
42,500 option shares are vested or until Mr. Wagner is no longer employed by
eUniverse. Upon a 50% or greater change in ownership control in eUniverse or a
disposition of all or substantially all of the assets of eUniverse, all of the
unvested stock options granted to Mr. Wagner vest immediately. Mr. Wagner served
as Chief Financial Officer from April 6, 1999 to January 2, 2001 and as Vice
President from April 6, 1999 to July 15, 2001. Mr. Wagner resigned as Vice
President of eUniverse as of July 15, 2001.
24
Executive Compensation
The table below summarizes the compensation paid or awarded during the
last three fiscal years to our Chief Executive Officer and our four other most
highly compensated Executive Officers for services rendered to eUniverse in all
capacities. These executives are referred to as the Named Executive Officers
elsewhere in this Form 10-K/A.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
LONG TERM COMPENSATION
------------------------------------------------
AWARDS PAYOUTS
------------------------- ---------------------
OTHER ANNUAL RESTRICTED SECURITIES LTIP ALL OTHER
FISCAL SALARY BONUS COMPENSATION STOCK AWARD UNDERLYING PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) OPTIONS # ($) ($)
- --------------------------- ------ ------ ----- ------------ ----------- ---------- ------- ------------
Brad D. Greenspan ............ 2001 99,800 -- 50,000(1) -- 170,000 -- --
Chairman of the Board 2000 -- -- 50,000(1) -- -- -- --
and Chief Executive Officer
Brett C. Brewer .............. 2001 104,979 -- -- -- 312,500 -- --
Co-President, Chief Operat- 2000 75,000 -- -- -- -- -- --
ing Officer and Director
Joseph L. Varraveto .......... 2001 37,657(2) -- -- -- -- -- --
Executive Vice President
and Chief Financial Officer
Leland Silvas ................ 2001 166,795 -- -- -- 136,667 -- --
Chief Executive Officer(3) 2000 200,000 -- 6,307(4) -- 291,668 -- --
William R. Wagner ............ 2001 135,416 27,500 -- -- 102,079 -- --
Vice President(5) 2000 125,000 -- -- -- 24,999 -- --
- -------------
(1) Represents consulting fees paid to Mr. Greenspan prior to his appointment as
Chief Executive Officer of eUniverse on August 29, 2000.
(2) Mr. Varraveto was appointed as Executive Vice President and Chief Financial
Officer of eUniverse on January 2, 2001.
(3) Mr. Silvas resigned as Chief Executive Officer of the Company effective July
21, 2000.
(4) Mr. Silvas was issued 200,000 shares in conjunction with his employment with
eUniverse. These have been valued at $.0315 per share, based upon the initial
capitalization of Entertainment Universe.
(5) Mr. Wagner resigned as Vice President of the Company effective July 15,
2001.
As of the date of this Proxy Statement, our current executive officers
are:
Executive
Officer
Name Age Position(s) Since
- ---- --- ----------- -----
Brad D. Greenspan.................. 28 Chairman of the Board of Directors and Chief Executive Officer April 14, 1999
Brett C. Brewer.................... 29 Co-President August 29, 2000
Shawn Goldschein................... 36 Co-President and Chief Strategic Officer August 29, 2000
Joseph L. Varraveto................ 39 Executive Vice President and Chief Financial Officer January 2, 2001
Christopher S. Lipp................ 29 Secretary, Vice President and General Counsel March 30, 2001
For biographical descriptions of Brad D. Greenspan and Brett C. Brewer,
please see Item 2 of this Proxy Statement.
Shawn Goldschein, Co-President and Chief Strategic Officer since August
29, 2000. Mr. Goldschein served as Vice President of Marketing and
Communications for WhatsHotNow.com from March 1999 to July 2000 and as Vice
President of Strategic Planning for Rare Medium from February 1997 to February
1999, where he was instrumental in generating new business while employed at
each position. Mr. Goldschein was employed by Icon New Media from October 1995
to October
25
1997, where he served as General Manager and founder of the company's
Advertising/Sponsorship Division. Mr. Goldschein received a B.A. degree in
finance and statistics from Syracuse University.
Joseph L. Varraveto, Executive Vice President and Chief Financial
Officer since January 2, 2001. From January 2000 to January 2001, Mr. Varraveto
served as President and Chief Operating Officer of ememories.com, where he was
responsible for securing new capital financing and human resource management,
strategic corporate development and planning, financial controls and investor
relations. From September 1999 to December 1999, he served as Chief Financial
Officer of AIR4LESS.com, a leisure travel Web site, where he secured early round
financing and several strategic alliances before the company merged with another
travel concern. Prior to entering the online world, Mr. Varraveto served as
Senior Vice President of Finance for PepsiCo's Frito Lay International Snack
Foods Division from January 1994 to August 1999, where he oversaw the
transformation of its overseas businesses into a single operating unit. He also
spent nine years at PricewaterhouseCoopers working on corporate acquisitions,
reorganizations, public offerings and debt offerings. Mr. Varraveto received a
B.A. in business economics from the University of California at Santa Barbara.
Christopher S. Lipp, General Counsel since May 2, 2001, Secretary since
March 30, 2001 and Vice President, Business and Legal Affairs since January 11,
2000. Prior to joining eUniverse, Mr. Lipp was employed as an attorney in the
Intellectual Property Group of Pillsbury Madison & Sutro LLP at Los Angeles,
California from September 1997 to January 2000. He has been a member of the
California State Bar since 1997. Mr. Lipp received his J.D. from the University
of Southern California Law School in May 1997 and a B.A. in government and
sociology from Georgetown University in 1994.
The following table summarizes the option grants to the Named Executive
Officers in the last fiscal year:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL RATES
NUMBER OF GRANTED TO OF STOCK PRICE APPRECIATION
SECURITIES EMPLOYEES EXERCISE FOR OPTION TERM
UNDERLYING IN FISCAL PRICE EXPIRATION ---------------------------
NAME AND PRINCIPAL POSITION OPTIONS GRANTED YEAR $/SHARE DATE 5% 10%
- --------------------------- --------------- ---- ------- ---- -- ---
Brad D. Greenspan............................ 1,440,000(1) 26.9% $2.75 9/29/10 $617,000 $3,160,000
Chairman of the Board of Directors
and Chief Executive Officer
Brett C. Brewer.............................. 750,000(1) 14.0% $2.75 9/29/10 $322,000 $1,646,000
Co-President, Chief Operating Officer
and Director
Joseph L. Varraveto.......................... 350,000(1) 6.5% $2.25 3/30/11 $352,000 $1,027,000
Executive Vice President
and Chief Financial Officer
- ----------
(1) One third of the options vest and are exercisable one year from the date of
grant. Thereafter, one twelfth of the options vest and are exercisable each
three months until all optioned shares are vested.
Aggregated Option Exercises in last Fiscal Year and
Fiscal Year-end Option Values/SAR Values
Value of
No. of Securities Unexercised
Underlying Unexercised in-the-money
Options/SAR's Options/SAR's
No. of Shares at Fiscal Year-end at Fiscal Year-end
Acquired Value -------------------------- ----------------------------
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------- ----------- -------- ----------- ------------- ----------- -------------
Brad D. Greenspan.... -- -- 170,000 1,570,000 -- --
Brett C. Brewer...... -- -- 275,000 550,000 -- --
Joseph L. Varraveto.. -- -- -- 350,000 -- --
Leland N. Silvas..... -- -- 428,335 -- -- --
William R. Wagner.... -- -- 115,208 27,292 -- --
26
PERFORMANCE GRAPH
The following graph compares the yearly percentage change in
eUniverse's cumulative total shareholder return on eUniverse's common stock to
the cumulative total return of the Nasdaq Composite Index and a peer group of
Internet stocks for the period beginning April 14, 1999 to March 31, 2001. Peer
group selected by Company consists of Amazon, AOL, CMGI, Doubleclick, ICG, Yahoo
and 24/7 Media. The graph assumes that the value of the investment in the
Company's common stock and the comparison index was $100 on April 14, 1999 and
assumes the reinvestment of dividends. The Company has never declared a dividend
on its common stock. The stock price performance depicted in the graph below is
not necessarily indicative of future price performance.
[PERFORMANCE GRAPH]
Date eUniverse Peer Group Nasdaq
- -----------------------------------------------------
30-Apr-99 100.00 100.00 100.00
1-Jun-99 76.29 100.42 94.86
30-Jun-99 80.41 94.86 105.63
30-Jul-99 58.76 103.13 103.18
31-Aug-99 50.52 116.28 107.73
30-Sep-99 48.45 137.10 107.99
29-Oct-99 42.27 168.06 116.66
30-Nov-99 53.09 211.74 131.20
30-Dec-99 32.99 262.99 160.03
31-Jan-00 69.07 222.63 154.96
29-Feb-00 73.20 205.56 184.70
31-Mar-00 74.23 180.38 179.83
28-Apr-00 63.92 138.61 151.82
31-May-00 52.58 133.23 133.74
30-Jun-00 44.85 110.42 155.97
31-Jul-00 36.86 104.35 148.14
31-Aug-00 41.24 116.00 165.42
29-Sep-00 31.96 81.17 144.44
31-Oct-00 28.87 73.18 132.51
30-Nov-00 18.56 44.16 102.17
29-Dec-00 13.40 36.32 97.16
31-Jan-01 19.59 40.20 109.04
28-Feb-01 21.13 31.38 84.62
30-Mar-01 16.49 22.47 72.37
27
ITEM 3. APPROVAL OF AUDITORS
Subject to stockholder ratification, the Board of Directors, upon
recommendation of the Audit Committee, has reappointed the firm of Merdinger,
Fruchter, Rosen & Corso, P.C., independent auditors, to audit the consolidated
financial statements for the fiscal year ending March 31, 2001. Merdinger,
Fruchter, Rosen & Corso, P.C. has served as the Company's independent auditors
since April 29, 1999. The Board of Directors, in its discretion, upon
recommendation of the Audit Committee, may direct appointment of new independent
auditors at any time during the year, if the Board of Directors feels that such
a change would be in the best interests of the Company and its stockholders.
Representatives of Merdinger, Fruchter, Rosen & Corso, P.C. are expected to be
present at the Annual Meeting, will have an opportunity to make a statement if
they desire to do so, and will be available to respond to questions.
Audit Fees
The aggregate fees billed for professional services rendered by
Merdinger, Fruchter, Rosen & Corso, P.C., for the audit of the Company's annual
financial statements for the most recent fiscal year and the reviews of the
financial statements included in the Company's Forms 10-Q for that fiscal year
were $125,000.
Financial Information Systems Design and Implementation Fees
The aggregate fees billed for the professional services with respect to
financial information systems design and implementation rendered by Merdinger,
Fruchter, Rosen & Corso, P.C. for the most recent fiscal year were $0.
All Other Fees
The aggregate fees billed for services rendered by Merdinger, Fruchter,
Rosen & Corso, P.C., other than the services described above, for the most
recent fiscal year were $0.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" SUCH RATIFICATION AND YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY
OTHERWISE. IF THE STOCKHOLDERS DO NOT RATIFY THIS APPOINTMENT, OTHER CERTIFIED
PUBLIC ACCOUNTANTS WILL BE APPOINTED BY THE BOARD UPON RECOMMENDATION OF THE
AUDIT COMMITTEE.
Other Business
Management knows of no other matters that may properly be, or are
likely to be, brought before the meeting. If other proper matters are
introduced, the individuals named as Proxies on the enclosed Proxy Card will
vote shares it represents. Stockholders who intend to present an item of
business at the 2002 Annual Meeting of Stockholders (other than a proposal
submitted for inclusion in the Company's proxy materials) must provide notice of
such business to the company's secretary no earlier than June 24, 2002 and no
later than August 23, 2002.
Stockholder Proposals
Stockholder proposals may be submitted for inclusion in eUniverse's
2002 proxy material after the 2002 Annual Meeting but must be received within a
reasonable time before eUniverse begins to print and mail its proxy materials.
Proposals should be sent via registered, certified, or express mail to: Office
of the Secretary, eUniverse, Inc., 6300 Wilshire Boulevard, Suite 1700, Los
Angeles, California 90048.
Management carefully considers all proposals and suggestions from
stockholders. When adoption is clearly in the best interest of eUniverse and our
stockholders, and can be accomplished without stockholder approval, the proposal
is implemented without inclusion in the proxy material.
28
Proxies and Voting at the Meeting
The common stock, $.001 par value, and Series A 6% Convertible
Preferred Stock, $.10 par value, are eUniverse's only classes of security
entitled to vote at the Annual Meeting. Each common stockholder of record at the
close of business on August 16, 2001 (the "Record Date"), is entitled to one
vote for each share of common stock held. Each preferred stockholder of record
at the close of business on the Record Date is entitled to 2.013 votes for each
share of preferred stock held. On the Record Date, there were 19,294,696 common
shares outstanding and entitled to be voted and 2,573,385 equivalent common
shares held by preferred stockholders on an as-converted basis, for an aggregate
of 21,868,081 votes.
Directors are elected by a plurality of votes cast. A majority of the
votes cast is required to ratify the appointment of auditors, to approve the
Sony Agreements, and to recommend that the Board consider adoption of a
stockholder proposal. Under the law of Nevada, eUniverse's state of
incorporation, "votes cast" at a meeting of stockholders by the holders of
shares entitled to vote are determinative of the outcome of the matter subject
to vote. Abstentions, broker non-votes, and withheld votes will not be
considered 'votes cast' based on current state law requirements and eUniverse's
Certificate of Incorporation and By-laws.
All stockholder meeting proxies, ballots, and tabulations that identify
individual stockholders are kept secret, and no such document shall be available
for examination, nor shall the identity or the vote of any stockholder be
disclosed except as may be necessary to meet legal requirements under the laws
of Nevada, eUniverse's state of incorporation. Votes are counted by employees of
Corporate Stock Transfer, Inc., eUniverse's independent transfer agent and
registrar, and certified by the Inspectors of Election who are employees of
Corporate Stock Transfer, Inc.
Shares cannot be voted unless a signed proxy card is returned, or other
specific arrangements are made to have shares represented at the meeting. Any
stockholder giving a proxy may revoke it at any time before it is voted by
giving notice of revocation in writing to the Corporate Secretary, by duly
executing and delivering to the Corporate Secretary a proxy bearing a later date
or by voting in person at the Annual Meeting. If a stockholder who has executed
and returned a proxy card is present at the meeting and wishes to vote in
person, he or she may elect to do so; and any such vote in person will
automatically revoke the power of the proxy holder to vote his or her proxy. If
a stockholder of record wishes to give a proxy to someone other than the
individuals named as Proxies on the proxy card, he or she may cross out the
names appearing on the enclosed proxy card, insert the name of such other
person, sign, and give the proxy card to that person for use at the Annual
Meeting.
Stockholders are encouraged to specify their choices by marking the
appropriate boxes on the enclosed proxy card. Shares will be voted in accordance
with such instructions. However, it is not necessary to mark any boxes if you
wish to vote in accordance with the Board of Directors' recommendations; merely
sign, date, and return the proxy card in the enclosed envelope.
Solicitation of proxies is being made by eUniverse through the mail.
The cost thereof will be borne by eUniverse. In addition, management has
retained Corporate Stock Transfer, Inc. to assist in soliciting proxies for a
fee of approximately $600, plus reasonable out-of-pocket expenses.
Incorporation By Reference
eUniverse incorporates into this Proxy Statement its Annual Report on
Form 10-K/A filed with the SEC on July 30, 2001, a copy of which is being
delivered to our stockholders with this Proxy Statement.
Christopher S. Lipp
Secretary, Vice President and General Counsel
August , 2001
29
[PRICEWATERHOUSECOOPERS LOGO]
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York NY 10019-6013
Telephone (646) 471 4000
Facsimile (646) 394 1301
Report of Independent Accountants
To the Shareholders of Indimi Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations and cash flows present fairly, in all material respects, the
financial position of the InfoBeat Business (a division of Indimi Inc.) at
December 31, 2000 and 1999, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
July 13, 2001
F-1
InfoBeat Business
(A division of Indimi Inc.)
Balance Sheets
December 31,
--------------------------------
2000 1999
Assets
Accounts receivable, net $ - $ 262,163
Prepaid expenses and other assets - 886,533
Property and equipment, net (Note 6) 1,956,319 163,985
Capitalized internal use software 3,354,234 -
Intangible assets, net 2,214,216 4,465,197
---------- ----------
Total assets $7,524,769 $5,777,878
========== ==========
Liabilities and Net Investment of Parent
Accounts payable and accrued expenses $5,172,275 $ 461,849
Accrued salaries and compensation 111,804 24,910
Deferred income (Note 7) 1,587,365 3,123,365
---------- ----------
Total liabilities 6,871,444 3,610,124
========== ==========
Net investment of Parent (Note 3): 653,325 2,167,754
---------- ----------
Total liabilities and net investment of Parent $7,524,769 $5,777,878
========== ==========
The accompanying notes are an integral part of these financial statements.
F-2
InfoBeat Business
(A division of Indimi Inc.)
Statements of Operations
For the Year Ended
December 31,
-----------------------------
2000 1999
Revenues:
Net advertising revenues $ 2,671,287 $ 2,607,337
Other revenues 29,205 214,593
----------- ----------
Total revenues 2,700,492 2,821,930
=========== ==========
Operating expenses:
Cost of revenues 3,754,700 5,467,932
Sales and marketing 9,019,526 1,264,107
General and administrative 6,085,433 3,611,752
Investment impairment loss 650,000 -
----------- ----------
Total operating expenses 19,509,659 10,343,791
=========== ==========
Loss before income taxes (16,809,167) (7,521,861)
Income taxes benefit (provision) (Note 9) - -
----------- ----------
Net loss $(16,809,167) $(7,521,861)
=========== ==========
The accompanying notes are an integral part of these financial statements.
F-3
InfoBeat Business
(A division of Indimi Inc.)
Statements of Cash Flows
For the Year Ended
December 31,
-----------------------------
2000 1999
Cash flows from operating activities:
Net loss $(16,809,167) $ (7,521,861)
Adjustment to reconcile net loss to net cash used in operating activities
Depreciation 22,297 12,388
Amortization of intangibles 2,250, 981 2,241,104
Investment impairment loss 650,000 -
Amortization of deferred income (1,536,000) (128,000)
Changes in operating assets and liabilities:
Accounts receivable 262,163 (262,163)
Prepaid expenses 886,533 (886,533)
Accounts payable, accrued expenses and other 4,710,426 513,214
Accrued salaries and compensation 86,894 24,910
------------ ------------
Net cash used in operating activities (9,475,873) (6,006,941)
============ ============
Cash flows from investing activities:
Purchase of property and equipment (1,814,631) (176,373)
Purchase of investment (650,000) -
Capitalized internal use software (3,354,234) -
------------ ------------
Net cash used in investing activities (5,818,865) (176,373)
============ ============
Cash flows from financing activities:
Capital contributions (Note 3) 15,294,738 6,183,314
------------ ------------
Net cash provided by financing activities 15,294,738 6,183,314
============ ============
Net increase in cash for the period - -
Cash at the beginning of the year - -
------------ ------------
Cash at the end of the year $ - $ -
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
InfoBeat Business
(A division of Indimi Inc.)
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Structure and Business
The InfoBeat Business (InfoBeat) is a division of Indimi Inc. (Indimi)
which is a 80.74% owned subsidiary of 550 Digital Media Ventures Inc. (550
DMV or the Parent). The minority interest in Indimi Inc. is primarily
owned by the former shareholders of AdTools, Inc. AdTools, Inc., a
previously unrelated company, was acquired by Indimi in April 2000. 550
DMV is owned 55% by Sony Broadband Entertainment (SBE) and 45% by Sony
Music Entertainment, Inc. (SMEI). Both of these companies are indirect
wholly owned subsidiaries of Sony Corporation of America (SCA), which in
turn is an indirect wholly-owned subsidiary of the ultimate parent, Sony
Corporation (Sony).
InfoBeat develops, maintains and delivers newsletters via e-mail. Revenues
are primarily derived from sales of advertising space within newsletters.
2. Basis of Presentation
InfoBeat is not a legal entity. The assets and liabilities associated with
InfoBeat are components of the Indimi legal entity. The accompanying
financial statements have been prepared from the historical accounting
records of Indimi. Certain expenses incurred by Indimi and other Sony
affiliates directly on behalf of InfoBeat have been allocated to InfoBeat
on various bases (See Note 8). The allocations, in the opinion of
management, are reasonable. However, such allocated expenses are not
necessarily indicative of InfoBeat's results had it been operated as a
separate company. Additionally, it is not practicable for management to
estimate the level of such expenses which might have been incurred had
InfoBeat been operated on a stand-alone basis for the years ended December
31, 2000 and 1999.
3. Net Investment of Parent and Liquidity
Net operating losses funded by the Parent are invested in InfoBeat and
have been reflected as Net Investment of Parent in the balance sheet.
Contributions from the Parent consist of both noncash and cash amounts.
Changes in the net investment of Parent (divisional equity) were as
follows:
2000 1999
----------- -----------
Net investment of Parent - January 1, $ 2,167,754 $ 6,706,301
Net loss (16,809,167) (7,521,861)
Non-cash distribution to Parent - (3,200,000)
Contributions from Parent 15,294,738 6,183,314
----------- -----------
Net investment of parent-December 31, $ 653,325 $ 2,167,754
=========== ===========
Management believes that its financing arrangement with its Parent will
yield sufficient short-term liquidity to bridge InfoBeat's financing needs
until such time as InfoBeat can secure other longer-term alternatives. The
Parent has committed to provide certain financial resources to InfoBeat to
enable InfoBeat to meet its obligations as and when they fall due and to
carry on its business until such time as InfoBeat can secure other
long-term alternatives.
F-5
InfoBeat Business
(A division of Indimi Inc.)
Notes to Financial Statements
- --------------------------------------------------------------------------------
4. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
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.
Revenue Recognition
InfoBeat's revenues are derived principally from the sale of
advertisements displayed in InfoBeat's e-mail newsletters. Advertising
revenues are recognized when the newsletters that contain the
advertisements are delivered. In December 1999, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB
101), Revenue Recognition in Financial Statements. SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The adoption of
SAB 101 did not have a material effect on the Company's financial position
or results of operations.
Fair Value of Financial Instruments
InfoBeat's financial instruments consist primarily of accounts payable for
which the current carrying amount approximates fair market value.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. The cost of additions and improvements are capitalized,
while maintenance and repairs are charged to expense when incurred.
Depreciation is calculated on a straight-line basis, over the estimated
useful lives of the related assets ranging principally from 3 to 7 years.
Leasehold improvements are amortized on a straight-line basis over the
shorter of the estimated useful life of the improvement or the term of the
related lease.
Capitalized Internal Use Software
InfoBeat has capitalized certain internal use software totaling $3,354,234
during the year ended December 31, 2000. For the year ended December 31,
2000, there was no amortization expense as the internal use software had
not been placed in service. Exactis.com, Inc. (Exactis), a third party
company, provides a majority of InfoBeat's engineering and e-mail
publishing services, subject to the provision of a three-year agreement
(see Note 7). The internal use software will, eventually, replace the
out sourced e-mail publishing service.
F-6
InfoBeat Business
(A division of Indimi Inc.)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Intangible Assets
Intangible assets represent the excess of the purchase price over the fair
value of the tangible net assets acquired and include customer lists,
distribution agreements and goodwill. The intangible assets are amortized
on a straight-line basis over their estimated useful life of three years.
Management assesses the recoverability of long-lived assets, including
intangible assets, held and used whenever events or changes in
circumstances indicate that future cash flows (undiscounted and without
interest charges) expected to be generated by an asset's disposition or
use may not be sufficient to support its carrying amount. If such
undiscounted cash flows are not sufficient to support the recorded value
of assets, an impairment loss is recognized to reduce the carrying value
of the long-lived asset.
Subscriber Acquisition Costs
Subscriber acquisition costs are the costs incurred by InfoBeat in
obtaining new subscribers to its e-mail newsletters. These costs are
expensed as incurred and recorded within sales and marketing expense. For
the years ended December 31, 2000 and 1999, subscriber acquisition costs
were approximately $6,950,399 and $165,000, respectively.
Income Taxes
As a division of Indimi, InfoBeat does not file separate federal income
tax returns but rather is included in the federal, state and local income
tax returns filed by SCA and its subsidiaries. Currently, no tax sharing
agreement exists between the Business and SCA. For purposes of the
financial statements, InfoBeat's allocated share of SCA's income tax
provision was based on the "separate return" method. Valuation allowances
have been established for the deferred tax assets which would arise if
InfoBeat was a separate legal entity. This is based upon management's best
estimate that the deferred tax assets will, more likely than not (a
likelihood of slightly more than 50%) not be realized.
Comprehensive Income/(Loss)
InfoBeat does not have any items that would be classified as other
comprehensive income/(loss).
Stock Option Plan
Effective September 1, 2000, Indimi adopted a stock option plan
authorizing the grant of up to 3,529,411 options. Under the terms of the
plan, Directors and key employees of Indimi may be granted options to
purchase Indimi's common stock at no less than 100% of the market price on
the date that the option is granted. On a limited basis, options may also
be issued to certain Directors of Indimi or employees of Sony Music.
Options will generally vest ratably over three years and expire ten years
from the date of grant unless otherwise specified in the award agreement.
As of December 31, 2000, no options have been granted under this plan.
5. Investments
During 2000, InfoBeat invested in LetsPlay, Inc. common stock. Based on
negative trends in LetsPlay's financial results, management determined
that the LetsPlay investment was other than temporarily impaired as of
December 31, 2000 and recorded a $650,000 impairment charge. Subsequent to
December 31, 2000, LetsPlay's lender called in their senior secured notes
and took possession of the assets of LetsPlay. As a result, the LetsPlay
corporation is being dissolved.
F-7
InfoBeat Business
(A division of Indimi Inc.)
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. Property and Equipment
Property and equipment at December 31, comprised:
2000 1999
----------- ----------
Computer equipment $1,798,744 $ -
Furniture and fixtures 39,717 23,830
Leasehold improvements 152,543 152,543
---------- ---------
1,991,004 176,373
Less: accumulated depreciation (34,685) (12,388)
---------- ---------
Property and equipment, net - December 31, $1,956,319 $ 163,985
========== =========
7. 24/7 Media, Inc. (formerly d/b/a Exactis.com) Transactions
Effective December 30, 1998, SMEI purchased certain assets of the on-line
publishing business, InfoBeat, Inc., from Exactis for $6,706,000 in cash,
including related acquisition costs. The acquisition was accounted for as
a purchase. Contemporaneous with the acquisition, SMEI and InfoBeat
entered into a three-year service agreement with Exactis, a provider of
permission-based out sourced e-mail marketing and communications solutions.
According to the terms of the agreement, Exactis performs certain e-mail
publishing services, including the production and delivery of e-mail
newsletters as well as database management functions for InfoBeat. In
connection with the services agreement, InfoBeat also received, for no
additional consideration, warrants for the purchase of 400,000 shares of
Exactis common stock, subject to meeting certain monthly revenue targets.
On November 19, 1999, Exactis completed its initial public offering. At
this time, Exactis modified the warrant agreement with InfoBeat in order
to eliminate all monthly revenue targets and immediately vest all of the
warrants. As of November 19, 1999, InfoBeat recorded $3,200,000 for
intrinsic value of the warrants received in exchange for providing
services under the InfoBeat agreement and began amortizing the deferred
income over the remaining life of the agreement. Net service fee expense
for the years ended December 31, 2000 and 1999 was $3,653,589 and
$5,089,194, respectively.
InfoBeat recorded a non-cash distribution of $3,200,000 to its Parent upon
distribution of the warrants to the Parent.
8. Related Party Transactions
Indimi, the Parent and SMEI have provided 1nfoBeat with office space and
certain administrative and support functions including, but not limited
to, accounting, payroll processing, human resources, legal, data
processing, telecommunications and managerial services. InfoBeat is
charged for such services based upon either actual cost incurred by SMEI
on behalf of InfoBeat or allocations applicable to the related charge
(e.g., square footage, headcount, time allocations, etc.). For the years
ended December 31, 2000 and 1999, such charges amounted to $870,000 and
$558,000, respectively. Management believes the method of allocation is
reasonable.
F-8
InfoBeat Business
(A division of Indimi Inc.)
Notes to Financial Statements
InfoBeat has no employees and has, historically, contracted for the
services of its workforce with Indimi, the Parent and SMEI. The associated
salary and bonus related costs incurred by these related parties are
recharged to InfoBeat based upon actual amounts incurred. The costs of any
fringe benefits provided to the workforce by its employer, including any
related workforce taxes, are charged to InfoBeat based upon estimates of
actual amounts incurred. For the years ended December 31, 2000 and 1999,
total workforce charges approximated $1,268,000 and $437,000,
respectively.
InfoBeat ceased utilizing a third party sales agency effective November
1999. Effective December 1999, Sony Pictures Digital Entertainment (SPDE)
operated as the primary sales agent for InfoBeat. Under the agency
arrangement, SPDE pays InfoBeat at the time that the associated
advertisement is run. InfoBeat retains, however, the credit risk on the
insertion order until SPDE collects the associated cash from the
applicable advertiser. As of December 31, 2000, management recorded
$220,271 within accrued liabilities as its estimate of amounts that would
be paid/returned to SPDE in relation to this exposure.
In conjunction with the above, SPDE received twenty-two percent (22%) of
gross advertising revenues plus reimbursement of certain ad sales costs
through August 2000. Effective September 2000, the agreement was amended
so that SPDE receives thirty percent (30%) of gross advertising revenues
but is no longer reimbursed for certain ad sales costs. The agency
commission component of these fees is recorded in net revenues. The ad
sales cost reimbursement component of $856,820 and $301,550 for 2000 and
1999, respectively, is recorded in sales and marketing expense.
9. Income Taxes
The tax effects of the principal temporary differences and carryforwards
that give rise to InfoBeat's net deferred tax asset are as follows:
2000 1999
------------- -----------
Accounts receivable allowances $ 95,000 $ 86,000
Intangible assets 1,547,000 771,000
Net operating loss carryforwards 11,730,000 2,410,000
Deferred income (694,000) (33,000)
Capitalized software (2,216,000) -
------------ -----------
10,462,000 3,234,000
Valuation allowance (10,462,000) (3,234,000)
------------ -----------
Net deferred tax asset (liability) $ - $ -
============ ===========
As of December 31, 2000, InfoBeat has net operating loss (NOL)
carryforwards of approximately $21,670,000 for federal and state tax
purposes. These losses begin to expire in 2019. The ability to derive
benefit from these carryforwards in the future is dependent on InfoBeat's
ability to generate sufficient taxable income prior to the expiration
date.
InfoBeat provided for valuation allowances against its net deferred tax
assets of $10,462,000 and $3,234,000 as of December 31, 2000 and 1999,
respectively. Management does not believe that
F-9
InfoBeat Business
(A division of Indimi Inc.)
Notes to Financial Statements
- --------------------------------------------------------------------------------
InfoBeat would be assured of being able to derive future benefit from
these net deferred tax assets if InfoBeat were operating as a stand-alone
entity.
10. Subsequent Events
On July 13, 2001, 550 DMV and eUniverse announced that 550 DMV will invest
$5,000,000 in eUniverse and eUniverse will use $9,900,000 of its stock to
acquire InfoBeat.
11. Unaudited Subsequent Event
In anticipation of the acquisition of Infobeat by eUniverse, eUniverse
agreed to provide editorial services for the Infobeat newsletters
beginning on July 30, 2001. As a result, the editorial services
previously provided by Infobeat employees were no longer required, and
accordingly, such staff's employment was terminated. Infobeat took a
charge to earnings for severance and related costs of $186,000.
F-10
Quarterly Results of Operations/Supplementary Financial Information (Unaudited)
The following table presents certain unaudited consolidated quarterly
results of operations for the six quarters ended June 30, 2001. This information
is unaudited but reflects all adjustments that are, in the opinion of the
management, necessary for a fair presentation of consolidated results of the
operations. These adjustments, consisting of normal recurring adjustments and
accruals, were made on a basis consistent with the annual audited financial
statements and generally accepted accounting principles. The consolidated
quarterly data should be read in conjunction with audited financial statements
and notes to such statements presented elsewhere in this report. The results of
operations for any quarter are not necessarily indicative of the results for any
future period.
Quarter Ended Revenues Gross Profit Net Income/(Loss)
- ------------- -----------------------------------------------------
June 30, 2001........................... $ 91,580 $ (646,953) $(3,252,103)
March 31, 2001.......................... 82,028 (902,290) (3,852,830)
December 31, 2000....................... 444,285 (801,081) (7,749,673)
September 30, 2000...................... 822,506 505,286 (4,194,510)
June 30, 2000........................... 1,030,472 694,616 (2,110,478)
March 31, 2000.......................... 403,229 (1,453,029) (2,754,506)
F-11