-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TndE+XJbSvl5IQp00bSdXvoDzICKPREAtcLjnAR2Y4BBvpxqKF1lWpiue3GtAUYO TEALzXUkYvmQFSapVyT89w== 0001032210-00-000580.txt : 20000327 0001032210-00-000580.hdr.sgml : 20000327 ACCESSION NUMBER: 0001032210-00-000580 CONFORMED SUBMISSION TYPE: 10-12G/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USA VIDEO INTERACTIVE CORP CENTRAL INDEX KEY: 0001107280 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 954370725 STATE OF INCORPORATION: WY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12G/A SEC ACT: SEC FILE NUMBER: 000-29651 FILM NUMBER: 577170 BUSINESS ADDRESS: STREET 1: 837 WEST HASTINGS STREET #507 STREET 2: VANCOUVER BRITISH COLUMBIA CANADA V6C 3 BUSINESS PHONE: 6046851017 MAIL ADDRESS: STREET 1: 837 WEST HASTINGS STREET #507 STREET 2: VANCOUVER BRITISH COLUMBIA CANADA V6C 3 10-12G/A 1 AMENDMENT NO. 1 TO FORM 10 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- Amendment No. 1 To FORM 10 General Form For Registration of Securities Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 USA VIDEO INTERACTIVE CORP. (Exact name of registrant as specified in its charter) Wyoming 95-43707-25 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 70 Essex Street, Mystic, Connecticut 06355 (Address, including postal code, of registrant's principal executive offices) Registrant's telephone number, including area code: 1 (800) 625-2200 Securities to be registered under Section 12(b) of the Exchange Act: None Securities to be registered under Section 12(g) of the Exchange Act: Common Shares - -------------------------------------------------------------------------------- USA VIDEO INTERACTIVE CORP. FORM 10 TABLE OF CONTENTS
PART I Page ---- Item 1. Business........................................................... 3 Item 2. Financial Information.............................................. 19 Item 3. Properties......................................................... 21 Item 4. Security Ownership of Certain Beneficial Owners and Management..... 22 Item 5. Directors and Executive Officers................................... 23 Item 6. Executive Compensation............................................. 25 Item 7. Certain Relationships and Related Transactions..................... 27 Item 8. Legal Proceedings.................................................. 28 Item 9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters........................................ 30 Item 10. Recent Sales of Unregistered Securities............................ 31 Item 11. Description of Registrant's Securities to be Registered............ 32 Item 12. Indemnification of Directors and Officers.......................... 33 Item 13. Financial Statements and Supplementary Data........................ 33 Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................... 33 Item 15. Financial Statements and Exhibits.................................. 34
ITEM 1. Business Description of Business Introduction ------------ USA Video Interactive Corp.'s (The "Company") technology offers businesses and individuals the capability of using high-quality full-motion video or still images on the Web to educate, sell, train, inform and entertain. The Company designs and supplies Store and Forward Video-on-Demand/TM/ ("VoD") and Wavelet services, which include the following features: Wavelet compression of video content for full-motion viewing on the Internet; content server and video editing suite sales and installation; content hosting and video editing services on a project basis; content production for full-motion Internet advertising; and customized solutions to Internet and intranet video requirements. Simply defined, VoD is an electronic video distribution method capable of delivering user-selected video information on a user-specified schedule; that is, a video that can be requested at any time and is available at the discretion of the end- user. VoD encompasses the entire service category that enables an information consumer to select the type of information, as well as the time, place and frequency of reception. The Company's high quality, full-motion video (existing content or live streaming video) turns a personal computer into a television with fully user- interactive capabilities, or turns televisions, via set-top boxes, into fully user-interactive entertainment and education modules. The technology provides video via existing twisted-pair telephone systems, set-top boxes or cable modems with copper or fiber-optic cable, wireless, satellite, Ethernet and ATM networks. Digitized content includes movies, sports, music and entertainment, educational resources, corporate training seminars, and other libraries and archives. The technology gives users the unique flexibility of standard, VCR- like controls of play, fast-forward, reverse and pause, and the convenience of a standard Internet-browser format for access. The technology can accommodate 10,000 or more streams (simultaneous users) accessing a single source with unlimited content, with each user having full and independent control of the viewing function. The Company also has a division to create and supply content, and a division to digitize existing single videos or entire video libraries, so they can be placed on computer servers or CD-ROMs for access over Internet or intranet systems. The Company digitizes videos using any compression technique desired by the customer: MPEG-1, MPEG-2, MPEG-4 or the Company's Interactive Wavelet Technology. Evolution of the Company ------------------------ . April 18, 1986, the Company was incorporated as First Commercial Financial Group Inc. in the Province of Alberta, Canada. . September 1, 1989, the Company changed its name to Micron Metals Canada Corp. and forward split its common shares on a two for one basis. . November 1991, the Company acquired 100% of the outstanding shares of USA Video Inc., which was incorporated in Texas in 1990, pursuant to a purchase agreement dated November 21, 1991 and amended March 6, 1992, July 28, 1992 and September 15, 1992. 3 . December 24, 1991, the Company incorporated a wholly-owned subsidiary, USA Video Corp., in the State of Nevada. . April 6, 1992, the Company changed its name to USA Video Corporation. . May 4, 1993, USA Video Corp. changed its name to USA Video (California) Corporation. . July 28, 1993, USA Video Inc. changed its name to USA Video Corporation. . January 3, 1995, the Company changed its name to USA Video Interactive Corp. . February 16, 1995 the Company continued its corporate jurisdiction from the Province of Alberta to the State of Wyoming. . February 23, 1995, the Company consolidated its common shares on a one for five basis. . In July, 1998, the Company created the USA Video Interactive Programming division. . In June 14, 1999, the Company incorporated another wholly-owned subsidiary, Merging Rivers Media Corporation, Inc., in the State of Wyoming. During 1999, the Company formed several new operational divisions of the company: . A Media Services division to create and/or digitize video content for Internet advertisers, advertising agencies, theater studios, and others. . An Engineering Services division to handle sales and service of its servers, switches and telecommunications equipment. . A West Coast subsidiary, Merging Rivers Media, an Internet-television advertising agency, to focus on entertainment-related activities. . A Programming Division, for the express purpose of negotiating and finalizing contracts related to content services. The Company is a public company in the development stage listed on the Canadian Venture Exchange under the trading symbol "US" and the NASD OTC Bulletin Board under the trading symbol "USVO". The Company's executive offices are located at 70 Essex Street, Mystic, Connecticut 06355, telephone: (800) 625-2200 and its corporate offices are located at #507, 837 West Hastings Street, Vancouver, B.C., V6C 3N6 , telephone: (604) 685-1017, (800) 321-8564, Fax: (604) 685-5777. The Company's Technology ------------------------ The Company has designed and patented a technology known as "Store and Forward Vision" ("SFV") for the delivery of video programs and interactive services to remote locations such as schools, libraries and businesses. The SFV system is the critical technology behind the Company's VoD systems and services. Simply defined, VoD is an electronic video distribution method capable of delivering user-selected video information on a user-specified schedule. 4 Video Systems. The Company's VoD technology can be implemented in a VoD system, which is an enhanced data server with peripheral components that provide access to and retrieval of large quantities of digital data. The system is flexible and scaleable, to accommodate high-volume, medium-, or low-capacity markets in a cost-effective manner because it can be configured using a broad range of commercially available, mature, off-the-shelf hardware components. System Components. The VoD system has five primary components that together provide the VoD service. These components can be co-located or separated by a local or wide-area distribution network. Video Library or "Content" - The original video source material. The Video Library contains the collection of video material in its original format, which is normally a high quality Beta-SP or D1 format. Encoder - Where analog video is digitized, encoded, and compressed for storage in a digital medium. The Encoder converts the original video to a computer-based digital format while preserving the initial quality, compresses the digitized video using one of several industry standard compression algorithms, and delivers compressed video to the archive, which is maintained on CD-ROM, DVD or any digital medium. Archived files are sized to attain delivery data rates from 0.015 to 6.0 megabits per second. Video Server - The device that stores video in a digital format for retrieval on demand; also performs several management functions. The Video Server accesses archived video data and is responsible for receiving and servicing user requests for programming. The Company establishes a connection between its server and the client's computer to provide access to its VoD programs. The Video Server also can track viewership and manage billing information if these services are required. The Video Server is designed in a highly modular fashion, allowing support for additional users to be added as system usage increases. Distribution Network - The connectivity for distribution of video data and client interaction; i.e. Internet, intranet, Ethernet, fiber, telephone line or cable. The Distribution Network is the infrastructure by which video is transmitted and accessed by users. Digitized video content can be streamed over the Internet (via existing twisted-pair telephone systems or cable modems with copper or fiber-optic cable). Video also can be streamed via wireless, intranet, satellite, cable-TV, set-top box, Ethernet, and ATM networks. Video Client - The Web Browser software and host system or other viewing device that is run to request and view digitized video. The Video Client is the user's workstation and can be any device (TV, PC, workstation) where digitized video can be decoded and processed for viewing. System Architecture. The architecture is designed to minimize the bandwidth consumed for the delivery of video content, whether via webcast or VoD method, and is able to support from one to tens of thousands of simultaneous subscribers. This architecture comprises a collection of mature off-the-shelf hardware and software components bundled with the Company's proprietary real-time wavelet encoder for maximizing the fidelity and efficiency of video compression. The architecture has three primary functional components, which perform the entire real-time media encoding and distribution process, as follows. WebCaster Live Encode Engine - Receives analog video inputs, encodes (i.e., digitizes and compresses) the input data, and forwards the encoded output stream to the uplink server. There can be multiple encode engines in a single system. Uplink Server - Receives the encoded media stream and provides a broadcast multicast at the server output. Downlink Server - For live webcasts, receives and routes the multicast and informs the user where it can be viewed, or acts as a file server for Video-on-Demand (VoD) or non-live viewing. Physically, a simple system could contain several encode engines and the uplink server in a single component rack or multiple servers in a single rack, depending upon the application. Control switching allows all of the functions in a single rack to be performed using a single monitor, keyboard, and mouse. Functionally, once all of the encoding and webcast parameters are set, the video source is connected, and the input stream is initiated into each encoder, operation of this architecture becomes a hands-off operation requiring only periodic monitoring to ensure the data stream is uninterrupted. 5 The Company's VoD system has several attributes that it believes provide benefits unique in the industry: Flexibility - Configuration design tailored to unique client requirements and budgets. Scaleability - Paths to system expansion for those who want to start small and grow later. Modularity - No single point of failure for improved reliability and maintenance. Affordability - COTS hardware and a software-based architecture, offering cost-effective alternatives to total hardware solutions. Non-Obsolescence - Upgrades and updates through software rather than through costly hardware equipment upgrades. Wavelet Compression. Although the Company's system is not constrained to a particular compression technique, advanced Wavelet compression technology is an integral part of the solution for the marketing of the Company's product. Wavelet compression allows high-speed, high-quality streaming video to be provided via the Internet using existing telephone lines and standard TV-cable. It also allows the Company to optimize the use of fiber-optic cable, which is being installed worldwide. The Company's Wavelet compression can be used cost- effectively for broadcast video and still images and outperform any existing compression technology. During compression, video files are made smaller by reducing the amount of data required to represent an image. "Lossless" compression provides total restoration of the original image, but cannot reduce file size by more than about one-third. On the contrary, "lossy" compression cannot restore the total original image, but can yield compression ratios of on the order of 7,000-to-1 for streaming video content, truly improving the efficiency of bandwidth use. The challenge is to achieve such a high degree of compression while retaining a high-fidelity video image. Successful lossy compression (compression which retains the maximum fidelity of the video image) discards information that contributes little to the original image and then smoothes the remaining information to restore homogeneity. Unlike compression using the Discrete Cosine Transform (e.g., MPEG1 and MPEG2), which segments the original image and can create a visually unpleasant blockiness or jitteriness, Wavelet processing is applied across the entire image, allowing higher compression ratios without blockiness. The art of Wavelet compression is in apportioning the discarded data so that the eye-brain 6 combination does not notice the impact of the data loss, so the decompressed video image is barely distinguishable from the original image even at fairly high compression ratios. Because of this superior approach, an increasing number of companies are exploring use of Wavelet; by virtue of its early development and incorporation of Wavelet, the Company believes it has a timing advantage in the market. For these principal reasons, the Company's technology focus is integrating Wavelet coders-decoders (codecs) into its VoD solution. The Company believes that the Wavelet technology is superior to Digital Cosine Transform compression (subdivides the image into small square segments and treats each segment as an individual image during the compression process) because it allows for high levels of compression while retaining higher resolution than methods used by competitors, which allows significantly more material to be stored on a server or CD-ROM at a lower cost. Wavelet-encoded video has none of the blocky, jittery images inherent in MPEG videos. Because the Company's Wavelet technology produces a video that is much closer to the original quality than MPEG-based video, compressed to a fraction of the original file size, it requires much less bandwidth for transmission. The Company's Wavelet compression technology gives users a greater degree of compression when compared to competitive solutions. In tests performed with existing and commercially available compression methods, the Company's Wavelet compression outperformed the competitors by a factor of at least 3:1. While initially the Company's Wavelet compression has been used to encode and store video content for the education markets, the Company is applying its Wavelet technology to the Internet. The Company also is working on a number of revenue generating opportunities for Wavelet compression in applications focused on the installed base of dial-up modem users; for example, video conferencing and video security monitoring. Research & Development ---------------------- Prior to 1999, the Company conducted seven years of research and development of its compression VoD technology. In 1999, the Company's focus shifted to promoting and marketing its products and services, with research and development directed primarily at supporting sales. The costs of research and development have been absorbed by the Company and will not be borne by its customers. The Company has begun to build a sales force and is pursuing alliances and contracts necessary to generate interest in the technology and sell its products and services within targeted industries. The Company spent the following amounts in the past three years on research and development: ----------------------------------------------- 1997 1998 1999 ----------------------------------------------- $2,668 $24,000 $93,337 ----------------------------------------------- The Patents ----------- The Company controls multiple patents in the critical path to exploiting VoD technology and developing VoD systems. Ownership of these patents brings value to the Company but the patents are not critical to the current development of business. The Company applied for an exclusive U.S. patent for its SFV VoD technology on 7 February 1, 1990. The Company was granted U.S. Patent # 5,130,792 on July 14, 1992. The market for VoD technology has since expanded and the Company is investigating the applicability of its patent to the multiple VoD deployments now under way using any kind of switched connection, such as telephone lines, in video transmission to educational institutions, corporations, government entities, and home end-users. In 1999, the U.S. Patent Office declined a request to reinstate this patent, which had expired because of an administrative oversight that led to late payment of fees in 1995. The Company has further investigated reasons for this administrative oversight and determined that additional factors beyond its control were present; the Company has appealed the denial of the patent reinstatement and has reason to believe the matter will be resolved in favor of the Company. In 1999, the Company received approval of its SFV system patent applications in five European countries: England, France, Germany, Italy and Spain. The technological characteristics of the European Patents are based on the U.S. Patent, covering systems for transmitting video programs to remote locations over a switched telephone network, but provide more comprehensive protection. The Company believes that these patents extend to any video on the Internet, regardless of its geographic origin, that can be received in any of these five countries. Identical patents are pending in Canada and Japan. The Company is in the process of arranging to enforce its patents. The Company's VoD Patent has been extensively searched by the Company's patent attorneys as to the technical prior art. It is believed that the claims of the Company's VoD patent are broad and may be of significant value in the VoD market. The scope of the market for licensing of the Company's VoD patent will be determined by how expansive the market for VoD products becomes and how many major industry players develop profitable VoD markets. The Company intends to vigorously defend its existing VoD Patents from infringement and continue to apply for additional patents in the global market place. Evolution of the Industry ------------------------- Until recently, VoD was marketed as a service that was to be provided by cable operators to the average consumer's home television using set-top boxes and digital video systems. It was touted as offering scaleable video service to between ten thousand and one million households, which households would presumably be willing and desirous to pay for such convenient at-home service. Ultimately, there were many problems including unrealistic throughputs and bandwidth requirements, slow digital upgrades to cable systems, insufficient set-top box manufacturing, and different interfacing requirements. Consumers were not willing to pay for these amenities until they saw some real value and the technology deployment costs were too high to allow a reasonable business model. Disillusionment was rampant among even the ardent supporters because the promises of TV-based VoD were not being met and there were insufficient library choices of 20 to 30 titles, not allowing for sufficient testing of consumer demand. Today, with the explosion of the Internet, access to information among multiple users is taken for granted. However, to date, distribution of video has been bottlenecked due to its requirement for broadband services. Now, with more and more bandwidth being installed, the potential for market acceptance of video distribution is coming closer to being a reality. A single short video clip can still provide more information and visual appeal than pages and pages of HTML text. The cost of bandwidth has been decreasing over the past few years, and prices are expected to decrease even more dramatically over the next two years, which will bring increased use of 8 high bandwidth applications to the general market as related transmission costs are reduced. In addition, the cost of cable modems, ADSL modems, ATM to the desktop, and ISDN modems will bring these services more in line with customer expectations and open up opportunities in the marketplace. According to Nathan G. Muller of Strategic Information Resources, VoD buy rates are more than 12 times stronger than the pay-per-view industry average buy rate. As reported by The 1996 Pay-Per-View Report, published by Paul Kagan Associates, Inc., VoD has the potential to challenge video tape rental as the top revenue generator in the home video industry, which Kagan estimates at $417 billion overall. According to Veronis, Suhler & Associates, communications industry analysts, total U.S. spending on media will reach $663.3 billion by 2003. The 7.5% combined annual growth rate will make communications the second fastest- growing industry (behind telecommunications) among the top 12 U.S. industries. As for growing end-user markets, in 1998, households spent $6.1 billion accessing the Internet, up 33.7% over 1997, and an additional $8.5 billion purchasing products over the Internet, more than seven times the 1997 total. Business-to-business electronic commerce was nearly five times higher than consumer purchases in 1998, totaling an estimated $40 billion. Revenues of publicly reporting subscription video services (SVS) companies rose 17.7% to $34.4 billion in 1997, the third consecutive year of double-digit growth. SVS operators accounted for $27.9 billion of the total, while cable and pay-per-view networks accounted for $6.4 billion. Total SVS spending, including advertising, subscriber and pay-per-view, is forecasted to rise to $66.4 billion in 2002 from $38.5 billion in 1997, an 11.6% compound annual growth rate. The Company is participating in these markets by working with a number of broadcast companies to move content onto the Internet through a variety of means. Competitive Conditions ---------------------- The Company competes in the VoD, streaming video, video services and Internet services markets involving transmission of data by wired and wireless methods including satellite, radio and other signals, telephone wires, cable, etc. Where once the market was relatively limited, video via the Internet has become the "hot application" for the present and near future. Many large companies (Microsoft, IBM, and others) which had been relatively small players in the field are now entering in a very significant way. There currently are several hundred competitors offering identical or nearly identical products and services. The Company believes it has an advantage, however, in that it integrates the latest form of compression (Wavelet, which is quickly becoming a standard in competition with the long-established MPEG). The Company utilizes patented video technology to produce what it believes to be the highest quality digital video available on the Internet to regular modem users (28.8k and 56k). The Company believes its video is superior to that of competitors' at the high- bandwidth (200k) level as well, providing significant advantages in storage and overall cost requirements. The products offered by the Company include turnkey VoD systems and services, development and hosting of content, services related to streaming video; VoD, Internet transmission of data; satellite transmission of data; other wired and wireless transmission of data; compression and decompression of data, particularly high quality digital video. The Company focuses on the sectors of education, 9 entertainment, training, and corporate and industrial services. The Company believes there are a handful of dominant players in the Internet video field including Real Networks, Microsoft (via its Windows Media Player), Broadcast.com, Intervu, and several others. Because of the extreme interest in the field, many mergers are underway and major players change fairly regularly. The Company believes that the fluid nature of the industry allows newcomers to thrive and emerge in leadership positions if they have technically superior, cost effective, properly marketed products and services. Competition is by direct competition in the marketplace, through affiliations with other companies with dominant positions in their fields, and through pure dint of high-profile, capital-intensive marketing and advertising campaigns. General Development of the Business Development Plan ---------------- An integral part of the Company's strategy is to develop as a market leader to take advantage of the demand for VoD and streaming video products and services and the many applications they serve. The Company's business development approach includes the following key elements with the goal of focusing on specific markets while creating a broad market awareness of its unique technology: . Complete building the sales and marketing teams and equip them with the tools and information they need to be successful; . Expand current sales contracts and other income-generating licensing agreements; . Identify and penetrate niche markets and increase Internet applications; . Continue developing a significant content library that includes educational, entertainment, and other content with the objective of providing turnkey packages; . Use the technology itself, as well as more traditional advertising and marketing, to create an industry-wide awareness of the Company's unique and patented VoD technology; . Based on a solid licensing program, identify potential patent infringements and aggressively enforce technology ownership rights; . Pursue grants and other non-traditional sources of revenue as well as service contracts; . Establish strategic and synergistic alliances and partnerships for: * Multiplying marketing efforts, * Developing and exploiting complementary technology, * Performing specific project work, * Seeking opportunities for licensing of patent and content rights; . Continue with research and development in order to maintain leading- edge VoD technology; and . Develop feedback mechanisms to drive market-driven product development. Currently, maximum emphasis is being placed on raising public, industry and market awareness of the capabilities of the Company's technology. The major industry markets targeted are education, 10 entertainment (including movies, music and music videos, and sports), training and e-commerce. Education includes colleges, universities, and elementary and high schools where video can be delivered to classrooms or offices and viewed on desktop computers or television. With instant digital access to enormous libraries, instructors will be able to create specialized video programs and students will be able to access material at their convenience. The current inefficient method of copying, mailing and logging videotapes will be eliminated. Entertainment includes residential access to movies, sports and other entertainment resources at the user's convenience, eliminating the time restrictions and limited choices of cable television and pay-per-view television. Additionally, people will have instant access to regional information services such as weather, traffic conditions, sightseeing destinations, and similar choices. Training includes corporate and motivational training procedures and other instructions needed by workers in any profession from medical and surgical, to architecture and design and factory and construction workers. E-Commerce will be greatly enhanced by true, high quality VoD technology as research has shown that interactive video is far more effective than static banners or other advertising currently deployed on the Internet. The targeted markets are vast and include books, music, videos, travel and hospitality, clothing, and many others. The transmission vehicles targeted for the VoD technology are the Internet, intranet systems, cable television, wireless, and satellite. Although optimally designed for fiber optic cable, which is currently being installed worldwide and which provides almost unlimited bandwidth for video and data transmission, the VoD technology provides fast, high quality, full screen, full motion video and audio using even existing twisted pair technology and a common home modem. The Company has fully operational pilot systems the education, home entertainment and corporate training markets. Additional deployments, sales and contracts are being aggressively pursued in the airport security, sports, college, public education, home entertainment and advertising markets. Marketing Plan -------------- The Company's focus is to expand market awareness of its VoD technology. The Company believes its unique and proprietary architecture and applications provide distinct advantages to users. In this light, the near-term corporate vision is to deploy media server solutions targeted to corporate, campus, cable, and telephone company VoD applications. The Company believes that with a set of strategic partners, which are discussed below, it is uniquely positioned to provide complete solutions. The Company believes the initial appeal of its VoD system will be its ability to deliver to its customers all the technological advantages that provide access on-demand to their specialized content, be it educational video resources, corporate records and training resources, government archive retrieval and legislative activities, or other content. The VoD technology will allow users to access digital video information whenever desired, eliminating the need for videocassettes and other analog formats. Budget constraints in the public sector 11 and downsizing in the corporate sector provide opportunities for the Company to introduce its cost-effective VoD solutions to a multi-billion dollar customer base in North America's schools, corporations, and government entities. The Company and its strategic allies are positioning for this mission by deploying technologies in arenas where it will be utilized immediately such as with students, educators, corporate leaders, and government workers who require continuous access to specialized video content. Through deployments to these customer bases, the Company will expose the users to the various specialized configurations available through the VoD technology which hopefully will lead the users to fully utilize emerging Internet video capabilities in their fields. The Company is using a number of market models to gain market entry with sales of video servers, content and services. One successful model is to partner with education content providers and to convert the videos from VHS tape directly to Wavelet encoded digital media. This gives the Company the ability to sell complete turnkey solutions with educational content, and should generate a distinct stream of licensing revenue. VoD can be extrapolated to cover a variety of "on-demand" information applications. Within each of these application areas, revenues can be generated from several sources, including services, systems, licenses, and advertising. Specifically, the Company plans to recognize revenue through sales of video and encoding servers, hardware, software and services, and contracted systems integration, design and support services. The Company has learned from its initial sales opportunities that its best success is going to be providing video services. Although the "early adopters" are buying the video servers and placing them on their own networks, most companies in discussions with the Company want the Company to host the video server and sell this as a service. This drastically reduces the costs to companies interested in VoD, as companies do not have to train employees on new hardware and software, no major capital expenditure is required, and no new management or maintenance of multiple networks is required. The Company provides all these services for a fee. The service to the customer is complete and turnkey. This type of service is of interest to both current and potential customers. Compared with short-term revenue from the one-time sale of video server services or hosting solutions, longer-term revenue is greater because it provides the Company a recurring revenue stream 12 with profit margins on all components of the services, including: . Hosting of video server; . Content management and encoding; and . Network setup and maintenance costs, primarily Internet. The cost of the services are amortized into the service charge to the customer, with a profit margin for the Company. The cost of these services will be standardized so that sales and channel representatives can quote these services on the spot. A pricing matrix is currently being developed for this purpose and the matrix will include the following pricing: . Compression method and MPEG 1, MPEG 2, MPEG 4 and Wavelet; . Encoding services by length of content, size and frames per second; . Amount of available concurrent users (streams), or broadcast method; . Length of time content is available on network; . Security of content; and . Whether content is to be delivered or archived on any media. The Company has completed agreements with UUNET in order to sell turnkey video on demand solutions and services. The Company's sales cycle is substantially reduced when selling video services, as clients typically do not need budget approvals or to budget for future purchasing periods due to the fact that no major capital outlay is required to purchase the service. The pricing matrix was completed in the fourth quarter of fiscal 1999. The Company will focus its marketing of total system solutions on the target markets it believes will not only benefit greatly from the VoD technology, but which are likely to be the most receptive to these solutions due to increasing budget allocations for technology, notably the: . Educational setting; . Corporate sector; and . Government agencies. These entities base their purchasing choices on the stability of the service provider, the total cost of ownership, the technology, and the service provider's ability to provide complete turn-key solutions, or specific components of the solution. The Company believes it has competitive advantages in all these areas and has the further advantage of a flexible set of support options. For the corporate and government markets, the Company will continue to use a direct sales approach until a suitable distribution channel for these markets is established. The Company plans to set up a General Services Administration ("GSA") listing once there is a steady amount of government orders. GSA listings simplify the purchasing process for government users by pre-qualifying the products, cost and services. 13 Strategic Alliances ------------------- During the first nine months of 1999, the Company expanded its management team, obtained European patents, added Wavelet compression technologies to standard MPEG offerings, founded Merging Rivers Media Corporation, a full- service ad subsidiary on the West Coast focusing on entertainment-related applications, and began generating sales and revenues. The Company is in active negotiations with a number of companies to establish partnerships and other alliances of mutual benefit. These alliances are updated regularly on the Company's website. The Company believes that the following alliances will play a central role in its ability to succeed in the marketplace: VIANET: The Company has a strategic alliance with Vianet Technologies, which is a research company that has developed a wavelet technology utilized by the Company. As part of this agreement, the Company will develop a Unix- compliant Wavelet codec, allowing for expansion of the market to include Unix- based operating systems such as those used by Sun Microsystems. UUNET: The Company has signed an agreement to co-locate its servers in the UUNET data center in Vienna, Virginia, and to collaborate in providing an overall package of Internet services as part of the Company's turnkey solution. EXODUS COMMUNICATIONS: The Company has a similar agreement with Exodus Communications for bandwidth and other services as well as access to Exodus Communications marketing organization and services. Exodus Communications hosts some 40 percent of the US corporate websites. Plan of Operation Over the Next Twelve Months --------------------------------------------- The Company has cash and other liquid assets with which to fund its business plan. However, it also will be necessary for the Company to sell additional common stock in order for it to put its business plan into operation. Specifically, the Company must raise the funds necessary to launch its products and services and continue research and development. If it can raise the funds to do so, the Company anticipates cash expenditures of between $2.5 million and $4 million. There can be no guarantee that the Company will be able to raise funds on acceptable terms, or at all. If the Company succeeds in raising additional funds through the sale of common stock, the ownership interest of holders of existing shares of the Company's common stock will be diluted. The principal aspects of its business plan for the next 12 months include the following: Organizational Expenses: The Company has incurred and will continue to incur organizational expenses, including legal and accounting fees, in connection with corporate matters, and raising the capital necessary to carry out its business plan. Marketing and Sales Expenses: In order to market and sell its services and products, the Company will incur expenses for salaries, for marketing and sales personnel, for renting and furnishing office space, for acquiring computers and software, and for telephone lines, Internet access, travel, and advertising. The Company will also incur expenses to expand its corporate website in order to support its marketing, sales, and customer support activities. These expenses will include the cost of fees for consulting services and for purchasing additional server hardware. Product Support Expense: The Company will incur expenses to hire personnel to provide technical support for customers who purchase its VoD product. 14 Administrative Expense: The Company will also incur expenses for hiring personnel and acquiring equipment for processing sales orders, and for routine administrative support of its operations. Product Development/Acquisition: The Company will incur expenses principally for fees paid to third parties for development of its products, or for the acquisition of the rights to other products. Research & Development: The Company has carried out some preliminary investigation into the development of an advanced Wavelet algorithm to adapt the existing Wavelet algorithm to other operating platforms such as Unix. Additional staff has been identified to commence development and integration of these algorithms into initial Wavelet properties. The program commenced during the first quarter of 2000. Employees: The Company currently has a total of 25 employees, consisting of 13 full-time employees. The Company anticipates that the number of employees will grow to 33 over the next year, including 3 in the sales division, 2 in the engineering division, 2 in the operations division, and 1 administrative person. Outlook: Issues and Uncertainties ---------------------------------- Business Risks This Form 10 contains forward-looking statements. The words, "anticipate", "believe", expect", "plan", "intend", "estimate", "project", "could", "may", "foresee", and similar expressions are intended to identify forward-looking statements. The following discussion and analysis should be read in conjunction with the Company's Financial Statements and Notes thereto and other financial information included elsewhere in this Form 10. This Form 10 contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual result could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Form 10. The Company operates in a highly competitive business, which has a number of inherent risks. These may be summarized as follows: 1. Limited Operating History: Because the Company has been in its development stage until recently, it is difficult to evaluate its business and prospects. The Company's revenue and income potential is not proven and its business model is still emerging. An investor in the Company's common stock must consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets. There can be no assurance that the Company's products and services will achieve commercial success and, if they do not, the price of the Company's common stock will decline. 2. Lack of Recent Profitable Operations: The Company has not achieved profitability. The Company expects to incur net losses for the foreseeable future and may never become profitable. The Company's net losses for the years ended December 31, 1999, 1998 and 1997 were $1,684,468, $981,598 and $678,156, respectively. The Company's limited operating history makes it difficult to forecast its future operating results. The Company expects to continue to increase its marketing and sales, product development and general and administrative expenses. As a result it will need to generate significant additional revenue and/or raise additional funds to achieve profitability. If the Company does achieve profitability, it cannot be certain that it sustain or increase it. 3. Competition: The Company's services compete against those of other established companies, some of which have greater financial, marketing and other resources than those of the Company. These competitors may be able to institute and sustain price wars, or imitate features of the Company's services, resulting in a reduction of Company's share of the market. In addition, there are no significant barriers to new competitors entering the market place. 4. Need for a Broad Customer Base: The Company will need to build and sustain a large customer base. Failure to do so may result in continued losses. 5. Reliance on New Products and Services: The Company's business and financial plans focus on products and services which are relatively new. There can be no assurance that existing sales levels, which are still quite small, can be maintained or that increased sales levels can be achieved. Internal cash generated by operations may not permit the level of research and development spending required to maintain the stream of new service improvements that may become necessary and outside financing may not be available. The Company is using certain relatively new software products and the developers of this software are, in some cases, still working to improve certain essential features of the software including a feature to allow the transfer of data to be done on a secure and confidential basis. 6. Obsolescence: The Company is at risk if it does not continue to upgrade and improve its services. Typically, the high technology industry is characterized by a consistent flow of new and improved products and services which render existing products and services obsolete. The Company's sales may decline if it is unable to adapt its products to changes in technology. The Company may incur significant expenses in developing new products and may not be successful in either developing such products or timely introducing them to the market. The Company will have to improve its methods for measuring the performance and commercial success of its different products to better respond to 15 customer demands for information on product effectiveness and to better determine which products and services can be developed most profitably. 7. Marketplace: The marketplace for the Company's services is relatively new and will be undergoing rapid and constant change. As a result, it is difficult to predict the continued demand for the Company's services. The Company's success is dependent on its ability to adjust to change and meet new demands. It is also dependent on continued use and expansion of the Internet and intranets. The Internet infrastructure may not be able to support the demands placed on it by continued growth. The growth in volume of Internet traffic may create instabilities in its structure such as shortages in Internet addresses and overworked search engines. Such instabilities may have an adverse affect on the Company's operations and business if they are not addressed. The Internet could also lose its viability due to delays in the development or adoption of new standards and protocols to handle increased levels of Internet activity, security, reliability, cost, ease of use, accessibility, and quality of service. 8. Management: The Company is dependent on a relatively small number of key employees to implement its business plan, the loss of any of whom may affect its ability to provide the required quality service and technical support to achieve and maintain a competitive market position. The Company does not have an employment agreement with any of the key employees, and, as a result, there is no assurance that they will continue to manage the Company's affairs in the future. The Company has not obtained any key man insurance with respect to such employees. 9. Marketing Plan: The Company's internal marketing plan is based on a number of assumptions which may or may not prove valid. Marketing expenditures are to be funded partly from the proceeds of private placements, exercise of stock options and warrants and cash flow from operations. Poor market acceptance of the Company's services or other unanticipated events may result in lower revenues than anticipated, making the planned expenditures on marketing and promotion unachievable. 10. Personnel and Resources: Limitations on the Company's personnel and resources may affect the ability of the Company to provide the required quality service and technical support to achieve and maintain a competitive market position. 11. Third Parties: The Company utilizes the services of third party contractors to provide certain technical services, telecommunications hardware, computers, software and communication lines. Therefore, the performance of the Company will be affected by the quality of the goods and services provided by, and the reputations of, such third parties. In addition, there can be no assurance that the Company will successfully maintain relationships and affiliations with third parties on terms satisfactory to the Company. An unanticipated termination of a relationship with any third party could adversely affect the Company's results of operations even if the Company were able to establish a relationship with an alternative third party. 12. Insurance Risks: The Company has not acquired liability insurance with respect to the provision of services by the Company. 13. Government Regulation of the Internet Possible: The laws and regulations applicable to the Internet and the Company's products and services are evolving and unclear and could damage the business. There are currently few laws or regulations directly applicable to access to the Internet. Due to the increasing popularity and use of the Internet, it is possible that laws and regulations may be adopted, covering issues such as user privacy, defamation, pricing, taxation, content regulation, quality of products and services, and intellectual property ownership and infringement. Such legislation could dampen the growth in use of the Internet, decrease the acceptance of the Internet as a communications and commercial medium, or require the Company to incur significant expenses in complying with any new regulations. Increased regulation or the imposition of access fees could substantially increase the costs of communication on the Internet, potentially decreasing the demand for the Company's services. A number of proposals have been made at the federal, state and local level that would impose additional taxes on the sale of goods and services through the Internet. Such proposals, if adopted, could substantially impair the growth of electronic commerce and could adversely affect the Company. Any new legislation or regulation in the United States or aboard or the application of existing laws and regulations to the Internet could damage the Company's business and cause the price of its common stock to decline. 16 14. Requirement of New Capital: The Company will need to continually expand and upgrade its infrastructure and systems and ensure high levels of service, speedy operation, and reliability. As a growing business, the Company typically needs more capital than it has available to it or can expect to generate through the sale of its services. In its short history, the Company has had to raise, by way of debt and equity financing, considerable funds to meet its needs. There is no guarantee that the Company will be able to continue to raise the funds needed for the Company's business. Failure to raise the necessary funds in a timely fashion will limit the Company's growth. 15. Year 2000 Issues: The Company's products did not require any significant modifications for the Year 2000. However, the Company may face Year 2000 issues as it seeks to coordinate with other entities with which it interacts electronically, including suppliers, customers and distribution partners. If the Company discovers that certain of its services need modification, or certain of its hardware and software is not year 2000 compliant, it will attempt to make modifications to its services and systems on a timely basis. The Company does not believe that the cost of these modifications will materially affect its operating results. However, it cannot provide assurance that it will be able to modify these products, services and systems in a timely, cost-effective and successful manner, and the failure to do so could have a material adverse effect on the Company's business and operating results. 16. Protection of Intellectual Property, Trade Secrets and Know-How: The Company regards its intellectual property as critical to its success and, therefore, it employs various methods, including trademarks, patents, copyrights and confidentiality agreements with employees, consultants and marketing partners, to protect its intellectual property and trade secrets. There can be no assurance, however, that the Company will be able to maintain the confidentiality of any of its proprietary technology, know-how or trade secrets, or that others will not independently develop substantially equivalent technology. The failure or inability to protect these rights could have a material adverse effect on the Company's results of operations. Furthermore, the Company cannot assure that its business activities will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims against the Company. Should it occur, such claims and any resultant litigation could subject the Company to significant liability for damages and could result in invalidation of its proprietary rights. Even if not meritorious, these potential claims could be time-consuming and expensive to defend or prosecute, and could result in the diversion of management time and attention away from the Company's business. 17. General Factors: The Company's areas of business may be affected from time to time by such matters as changes in general economic conditions, changes in laws and regulations, taxes, tax laws, prices and costs, and other factors of a general nature which may have an adverse effect on the Company's business. Risks Related to the Company's Securities 1. Issuance of Additional Shares: A substantial portion of the 250,000,000 authorized common shares of the Company are unissued. The Board of Directors has the power to issue such shares without shareholder approval. None of the 250,000,000 authorized preferred shares of the Company have been issued. The preferred shares may be issued in series from time to time with such designation, rights, preferences and limitations as the Board of Directors may determine by resolution and without shareholder approval. There are outstanding warrants and options whose holders may acquire additional common shares. The Company fully intends to issue additional common shares or preferred shares if necessary in order to acquire products, properties, capital, businesses or for any other corporate purposes. Any additional issuances by the Company from its authorized but unissued shares would have the effect of further diluting the percentage interest of existing shareholders. 2. Cumulative Voting and Preemptive Rights: There are no pre-emptive rights in connection with the Company's common shares. Cumulative voting in the election of directors is not permitted. Accordingly, the holders of a majority of the common shares, present in person or by proxy, will be able to elect all of the Company's Board of Directors. 17 3. Concentration of Ownership: The Executive Officers and Directors own or exercise full or partial control over more than 20% of the Company's outstanding shares. As a result, other investors in the Company's common shares may not have as much influence on corporate decision making. 4. Preferred Stock Change in Control: Preferred Stock may be issued in series from time to time with such designation, rights, preferences and limitations as the Board of Directors may determine by resolution. The Board of Directors could use an issuance of Preferred Stock with dilutive or voting preferences to delay, defer or prevent a change in control of the Company. In addition, the concentration of control over the Company's common stock in the Directors and Executive Officers could prevent any change in control of the Company not acceptable to the existing Directors and Executive Officers. 5. Estimates and Financial Statements: Some of the information in this Form 10 consists of and relies upon evaluations and estimates made by management and other professionals. Even though management believes in good faith that such estimates are reasonable, based upon market studies and data provided by sources knowledgeable in the field, there can be no assurance that such estimates will ultimately be found to be accurate or even based upon accurate evaluations. Any management errors in evaluations or estimates could have a significant negative effect upon the Company's profitability or even its viability. 6. No Foreseeable Dividends: The Company has not paid dividends on its common shares and does not anticipate paying dividends on its common shares in the foreseeable future. 7. Possible Volatility of Securities Prices: The market for the Company's stock is highly volatile and will likely continue to behave in this manner in the future. Additionally, market prices for securities of many smaller companies have experienced wide fluctuations not necessarily related to the operating performance of the companies themselves. The stock markets may continue to experience volatility that may inflate or deflate the market price of the Company's common stock. 8. Requirements of SEC With Regard to Low-Priced "Penny Stock" Securities: The Company's securities are subject to Rule 15g-9 under the 1934 Act, which imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and "accredited investors" (generally, an individual with a net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, the rule may adversely affect the ability of broker-dealers to sell the Company's securities and may adversely affect the ability of shareholders to sell their shares in the secondary market. 9. Limited Liability of Executive Officers and Directors: The Company's by-laws contain provisions that limit the liability of directors for monetary damages and provide for indemnification of officers and directors under certain circumstances. These provisions may discourage shareholders from bringing a lawsuit against the directors for breaches of fiduciary duty and may also reduce the likelihood of derivative litigation against directors and officers even though such action, if successful, might otherwise have benefited the shareholders. In addition, a shareholder's investment in the Company may be adversely affected to the extent that costs of settlement and damage awards against the officers or directors are paid by the Company pursuant to the indemnification provisions of the articles of incorporation and by-laws. The impact on a shareholder's investment in terms of the cost of defending a lawsuit may deter a shareholder from bringing suit against one of the Company's officers or directors. Financial Information About Industry Segments The information in the financial statements provided with this registration statement are incorporated by reference as though set forth here. 18 ITEM 2. Financial Information Selected Financial Data The following selected financial data reflects the fact that the Company is emerging from its development stage and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition", "Plan of Operations Over the Next Twelve Months" and the financial statements appearing elsewhere in this registration statement.
- -------------------------------------------------------------------------------------------------------- Item 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- Revenue $ 20,500 $ 0 $ 0 $ 0 $ 0 - -------------------------------------------------------------------------------------------------------- Income / Loss ($1,657,078) ($ 981,598) ($ 678,156) ($ 658,983) ($ 3,168,518) - -------------------------------------------------------------------------------------------------------- Income / Loss per share ($ 0.03) ($ 0.02) ($ 0.02) ($ 0.03) ($ 0.22) - -------------------------------------------------------------------------------------------------------- Total assets $ 995,351 $ 435,232 $ 418,354 $ 470,553 $ 303,260 - -------------------------------------------------------------------------------------------------------- Long-term obligations $ 0 $ 0 $ 0 $ 0 $ 0 - -------------------------------------------------------------------------------------------------------- Cash dividends per share $ 0 $ 0 $ 0 $ 0 $ 0 - --------------------------------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- This Form 10 contains forward-looking statements. The words, "anticipate", "believe", expect", "plan", "intend", "estimate", "project", "could", "may", "foresee", and similar expressions are intended to identify forward-looking statements. The following discussion and analysis should be read in conjunction with the Company's Financial Statements and Notes thereto and other financial information included elsewhere in this Form 10. This Form 10 contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Form 10. Revenue The Company has not earned any significant revenue during the last two fiscal years. Revenue-generating contracts have been signed in the first quarter 2000. 19 The Company provides a number of revenue generating services to the interactive video industry, including: . Content encoding services to all MPEG and Wavelet formats on any media; . Deployment of media services and related equipment; . Requirements analysis and application development for media server applications, installation and deployment of complete digital video management solutions including network infrastructure; . Customization of user friendly browser-based video management tools for off-the-shelf media servers; . Content Services -- negotiating and finalizing agreements pertaining to the production, distribution, and exhibition of VoD (Programming Division); and . Post-sale technical support options and packages. The Company has an encoding suite at its facilities in Mystic, Connecticut, for encoding content. The Company's systems integration team provides engineering and installation services to customers who are implementing interactive video solutions. Services can be provided for an end-to-end solution for the customer or a specific area within a project. 20 General and Administrative Expenses General administrative expenses remained constant during the fiscal years 1998 and 1997. Both of these years resulted in a 30% decrease in expenses from 1996. Management fees were reduced significantly in 1998 and 1997 as the former President, Gordon Lee, resigned his position as President and his contract was settled and discontinued. Product marketing costs rose significantly during 1998 as the Company commenced a marketing program for its technology. Liquidity and Capital Resources The Company has historically satisfied its capital needs primarily by issuing equity securities. Its operating activities used $1,600,900, $698,224 and $651,072 for the years ended December 31, 1999, 1998 and 1997, respectively. To fund its operations, the Company generated $2,227,186, $977,630 and $937,126 in 1999, 1998 and 1997, respectively, through sales of its common stock. The operation, development and expansion of the Company's business will likely require additional capital infusions for the foreseeable future. The Company plans to manage its payables balances and satisfy its operating and capital needs partially from cash generated by operating activities and partially through sales of equity securities. Exposure to Market Risk ----------------------- The Company believes its exposure to overall foreign currency risk is immaterial. The Company does not manage or maintain market risk sensitive instruments for trading or other purposes and is, therefore, not subject to multiple foreign exchange rate exposures. The Company reports its operations in US dollars and its currency exposure, although considered by the Company as immaterial, is primarily between the US and Canadian dollars. Exposure to the currencies of other countries is also immaterial as international transactions are settled in US dollars. Any future financing undertaken by the Company will be denominated in US dollars. As the Company increases its marketing efforts, the related expenses are basically in US dollars except for the marketing efforts in Canada. If these advertisements are coordinated through a US agency, then the expenses are in US dollars. The Company is not exposed to the effects of interest rate fluctuations as it does not carry any long-term debt. ITEM 3. Properties The Company's headquarters and executive offices are located at 70 Essex Street, Unit 1C, Mystic, Connecticut 06355 and the telephone number is (800) 625-2200. The Company leases this space on an annual basis from Wharf Building Associates at a monthly rent fee of $1,509.00. The Company also has additional office space at 100 Essex Street, Unit 1A, Mystic, Connecticut 06355. The Company leases this space on an annual basis from Mystic Shipyard, LLC at a monthly rent fee of $1,700.00. 21 The Company also has corporate offices located at Suite 507, 837 West Hastings Street, Vancouver, British Columbia, V6C 3N6 and the telephone number is (604) 685-1017. The Company leases this space on a month-to-month basis from Graystone Property Management Ltd. at a monthly rent fee of U.S. $1,780.00. The Company paid a security deposit of U.S. $20,500.00 upon leasing the property. The Company believes that its present facilities will be suitable for the operation of its business for the foreseeable future. The facilities are adequately insured against perils commonly covered by business insurance policies. These locations could be replaced without significant disruption to the Company. ITEM 4. Security Ownership of Certain Beneficial Owners and Management The following table sets forth as of January 31, 2000, the outstanding common shares of the Company owned of record or beneficially by each Executive Officer and Director and by each person who owned of record, or was known by the Company to own beneficially, more than 5% of the Company's common shares, and the shareholdings of all Executive Officers and Directors as a group.
- --------------------------------------------------------------------------------------------------------- Name Shares Owned Percentage of Shares Owned - --------------------------------------------------------------------------------------------------------- Edwin Molina (1) 5,085,400 6.59% President, Chief Executive Officer and member of the Board of Directors - --------------------------------------------------------------------------------------------------------- Anton J. Drescher (2) 5,334,385 7.03% Chief Financial Officer, Secretary and member of the Board of Directors - --------------------------------------------------------------------------------------------------------- Ronald L. Patton (3) 1,002,000 1.35% Chief Technical Officer - --------------------------------------------------------------------------------------------------------- Anthony J. Castagno (4) 1,513,000 2.02% Chief Operating Officer - --------------------------------------------------------------------------------------------------------- Gerhard J. Drescher (5) 271,598 0.37% Director - --------------------------------------------------------------------------------------------------------- Norman Bonin (6) 50,000 0.07% Director - --------------------------------------------------------------------------------------------------------- ALL EXECUTIVE OFFICERS & DIRECTORS AS A 15,710,383 21.14% GROUP (7 Persons) (7) - ---------------------------------------------------------------------------------------------------------
Except as noted below, all shares are held of record and each record shareholder has sole voting and investment power. 1) Includes 1,200,000 options and 1,685,000 warrants that are currently exercisable. Mr. Molina's address is the same as the Company's executive offices in Mystic, Connecticut. 2) Includes 1,000,000 options and 520,000 warrants that are currently exercisable. Mr. Drescher's address is the same as the Company's corporate office in Vancouver, British Columbia. 3) Includes 50,000 warrants. Mr. Patton's address is the same as the Company's executive offices in Mystic, Connecticut. 4) Includes 470,000 warrants. Mr. Castagno's address is the same as the Company's executive offices in Mystic, Connecticut. 5) Includes 50,000 options and 221,598 warrants that are currently exercisable. Mr Drescher's address is the same as the Company's corporate office in Vancouver, British Columbia. 6) Includes 50,000 options that are currently exercisable. Mr Bonin's address is the same as the Company's corporate office in Vancouver, British Columbia. 7) Includes 2,450,000 options and 3,275,000 warrants that are currently exercisable. There are no arrangements known to the Company the operation of which may result in a change of control of the Company. 22 ITEM 5. Directors and Executive Officers The following table sets forth the name, age and position of each director and executive officer of the Company:
- ------------------------------------------------------------------------------------------------------- NAME AGE POSITION PERIOD SERVED - ------------------------------------------------------------------------------------------------------- Edwin Molina 44 Director, Chief Executive Officer and President since 1998 - ------------------------------------------------------------------------------------------------------- Anton J. Drescher 43 Director, Chief Financial Officer and Secretary since 1994 - ------------------------------------------------------------------------------------------------------- Gerhard J. Drescher 39 Director since 1992 - ------------------------------------------------------------------------------------------------------- Norman J. Bonin 47 Director since 1998 - ------------------------------------------------------------------------------------------------------- Anthony J. Castagno 50 Chief Operating Officer since 1998 - ------------------------------------------------------------------------------------------------------- Ronald L. Patton 45 Chief Technical Officer since 1999 - ------------------------------------------------------------------------------------------------------- Daniel L. Sciro 34 Vice-President, Sales since 1998 - -------------------------------------------------------------------------------------------------------
Gerhard Drescher, Anton Drescher, Edwin Molina and Norman Bonin were elected directors of the Company in June 1999. Each director will serve until the next annual meeting of shareholders and their respective successors are elected and qualified. Executive Officers, Directors and Other Significant Employees of the Company: Edwin Molina - President, Chief Executive Officer and Director - -------------------------------------------------------------- Mr. Molina served as a Senior Administrator with the Company from June 1992 to June 30, 1998, when he was appointed as President, Principal Executive Officer and a member of the Board of Directors. Prior to joining the Company he was a Senior Administrator with Adnet USA LLC, a private California company, from May 1996 to June 1998. Mr. Molina was also a Senior Administrator with Future Link Systems Inc., a Vancouver Stock Exchange listed company, from January 1988 to June 1992. Mr. Molina works a minimum of 60 hours per week on Company activities. His duties include overseeing all activities of the Company including providing strategic direction, managing and directing personnel and budgets, overseeing the activities of other corporate officers and staff, and directly overseeing all investor-related activities of the Company. Anton J. Drescher - Chief Financial Officer, Secretary and Director - ------------------------------------------------------------------- Mr. Drescher has been Chief Financial Officer of the Company since December 1994. He has been a Certified Management Accountant since 1981. He has been a director and Secretary/Treasurer of Future Link Systems Inc. since 1997; Director and Secretary/Treasurer of Interlink Systems Inc., a public company listed on The Canadian Dealing Network, since 1996; President of Westpoint Management Consultants Limited, a private British Columbia company, since 1979; President of Harbour Pacific Capital Corp., a private British Columbia company, since 1998. Gerhard Drescher and Anton Drescher are brothers. Mr. Drescher works a minimum of 60 hours per week on Company activities. His duties include overseeing all financial activities of the company including direct oversight of budgets, accounts receivable and accounts payable, interactions with regulatory authorities in the United States and Canada, and consultation on strategic direction. Gerhard J. Drescher - Director - ------------------------------ Mr. Drescher has been a director of the Company since February 1992. Mr. Drescher is the President and sole shareholder of Python Technologies Ltd., of Vancouver, British Columbia, an electronics consulting firm, since 1989. He has been a director of Future Link Systems Inc. since 1994. 23 Norman J. Bonin - Director - -------------------------- Mr. Bonin has been a director of the Company since June 1998. Mr. Bonin is President and a director of Direct Disposal Corp., a private British Columbia company, since 1993. He has been a director of Future Link Systems Inc. since 1998. Anthony J. Castagno - Chief Operating Officer - --------------------------------------------- Mr. Castagno has been with the Company since December 1998. Mr. Castagno provides business development, investment and marketing strategy. He also is President of The Rowe Group, an independent consulting firm specializing in start-up and rapidly growing high-tech companies. Mr. Castagno has more than 20 years business, corporate public relations and marketing experience, teaches Mass Media and Communications at the University of Connecticut, and has authored numerous articles and reference materials. Mr. Castagno works a minimum of 60 hours per week on Company activities. His duties include providing strategic direction and overseeing all marketing, sales, public relations and media relations, initiating and negotiating contracts, overseeing technological fulfillment of contracts, and overseeing day-to-day operations of the Company. Ronald L. Patton - Chief Technical Officer - ------------------------------------------ Mr. Patton has been with the Company since January 1999. Mr. Patton formerly served for 20 years as Vice President of Integrated Performance Decisions at Analysis & Technology and Senior Vice President of Research and Development at Sonalysts, Inc. He worked with a team from Paramount Pictures to create special audio effects for "Hunt for Red October," which received an Academy Award for sound effects. Mr. Patton works a minimum of 60 hours per week on Company activities. His duties include directing and overseeing all technology activities of the Company, including developing and modifying products and services to support sales and marketing; developing new products and services to introduce to market, and directing a team of technology professionals. Daniel J. Sciro - Vice-President, Sales - --------------------------------------- Mr. Sciro has been with the Company since June 1998. Mr. Sciro previously served as President of two telecommunication companies based in New York. He developed and deployed global telecommunication technologies for clients including the U.S. government, supplying ship-to-shore communication technology during the Gulf War. Mr. Sciro works a minimum of 60 hours per week on Company activities. His duties include developing and implementing sales and sales strategies, establishing new clients and designing systems to meet the requirements of clients, negotiating contracts, and directing a teams of sales professionals. 24 ITEM 6. Executive Compensation Compensation of "Named Executive Officers" The following table sets forth compensation awarded to, earned by or paid to Named Executives for the designated fiscal years. Other than set forth below, no employee of the Company earned salary and bonus of $100,000 or more in fiscal year 1999. Summary Compensation Table
Long Term Compensation ---------------------------------------------- Annual Compensation Awards Payouts - ------------------------------------------------------------------------------------------------------------ Name Other Securities and Annual Restricted Underlying Principal Compen- Stock Options/ LTIP All Other Position Year Salary ($) Bonus ($) sation ($) Award(s) ($) SARs (#) Payouts ($) Compensation ($) - --------------------------------------------------------------------------------------------------------------------------- Molina, 1999 $120,000(1) $200,665 1,200,000 Edwin (5) (CEO) 1998 $ 60,500 $ 3,172 1,300,000 (6) (1) 1997 250,000 - --------------------------------------------------------------------------------------------------------------------------- Drescher, 1999 $120,000(2) $159,025 1,000,000 Anton (7) (CFO) 1998 $ 77,270 $ 34,429 1,000,000 (8) 1997 $ 65,517 $ 27,782 500,000 (9) - --------------------------------------------------------------------------------------------------------------------------- Patton, 1999 $120,000(3) $ 49,580 500,000 Ronald (10) (CTO) - --------------------------------------------------------------------------------------------------------------------------- Castagno, 1999 $120,000(4) $194,300 250,000 Anthony (11) (COO) - ---------------------------------------------------------------------------------------------------------------------------
(1) Of the $120,000 paid to Mr. Molina in 1999, $24,000 consisted of management fees and $96,000 consisted of product marketing fees. (2) The entire $120,000 paid to Mr. Drescher in 1999 consisted of consulting fees. (3) Of the $120,000 paid to Mr. Patton in 1999, $60,000 consisted of product marketing fees and $60,000 consisted of product development fees. (4) Of the $120,000 paid to Mr. Castagno in 1999, $36,000 consisted of consulting fees, $36,000 consisted of office assistance fees, $12,000 consisted of public relations fees and $36,000 consisted of product marketing fees. (5) On February 23, 1999, Mr. Molina exercised 100,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $2,680.00. On March 9, 1999, Mr. Molina exercised 200,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $4,020.00. On March 22, 1999, Mr. Molina exercised 100,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $2,010. On April 7, 1999, Mr. Molina exercised 50,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $10,050.00. On May 3, 1999, Mr. Molina exercised 100,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $32,830.00. On June 18, 1999, Mr. Molina exercised 250,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $149,075.00. (6) On May 6, 1998, Mr. Molina exercised 250,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $3,350.00. On November 3, 1998, Mr. Molina exercised 100,000 options at an exercise price of $0.067 per option, resulting in compensation of $0.00. On November 10, 1998, Mr. Molina exercised 150,000 stock options at an exercise price of $0.067 per option, resulting in a realized value of ($1,005.00). On December 17, 1998, Mr. Molina exercised 250,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $827.00. (7) On February 2, 1999, Mr. Drescher exercised 200,000 stock options at an exercise price of $0.067 per option, resulting in a realized value of ($2,010.00). On February 17, 1999, Mr. Drescher exercised 300,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $15,075.00. On March 9, 1999, Mr. Drescher exercised 100,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $2,010.00. On April 28, 1999, Mr. Drescher exercised 250,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $55,275.00. On May 26, 1999, Mr. Drescher exercised 100,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $36,850.00. On June 10, 1999, Mr. Drescher exercised 50,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $38,860.00. In 1999, Mr. Drescher received interest on loans to the Company in the amount of $12,965.00 (8) On January 28, 1998, Mr. Drescher exercised 500,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $10,050.00. In 1998, Mr. Drescher received interest on loans to the Company in the amount of $24,379.00. (9) On June 20, 1997, Mr. Drescher exercised 500,000 stock options at an exercise price of $0.072 per option, resulting in a realized value of ($1,800.00). In 1997, Mr. Drescher received interest on loans to the Company in the amount of $29,582.00. (10) On May 12, 1999, Mr. Patton exercised 100,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $49,580.00. (11) On July 6, 1999, Mr. Castagno exercised 250,000 stock options at an exercise price of $0.067 per option, resulting in compensation of $194,300.00. 25 The following table sets forth certain information concerning grants of stock options pursuant to stock option plans to the Named Executive Officer during the year ended December 31, 1999. OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term - ----------------------------------------------------------------------------------------------------------------------- % of Total Options / Number of SARs Market Securities Granted to Price Underlying Employees on Options/SARs in Fiscal Exercise Date of Expira- Granted Year (1) Price Grant tion ($/Sh) ($/Sh) Date 0% ($) 5% ($) 10% ($) - ----------------------------------------------------------------------------------------------------------------------- Molina, 1,200,000 23.53% $ 1.00 $ 1.04 7/16/01 $48,000 $110,400 $172,800 Edwin - ----------------------------------------------------------------------------------------------------------------------- Drescher, 1,000,000 23.53% $ 1.00 $ 1.04 7/16/01 $40,000 $ 92,000 $144,000 Anton - ----------------------------------------------------------------------------------------------------------------------- Patton, 500,000 11.76% $0.067 $0.065 1/31/01 $ 625 $ 2,250 Ronald - ----------------------------------------------------------------------------------------------------------------------- Castagno, 250,000 5.88% $0.067 $0.060 1/12/01 N/A N/A Anthony - -----------------------------------------------------------------------------------------------------------------------
(1) A total of 4,250,000 stock options were granted to employees in 1999. The following table sets forth certain information concerning exercises of stock options pursuant to stock option plans by the Named Executive Officer during the year ended December 31, 1999 and stock options held at year end. Aggregated Option / SAR Exercises in Last Fiscal Year and FY-End Option / SAR Values
- -------------------------------------------------------------------------------------------------------------------- Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options / SARs Options / SARs at FY-End (#) at FY-End ($) Shares Acquired Exercisable / Exercisable / Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable(1) - -------------------------------------------------------------------------------------------------------------------- Molina, Edwin 800,000 $200,665 1,200,000 / 0 N/A (2) / $0 - -------------------------------------------------------------------------------------------------------------------- Drescher, Anton 1,000,000 $146,060 1,000,000 / 0 N/A (3) / $0 - -------------------------------------------------------------------------------------------------------------------- Patton, Ronald 100,000 $ 49,580 400,000 / 0 $ 365,200 / $0 - -------------------------------------------------------------------------------------------------------------------- Castagno, Anthony 250,000 $194,300 0 / 0 $ 0 / $0 - --------------------------------------------------------------------------------------------------------------------
(1) On December 31, 1999, the average of the high and low price of the stock trading on the OTC BB was $0.98. (2) Mr. Molina's 1,200,000 options, with an exercise price of $1.00, were not in-the-money based on the December 31, 1999 closing price of $0.98 per share for the Company's common stock. (3) Mr. Drescher's 1,000,000 options, with an exercise price of $1.00, were not in-the-money based on the December 31, 1999 closing price of $0.98 per share for the Company's common stock. 26 Compensation of Directors Directors receive no compensation for their service as such, although they do receive reimbursement for consulting services provided to the Company. In addition to Mr. Molina, Mr. Anton Drescher, Mr. Gerhard Drescher and Mr. Bonin each were granted options to purchase an aggregate of 2,300,000 common shares of the Company, due in part to their service as directors. All of the options are fully vested, have an exercise price of $1.00 per share and must be exercised by July 16, 2001. The Company has no obligation or policy to grant stock options to directors. Employment Contracts The Company does not have an employment contract with Mr. Molina and it has no obligation to provide compensation to him in the event of his resignation, retirement or termination, or a change in control. The Company may in the future create retirement, pension, profit sharing, insurance and medical reimbursement plans covering its Executive Officers and Directors. At the present time no such plans exist. No advances have been made or are contemplated by the Company to any of its Executive Officers or Directors. ITEM 7. Certain Relationships and Related Transactions Transactions with Management and Others --------------------------------------- No director, executive officer or nominee for election as a director of the Company, and no owner of five percent or more of the Company's outstanding shares or any member of their immediate family has entered into or proposed any transaction in which the amount involved exceeds $60,000. Executive officers have received fees for services rendered as indicated in the Executive Compensation section of the Form 10 in the Summary Compensation Table under the heading Salary. Certain Business Relationships ------------------------------ No directors or nominee for director is or has been during the Company's last fiscal year an executive officer or beneficial owner of more than 10% of any other entity that has engaged in a transaction with the Company in excess of 5% of either company's revenues or assets. Indebtedness of Management -------------------------- There are no persons who are directors, executive officers of the Company, nominees for election as a director, immediate family members of the foregoing, corporations or organizations (wherein the foregoing are executive officers or partners, or 10% of the shares of which are directly or beneficially owned by the foregoing), trusts or estates (wherein the foregoing have a substantial beneficial interest or as to which the foregoing serve as a trustee or in a similar capacity) are indebted to the Company in an amount in excess of $60,000. 27 ITEM 8. Legal Proceedings The following are pending legal proceedings in which the Company is a party: 1. USA Video Interactive Corp. v. Wegener Communications, Inc. ----------------------------------------------------------- This case was commenced by the Company against Wegener Communications, Inc., a Georgia corporation, on January 7, 2000 in the U.S. District Court for the District of Connecticut. The facts of the case follow. In early February, 1999, the defendant agreed to pay the Company five percent of the value of any orders from customers referred to it by the Company. In reliance on this agreement, the Company expended efforts to find the defendant compatible clients and introduced the defendant to Autotote Communications. The defendant secured a contract with Autotote Communications worth $4 million. The defendant failed to pay the Company the agreed upon commission of five percent and this suit was ultimately commenced to seek relief in the form of compensatory damages, punitive damages, and attorney fees. 2. USA Video Interactive Corp. and Merging Rivers Media Corp. v. Rafael -------------------------------------------------------------------- O. Quezada - ---------- This case was commenced by the Company and its subsidiary, Merging Rivers Media Corp., against Rafael O. Quezada, former president of Merging Rivers, on January 10, 2000 in the U.S. District Court for the District of Connecticut. The facts of the case follow. In mid-April, 1999, the Company entered into a Confidentiality and Non-Disclosure Agreement with the defendant, prohibiting him from disclosing and using the Company confidential information without prior written consent of the Company. The Agreement also provided that the Company would retain all publication and ownership rights to all intellectual property. In mid-June, 1999, the Company and Merging Rivers entered into a Consulting Agreement with the defendant which provided that the defendant was to represent Merging Rivers and the Company to clients and prospective clients for purposes of selling video and other multimedia advertising. At the end of July, 1999, the Company provided a laptop computer to the defendant containing proprietary information. The defendant later registered domain names and trademarks in his own name, charging the expenses to the Company. While a consultant to the Company and president of Merging Rivers, the defendant sought employment with a competitor to work on an identical project for which he was doing work for the Company. Following termination of his consulting agreement with the Company and his employment with Merging Rivers, the defendant interfered with a business relationship between the Company and one of its customers. The plaintiffs are seeking full compensatory and consequential damages, an award of treble damages, and other equitable relief. 28 3. SABA Energy Ltd. v. USA Video Interactive Corp. ----------------------------------------------- This case was commenced by SABA Energy Ltd. against the Company on October 23, 1996 in the Court of Queen's Bench of Alberta Judicial Centre of Calgary. This case involves a failed assignment of a Petroleum and Natural Gas Lease. The plaintiff and the Company entered into an agreement to transfer the rights to the Lease. The Company registered the assignment of the Lease but failed to register the well licenses with Alberta Energy. The agreement provides that the Company indemnify the plaintiff for any liability, loss, claim or damages arising out of any act, omission, matter or thing done by the defendant. In May, 1995, the Company failed to pay rent for the Lease and failed to take responsibility for abandoning the wells. On April 14, 1997, a Default Judgment was awarded to SABA Energy Ltd. in the amount of Cdn $78,265.53 including interest and taxable costs. A settlement was reached between the parties on March 3, 2000, in the Amount of Cdn. $76,000, which has been paid in full by the company. The settlement fully releases and discharges the company from further liability in this case. 4. DCC Building #4 Limited Partnership v. USA Video Corporation ------------------------------------------------------------ This case was commenced by DCC Building #4 Limited Partnership against USA Video Corporation, a subsidiary of the Company, on September 7, 1995 in the District Court of Dallas County, Texas. A default judgment was entered by the court on November 10, 1995. There is a contingent liability in the amount of $505,169 ($25,399 included in accounts payable December 31, 1998) in respect to the default judgment entered against USA Video Corporation. This suit was in regard to a lease of premises by USA Video Corporation in Dallas, Texas. USA Video Corporation vacated the premises in Dallas, Texas during the year ended December 31, 1995 and a claim was made to the company for the total amount payable under the terms of the lease through the term of the lease, ending in 2002. Management of the Company is of the opinion that the amount payable under the terms of this judgment is not determinable at this time as the damages may be substantially mitigated by the landlords renting the property to another party. Settlement talks are underway. Any settlement resulting from the resolution of this contingency will be accounted for during the year of the settlement. To the knowledge of the Company's Executive Officers and Directors, the Company is not a party to any other legal proceeding or litigation and none of its property is the subject of a pending legal proceeding. Further, the Officers and Directors know of no other threatened or contemplated legal proceedings or litigation. 29 ITEM 9. Market Price of and Dividends on the Company's Common Equity and Related Stockholder Matters There is a limited public market for the common shares of the Company which currently trades on the Canadian Venture Exchange under the symbol "US" where it has been traded since February 23, 1995 and on the NASD OTC Bulletin Board under the symbol "USVO" where it has been traded since February 22, 1995. The following quotations reflect inter-dealer prices, without retail mark-up, mark- down or commission and may not represent actual transactions: Canadian Venture Exchange (Symbol "US") Quarter High * Low * ------- ---- --- (Cdn $) (Cdn $) First Quarter 1998 .245 .105 Second Quarter 1998 .18 .075 Third Quarter 1998 .18 .07 Fourth Quarter 1998 .115 .06 First Quarter 1999 .80 .07 Second Quarter 1999 1.83 .25 Third Quarter 1999 1.69 1.02 Fourth Quarter 1999 1.65 .90 * The prices are high and low sale prices. This information was provided by Bloomberg Professional. OTC Bulletin Board (Symbol "USVO") Quarter High * Low * ------- ---- --- ($US) ($US) First Quarter 1998 0.13 0.08 Second Quarter 1998 0.01 0.03 Third Quarter 1998 0.12 0.04 Fourth Quarter 1998 .063 0.035 First Quarter 1999 0.75 0.045 Second Quarter 1999 1.95 0.16 Third Quarter 1999 1.17 0.66 Fourth Quarter 1999 1.39 0.62 * The prices are high and low bid prices. This information was provided by NASDAQ, Trading & Marketing Services. As of January 31, 2000, there were 74,322,089 common shares outstanding, held by 1,118 shareholders of record and by various broker/dealers on behalf of an indeterminate number of street 30 name shareholders. To date the Company has not paid any dividends on its common shares and does not expect to declare or pay any dividends on such common shares in the foreseeable future. Payment of any dividends will depend upon future earnings, if any, the financial condition of the Company, and other factors as deemed relevant by the Company's Board of Directors. ITEM 10. Recent Sales of Unregistered Securities Set forth below is information regarding the issuance and sales of securities of the Company without registration for the past three (3) years. No such sales involved the use of an underwriter and no commissions were paid in connection with the sale of any securities. a) In January, 2000, the Company concluded an offering of units. Each unit consisted of one common share and one warrant to acquire an additional share at $1.10 per share by January 26, 2002. On completion of the offering, a total of 250,000 units were issued at $4.00 per unit for total proceeds of $1,000,000.00. The offer and sale of the units were exempt from registration under Rule 506 of Regulation D and under Section 4(2) of the Securities Act of 1933. The Company limited the manner of the offering and there were no non- accredited investors. If the foregoing exemptions are not available, the Company believes that $200,000.00 of these sales were also exempt under Regulation S under the Securities Act of 1933, as amended, due to the foreign nationality of the relevant purchasers. b) During the period ended February, 2000, the Company issued 825,000 shares pursuant to warrants exercised at $0.068 per share for total proceeds of $55,997.00. The shares acquired were exempt from registration under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2), respectively, of the Securities Act of 1933. The Company has made publicly available financial and disclosure information with its filings to the Canadian Venture Exchange. The Company limited the manner of the offering and there were less than five (5) non-accredited investors. The Company believes that a portion of these sales were also exempt under Regulation S under the Securities Act of 1933, as amended, due to the foreign nationality of the relevant purchasers. c) In July 1999, the Company concluded an offering of units. Each unit consisted of one common share and one warrant to acquire an additional share at $1.10 per share by July 15, 2001. On completion of the offering, a total of 750,000 units were issued at $1.00 per unit for total proceeds of $750,000.00. The offer and sale of the units were exempt from registration under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2), respectively, of the Securities Act of 1933. The Company limited the manner of the offering and the number of non-accredited investors to five (5) investors. If the foregoing exemptions are not available, the Company believes that $150,000.00 of these sales were also exempt under Regulation S under the Securities Act of 1933, as amended, due to the foreign nationality of the relevant purchasers. d) In May 1999, the Company concluded an offering of units. Each unit consisted of one common share and one warrant to acquire an additional share at $0.49 per share by May 19, 2001. On completion of the offering, a total of 500,000 units were issued at $0.395 per unit for total proceeds of $197,400.00. The offer and sale of the units were exempt from registration under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2), respectively, of the Securities Act of 1933. The Company limited the manner of the offering and the number of non-accredited investors to four (4) investors. If the foregoing exemptions are not available, the Company believes that $38,493.00 of these sales were also exempt under Regulation S under the Securities Act of 1933, as amended, due to the foreign nationality of the relevant purchasers. e) In March 1999, the Company concluded an offering of units. Each unit consisted of one common share and one warrant to acquire an additional share at $0.13 per share by March 23, 2001. On completion of the offering, a total of 1,000,000 units were issued at $0.114 per unit for total proceeds of $114,293.00. The offer and sale of the units were exempt from registration under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2), respectively, of the Securities Act of 1933. The Company limited the manner of the offering and the number of non-accredited investors to two (2) investors. If the foregoing exemptions are not available, the Company believes that $40,003.00 of these sales were also exempt under Regulation S under the Securities Act of 1933, as amended, due to the foreign nationality of the relevant purchasers. f) In January 1999, the Company concluded an offering of units. Each unit consisted of one common share and one warrant to acquire an additional share at $0.67 per share by March 23, 2001. On completion of the offering, a total of 2,000,000 units were issued at $0.067 per unit for total proceeds of $133,574.00. The offer and sale of the units were exempt from registration under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2), respectively, of the Securities Act of 1933. The Company limited the manner of the offering and the number of non-accredited investors to two (2) investors. If the foregoing exemptions are not available, the Company believes that $48,421.00 of these sales were also exempt under Regulation S under the Securities Act of 1933, as amended, due to the foreign nationality of the relevant purchasers. g) During the year ended December 31, 1999, the Company issued 4,881,000 shares pursuant to options exercised at between $0.067 and $1.00 per share for total proceeds of $405,895.00. The sale of the shares was exempt from registration under Rule 701 under the Securities Act of 1933. The sales were made on exercise of grants under the Company's written share option plan, a copy of which the Company has provided to its participants. 31 h) During the year ended December 31, 1999, the Company issued 5,095,000 shares pursuant to warrants exercised at between $0.067 and $0.294 per share for total proceeds of $626,024.00. The shares acquired were exempt from registration under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(c), respectively, of the Securities Act of 1933. The Company has made publicly available financial and disclosure information with its filings to the Canadian Venture Exchange. The Company limited the manner of the offerings and there were less than ten (10) non-accredited investors in each offering. The Company believes that a portion of these sales were also exempt under Regulation S under the Securities Act of 1933, as amended, due to the foreign nationality of the relevant purchasers. i) In September 1998, the Company concluded an offering of units. Each unit consisted of one common share and one warrant to acquire an additional share at $0.067 per share by September 30, 2000. On completion of the offering, a total of 6,000,000 units were issued at $0.067 per unit for total proceeds of $404,449.00. The offer and sale of the units were exempt from registration under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2), respectively, of the Securities Act of 1933. The Company limited the manner of the offering and the number of non-accredited investors to four (4) investors. If the foregoing exemptions are not available, the Company believes that $175,261.00 of these sales were also exempt under Regulation S under the Securities Act of 1933, as amended, due to the foreign nationality of the relevant purchasers. j) During the year ended December 31, 1998, the Company issued 5,505,000 shares pursuant to warrants exercised at between $0.067 and $0.108 per share for total proceeds of $454,331.00. The shares acquired were exempt from registration under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(c), respectively, of the Securities Act of 1933. The Company has made publicly available financial and disclosure information with its filings to the Canadian Venture Exchange. The Company limited the manner of the offerings and there were less than five (5) non-accredited investors in each offering. The Company believes that a portion of these sales were also exempt under Regulation S under the Securities Act of 1933, as amended, due to the foreign nationality of the relevant purchasers. k) During the year ended December 31, 1998, the Company issued 3,450,000 shares pursuant to options exercised at $0.067 per share for total proceeds of $232,558.00. The sale of the shares was exempt from registration under Rule 701 under the Securities Act of 1933. The sales were made on exercise of grants under the Company's written share option plan, a copy of which the Company has provided to its participants. l) In October 1997, the Company concluded an offering of units. Each unit consisted of one common share and one warrant to acquire an additional share at $0.067 per share by October 3, 1999. On completion of the offering, a total of 1,250,000 units were issued at $0.235 per unit for total proceeds of $293,448.00. The offer and sale of the units were exempt from registration under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2), respectively, of the Securities Act of 1933. The Company limited the manner of the offering and there were no non-accredited investors. If the foregoing exemptions are not available, the Company believes that $13,400.00 of these sales were also exempt under Regulation S under the Securities Act of 1933, as amended, due to the foreign nationality of the relevant purchasers. m) In June 1997, the Company concluded an offering of units. Each unit consisted of one warrant to acquire an additional share at $0.67 per share by June 27,1999. On completion of the offering, a total of 4,000,000 units were issued at $0.072 per unit for total proceeds of $288,933.00. The offer and sale of the units were exempt from registration under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2), respectively, of the Securities Act of 1933. The Company limited the manner of the offering and there were no non-accredited investors. If the foregoing exemptions are not available, the Company believes that $100,500.00 of these sales were also exempt under Regulation S under the Securities Act of 1933, as amended, due to the foreign nationality of the relevant purchasers. n) During the year ended December 31, 1997, the Company issued 650,000 shares pursuant to options exercised at $0.072 per share for total proceeds of $46,952.00. The sale of the shares was exempt from registration under Rule 701 under the Securities Act of 1933. The sales were made on exercise of grants under the Company's written share option plan, a copy of which the Company has provided to its participants. o) During the year ended December 31, 1997, the Company issued 4,019,000 shares pursuant to warrants exercised at between $0.079 and $0.116 per share for total proceeds of $415,769.00. The shares acquired were exempt from registration under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(c), respectively, of the Securities Act of 1933. The Company has made publicly available financial and disclosure information with its filings to the Canadian Venture Exchange. The Company limited the manner of the offerings and there were no non-accredited investors. The Company believes that a portion of these sales were also exempt under Regulation S under the Securities Act of 1933, as amended, due to the foreign nationality of the relevant purchasers. ITEM 11. Description of Securities to Be Registered The following description of the Company's capital stock does not purport to be complete and is subject to and qualified in its entirety by the Company's articles of incorporation and bylaws, which are included as exhibits to the registration statement and by the applicable provisions of Wyoming law. The authorized capital stock of the Company consists of 250,000,000 common shares without nominal or par value and 250,000,000 preferred shares without nominal or par value. Common Stock ------------ Dividends: The holders of common shares are entitled to dividends, out of funds legally available therefore, when and as declared by the Board of Directors. The Board of Directors have never declared a dividend and do not anticipate declaring a dividend in the future. Voting Rights: Each outstanding common share entitles the holder thereof to one vote per share on all matters. Cumulative voting is not provided for in connection with the election of the Board of Directors, which means that the holders of more than 50% of such outstanding shares, voting for the election of directors, can elect all of the directors to be elected, if they so choose, and, in such event, the holders of the remaining shares will not be able to elect any of the Company's directors. Preemption Rights: The holders of the common shares have no preemptive or subscription rights. Each outstanding share of common stock entitles the holder thereof to one vote per share on all matters and cumulative voting is not provided for in connection with the election of the Board of Directors. This means that the holders of more than 50% of such outstanding shares, voting for the election of directors, can elect all of the directors to be elected, if they so choose, and, in such event, the holders of the remaining shares will be able to elect any of the Company's directors. Preferred Stock --------------- The Board of Directors will determine, in whole or in part, the preferences, limitations and relative rights, within the limits set forth by the laws of the state of incorporation, or any successor statute, of any class of its preferred shares before the issuance of any shares of that class or one or more series within that class before the issuance of any shares of that series. The Board of Directors could use an issuance of preferred stock with dilutive or voting preferences to delay, defer or prevent a change in control of the Company. Stock Options ------------- A total of 6,718,000 stock options, convertible on a one for one basis, were outstanding as at February 17, 2000: Exercise Price No. of Options Date of Grant Expiry Date Per Option - -------------- ------------- ----------- ---------- 80,000 October 20, 1998 October 20, 2000 $0.067 875,000 January 31, 1999 January 31, 2000 $0.067 500,000 March 9, 1999 March 9, 2001 $0.095 2,944,000 July 16, 1999 July 16, 2001 $ 1.00 669,000 November 25, 1999 November 25, 2001 $ 1.00 750,000 December 22, 1999 December 22, 2001 $ 1.00 900,000 (1) February 17, 2000 February 17, 2002 $ 5.00 (1) These options are subject to Regulatory Acceptance. For further information on the Company's stock options, please see the Company's Share Option Plan attached as an exhibit to the registration statement. Warrants -------- A total of 5,675,000 warrants, convertible on a one for one basis, were outstanding as a January 31, 2000: No. of Warrants Expiry Date Exercise Price - --------------- ----------- -------------- 2,275,000 September 30, 2000 $0.067 925,000 January 31, 2001 $0.067 975,000 March 23, 2001 $0.129 500,000 May 19, 2001 $0.495 750,000 July 15, 2001 $ 1.10 250,000 (1) January 26, 2002 $ 4.00 (1) These warrants are subject to Regulatory Acceptance. The Board of Directors may determine and from time to time vary the conditions upon which share warrants are issued. The bearer of a share warrant shall be entitled to attend and vote at general meetings. A share warrant may be surrendered and the name of the holder of the shares may be entered in the register. The bearer of a share warrant is considered a shareholder of the Company. The holder of the share warrant is subject to the conditions in force with respect to share warrants whether made before or after the issue of the warrant. 32 ITEM 12. Indemnification of Directors and Officers Subject to the applicable corporate law, the Company's bylaws limit the liability of directors and officers for any loss, damage or expense to the Company in their capacity as directors and officers and provide for the indemnification of directors and officers. The effect of these provisions is potentially to indemnify the Company's directors and officers from all costs and expenses of liability incurred by them in connection with any action, suit or proceeding in which they are involved by reason of their affiliation with the Company. These provisions in the bylaws do not eliminate a director's or officer's duty of care, and in appropriate circumstances equitable remedies such as an injunction or other forms of non-monetary relief would remain available. Each director and officer will continue to be subject to liability for breach of the his or her duty of loyalty to the Company, for acts or omissions not in good faith or involving intentional misconduct or knowing violations of law, for acts or omissions that the director or officer believes to be contrary to the best interests of the Company or the Company's stockholders, for any transaction from which the director or officer derived an improper personal benefit, for improper transactions between the director or officer and the Company and for improper loans to stockholders and loans to directors or officers. This provision also does not affect a director's or officer's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. There is no pending litigation or proceeding involving the Company's directors or officers as to which indemnification is being sought, nor is the Company aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer. ITEM 13. Financial Statements and Supplementary Data The information in the financial statements provided with this registration statement are incorporated by reference as though set forth here. ITEM 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in and disagreements with accountants are reportable pursuant to this item. 33 ITEM 15(a). Financial Statements Index to Consolidated Financial Statements Report of Independent Auditors.............................................................................. F-1 Balance Sheets as of December 31, 1999 and December 31, 1998................................................ F-2 Income Statements for the years ended December 31, 1999, 1998 and 1997...................................... F-3 Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997............................... F-5 Statement of Stockholders Equity for the years ended December 31, 1986 to December 31, 1999 and January 1, 1992 to December 31, 1999........................................................................ F-7 Notes to Financial Statements............................................................................... F-14
ITEM 15(b). Exhibits
Exhibit No. Description - -------------- ------------------------------------------------------------ 3.1* Articles of Continuance (Wyoming) filed February 16, 1995 3.2* Articles of Amendment (Alberta) filed January 3, 1995 3.3* Articles of Amendment (Alberta) filed June 28, 1993 3.4* Articles of Amendment (Alberta) filed April 6, 1992 3.5* Articles of Amendment (Alberta) filed September 1, 1989 3.6* Articles of Incorporation (Alberta) filed April 18, 1986 3.7* Bylaws 4.1* Specimen Share Certificate for Common Shares 4.2* Form of Warrants 4.3* Share Option Plan 4.4* Form of Share Option Agreement (Directors) 4.5* Form of Share Option Agreement (Consultant/Employee) 10.1* Letter Agreement dated February 7, 2000 between VIANET and registrant 10.2 Client Referral Agreement dated May 3, 1999 between UUNET Technologies, Inc. and registrant 10.3 Co-Location Services Agreement dated June 3, 1999 between UUNET Technologies, Inc. and registrant 10.4 Alliance Partner Agreement dated November 11, 1999 between Exodus Communications, Inc. and registrant 21 * List of Subsidiaries 27 Financial Data Schedule * Filed previously
34 F-1 TERRY AMISANO LTD. AMISANO HANSON KEVIN HANSON, C.A. CHARTERED ACCOUNTANTS AUDITORS' REPORT To the Stockholders, USA Video Interactive Corp. We have audited the consolidated balance sheets of USA Video Interactive Corp. as at December 31, 1999 and 1998 and the consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1999 and for the period from inception of the development stage, January 1, 1992 to December 31, 1999. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1999 and for the period from inception of the development stage, January 1, 1992 to December 31, 1999, in accordance with generally accepted accounting principles in the United States. Vancouver, Canada "AMISANO HANSON" March 13, 2000 Chartered Accountants Comments by Auditors for U.S. Readers on Canada - U.S. Reporting Conflict - ------------------------------------------------------------------------- In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is substantial doubt about a company's ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern which assumes the realization of assets and discharge of liabilities in the normal course of business. As discussed in Note 1 to the accompanying financial statements and in respect of the company's substantial losses from operations and its working capital deficiency, substantial doubt about the company's ability to continue as a going concern exists. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our report to the shareholders dated March 13, 2000 is expressed in accordance with Canadian reporting standards, which do not permit a reference to such uncertainty in the auditors' report when the uncertainty is adequately disclosed in the consolidated financial statements. Vancouver, Canada "AMISANO HANSON" March 13, 2000 Chartered Accountants Suite 604 - 750 West Pender Street, Vancouver, BC, Canada, V6C 2T7 TELEPHONE: (604) 689-0188 FACSIMILE: (604) 689-9773 E-MAIL: amishan@istar.ca F-2 USA VIDEO INTERACTIVE CORP. (A Development Stage Company) CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 (Stated in US Dollars) --------------------
ASSETS ------ 1999 1998 ----------- ------------ Current Cash and cash equivalents $ 417,666 $ 2,618 Marketable securities - Notes 3 and 8 20,700 73,920 Accounts receivable - Note 8 17,661 21,049 Prepaid expenses - Note 5 43,841 70,862 ----------- ----------- 499,868 168,449 Capital assets - Note 6 436,417 236,961 Patents - Note 7 59,066 29,822 ----------- ----------- $ 995,351 $ 435,232 =========== =========== LIABILITIES ----------- Current Accounts payable - Note 8 $ 497,163 $ 494,600 Due to related parties - Note 8 188,866 174,028 ----------- ----------- 686,029 668,628 ----------- ----------- STOCKHOLDERS' EQUITY (DEFICIENCY) --------------------------------- Common stock - Notes 9 and 13 20,950,152 18,722,966 Deficit accumulated during the development stages (20,640,830) (18,956,362) ----------- ----------- 309,322 (233,396) ----------- ----------- $ 995,351 $ 435,232 Nature and Continuance of Operations - Note 1 Commitments - Notes 9 and 13 Subsequent Events - Note 13 Contingent Liability - Note 15
APPROVED BY THE DIRECTORS: /s/ Tony Drescher , Director /s/ Edwin Molina , Director - --------------------- --------------------- Anton J. Drescher Edwin Molina SEE ACCOMPANYING NOTES F-3 USA VIDEO INTERACTIVE CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1999, 1998 and 1997 and January 1, 1992 (Date of Inception of Development Stage) to December 31, 1999 (Stated in US Dollars) --------------------
January 1, 1992 (Date of Incep- tion of Develop- ment Stage) to Years ended December 31, December 31, 1999 1998 1997 1999 ------------------ ------------------ ------------------ --------------------- Sales $ 20,500 $ - $ - $ 20,500 Cost of goods sold (19,199) - - (19,199) ------------ ---------- --------- ----------- 1,301 - - 1,301 ------------ ---------- --------- ----------- Expenses Amortization of capital assets 108,869 38,473 4,605 238,424 Amortization of goodwill - - - 228,023 Amortization of patents 4,493 2,508 2,170 17,329 Automobile expenses - 5,127 - 51,974 Consulting fees - Note 8 156,000 84,611 108,197 1,961,779 Delivery costs - - - 56,042 Equipment rental - - - 95,136 Filing fees 13,897 8,326 6,581 87,996 Insurance 3,309 928 - 56,041 Interest and bank charges - Note 8 12,965 24,665 46,164 543,338 Interest on convertible debentures - Note 8 - - - 160,641 License fees and penalty 58,937 - - 58,937 Management fees - Note 8 24,000 27,000 174,025 1,940,845 Membership fee 6,250 - - 6,250 Product marketing costs - Note 8 422,143 209,553 85,865 788,548 Office and general - Note 8 135,894 32,919 27,764 874,333 Office assistance - Note 8 87,926 40,881 14,328 143,135 Printing 111,410 21,786 - 273,823 Professional fees - Note 8 57,611 48,611 65,147 748,337 Public relations - Note 8 26,934 13,050 39,494 386,334 Rent - Note 8 41,212 33,214 17,278 487,558 Repairs and maintenance - 2,638 - 20,817 Research and development costs - Note 8 93,337 24,000 2,668 3,732,257 Salaries and benefits - Note 8 - - - 1,798,755 Telephone and utilities 66,681 35,511 25,460 550,897 Transfer agent fees 12,532 5,960 7,216 58,083 Travel and entertainment 91,384 26,072 6,038 795,401 Web site costs 65,116 12,391 18,072 95,579 ------------ ---------- --------- ----------- (1,600,900) (698,224) (651,072) (16,256,612)
SEE ACCOMPANYING NOTES F-4 USA VIDEO INTERACTIVE CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1999, 1998, and 1997 and January 1, 1992 (Date of Inception of Development Stage) to December 31, 1999 (Stated in US Dollars) --------------------
January 1, 1992 (Date of Incep- tion of Develop- ment Stage) to Years ended December 31, December 31, 1999 1998 1997 1999 ------------------ ------------------ ------------------ --------------------- Loss before other items (1,599,599) ( 698,224) ( 651,072) (16,255,311) ----------- ----------- ---------- ------------ Other items Interest income 11,715 - - 16,735 Foreign exchange gain 15,308 70,328 5,074 266,967 Gain (loss) on sale of marketable securities - Note 8 ( 35,788) ( 688) 64,213 393,090 Gain on disposal of capital assets - Note 8 - 77 - 67,122 Gain on settlement of accounts payable - - - 197,228 Gain on write-off of accounts payable 73,926 - 26,760 142,428 Severance pay - Note 8 - ( 90,000) - ( 90,000) Oil well closure costs - - ( 3,092) ( 79,702) Write-down of marketable securities - Note 8 ( 101,265) ( 118,807) ( 86,680) (1,109,162) Write-down of advances - Note 8 ( 21,375) ( 130,631) - ( 159,333) Write-down of capital assets - ( 13,653) ( 33,359) ( 791,124) Write-off of resource properties - - - ( 717,789) Write-off of goodwill - - - ( 640,639) ----------- ----------- ---------- ------------ ( 57,479) ( 283,374) ( 27,084) (2,504,179) ----------- ----------- ---------- ------------ Loss before cumulative effect of a change in accounting principle (1,657,078) ( 981,598) ( 678,156) (18,759,490) Cumulative effect on prior years of changing to a different amortization method - Note 6 ( 27,390) - - ( 27,390) ----------- ----------- ---------- ------------ Net loss $ 1,684,468) $( 981,598) $( 678,156) $(18,786,880) =========== =========== ========== ============ Net loss per share $ ( 0.03) $( 0.02) $( 0.02) =========== =========== ========== Weighted average shares outstanding 66,766,504 50,457,546 37,878,380 =========== =========== ==========
SEE ACCOMPANYING NOTES F-5 USA VIDEO INTERACTIVE CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1999, 1998 and 1997 and January 1, 1992 (Date of Inception of Development Stage) to December 31, 1999 (Stated in US Dollars) --------------------
January 1, 1992 (Date of Incep- tion of Develop Years ended December 31, ment Stage to ------------------------------------- December 31, 1999 1998 1997 1999 ----------- --------- --------- ---------------- Cash flow from operating activities: Net loss $(1,684,468) $(981,598) $(678,156) $(18,786,880) Adjustments to reconcile net loss to net cash used in operations: Amortization of capital assets 108,869 38,473 4,605 238,424 Amortization of goodwill - - - 228,023 Amortization of patents 4,493 2,508 2,170 17,329 Foreign exchange 1,657 (38,773) (5,074) (86,078) Loss (gain) on sale of marketable securities 35,788 688 (64,213) (393,090) Gain on disposal of capital assets - (77) - (67,122) Gain on settlement of accounts payable - - - (197,228) Gain on settlement of accounts payable - - - (197,228) Gain on write-off of accounts payable (73,926) - (26,760) (142,428) Write-down of marketable securities 102,465 128,312 86,680 1,134,983 Write-down of advances 21,375 130,631 - 158,973 Write-down of capital assets - 13,653 33,359 791,124 Write-off of resource properties - - - 717,789 Write-off of goodwill - - - 640,639 Cumulative effect on prior years amortization of changing to a different amortization method 27,390 - - 27,390 Accounts receivable 3,388 3,077 204,951 1,961 Prepaid expenses 28,065 (30,084) 1,087 (35,026) Accounts payable 72,588 35,798 (202,100) 1,210,243 Due to related parties 14,838 1,252 (82,309) (71,921) ------------ ---------- ---------- ----------- Net cash used in operating activities (1,337,478) (696,140) (725,760) (14,612,895) ------------ ---------- ---------- -----------
SEE ACCOMPANYING NOTES F-6 USA VIDEO INTERACTIVE CORP. (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1999, 1998 and 1997 and January 1, 1992 (Date of Inception of Development Stage) to December 31, 1999 (Stated in US Dollars) --------------------
January 1, 1992 (Date of Incep- tion of Develop Year ended December 31, ment Stage) to ----------------------------------------------- December 31, 1999 1998 1997 1999 ------------------- ------------- ----------- ---------------- Cash flow provided by (used in) investing activities: Proceeds on sale of marketable securities 4,867 26,045 123,415 1,309,195 Purchase of marketable securities (88,700) (58,520) (139,948) (2,045,967) Advances (21,375) (113,779) (52,481) (158,973) Investment - - - 246,571 Goodwill - - - (868,662) Proceeds on sale of capital assets - 674 - 279,528 Purchases of capital assets (335,715) (151,284) (127,632) (1,705,761) Patent fees (33,737) (5,759) (5,599) (76,395) Resource properties - - - 19,213 --------- --------- ---------- ---------- Net cash used in investing activities (474,660) (302,623) (202,245) (3,001,251) --------- --------- ---------- ---------- Cash flow provided by (used in) financing activities: Note payable - - (114,857) - Convertible debenture - - - 1,558,438 Common shares issued for cash 2,227,186 977,630 938,275 17,419,835 Common share subscriptions - - 113,708 - Reserved earnout shares acquired and cancelled - - - (947,200) --------- --------- ---------- ---------- Net cash provided by financing activities 2,227,186 977,630 937,126 18,031,073 --------- --------- ---------- ---------- Net increase (decrease) in cash 415,048 (21,133) 9,121 416,927 Cash, beginning of the period 2,618 23,751 14,630 739 --------- --------- ---------- ---------- Cash and cash equivalents, end of the period $ 417,666 $ 2,618 $ 23,751 $ 417,666 ========= ========= ========== ========== Supplementary Information - Note 10
SEE ACCOMPANYING NOTES F-7 USA VIDEO INTERACTIVE CORP. (A Development Stage Company) CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY) for the years ended December 31, 1986 to December 31, 1999 and January 1, 1992 (Date of Inception of Development Stage) to December 31, 1999 (Stated in US Dollars) --------------------
Deficit Accumulated During the Number Common Stock Common Share Development of Shares Price Amount Subscriptions Stages Total --------- ------------ ---------- ------------- ----------- -------- Issued on incorporation 500,000 $0.038 $ 18,855 $ - $ - $ 18,855 Issued for prospectus 1987 2,000,000 $0.038 75,421 75,421 Exercise of share purchase options 1987 237,500 $0.298 70,660 70,660 Exercise of share purchase options 1988 152,500 $0.800 122,044 122,044 Issued for private placement 1989 237,280 $0.667 158,149 158,149 Issued for resource property finders fee 1989 20,000 $0.422 8,445 8,445 Stock split 1989 3,147,280 Exercise of share purchase options 1989 133,000 $0.416 55,314 55,314 Issued for resource property finders fee 1989 29,000 $0.416 12,060 12,060 Issued for settlement of debt 1989 20,000 $0.422 8,445 8,445 Issued for loan repayment 1989 200,000 $0.422 84,445 84,445 Exercise of share purchase options 1990 304,500 $0.429 130,490 130,490 Issued for private placement 1990 795,500 $0.370 294,086 294,086 Issued on conversion of debenture 1990 1,000,000 $0.129 128,536 128,536 Exercise of share purchase options 1991 425,000 $0.044 18,546 18,546 Exercise of share purchase warrants 1991 300,000 $0.175 52,365 52,365 Net loss from inception to December 31, 1991 (906,750) (906,750) Share subscriptions at December 31, 1991 6,923 6,923 --------- --------- ----- -------- -------- Balance December 31, 1991 9,501,560 1,237,861 6,923 (906,750) 338,034
SEE ACCOMPANYING NOTES F-8 USA VIDEO INTERACTIVE CORP. (A Development Stage Company) CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY) for the years ended December 31, 1986 to December 31, 1999 and January 1, 1992 (Date of Inception of Development Stage) to December 31, 1999 (Stated in US Dollars) --------------------
Deficit Accumulated During the Number Common Stock Common Share Development of Shares Price Amount Subscriptions Stages Total ---------- ------------ --------- -------------- ------------- ----------- Issued for cash: Private placement 3,000,000 $0.141 422,081 422,081 Private placement 1,625,669 $0.629 1,022,518 1,022,518 Share purchase options 450,000 $0.041 18,621 (6,923) 11,698 Share purchase options 371,000 $0.414 153,521 153,521 Share purchase warrants 700,000 $0.166 115,865 115,865 Share purchase warrants 283,250 $0.414 117,210 117,210 Convertible debenture warrants 8,297,320 $0.041 343,347 343,347 Issued for conversion of debenture 8,297,320 $0.031 257,511 257,511 Issued for settlement of debt 1,031,332 $0.093 96,023 96,023 Issued for settlement of debt 134,800 $0.414 55,781 55,781 Net loss for year (2,721,567) (2,721,567) Share subscriptions at December 31, 1992 154,181 154,181 ---------- --------- ------- ---------- ---------- Balance December 31, 1992 33,692,251 3,840,339 154,181 (3,628,317) 366,203
SEE ACCOMPANYING NOTES F-9 USA VIDEO INTERACTIVE CORP. (A Development Stage Company) CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY) for the years ended December 31, 1986 to December 31, 1999 and January 1, 1992 (Date of Inception of Development Stage) to December 31, 1999 (Stated in US Dollars) --------------------
Deficit Accumulated During the Number Common Stock Common Share Development of Shares Price Amount Subscriptions Stages Total ---------- ------------ ---------- -------------- ------------- ----------- Issued for cash: Private placement 500,000 $0.395 197,705 197,705 Private placement 1,000,000 $0.465 465,188 465,188 Private placement 2,328,615 $0.636 1,480,436 (154,181) 1,326,255 Issue costs (18,938) (18,938) Private placement 50,000 $1.287 64,351 64,351 Share purchase options 2,521,320 $0.388 977,407 977,407 Share purchase options 150,000 $0.465 69,778 69,778 Share purchase warrants 50,000 $0.644 32,175 32,175 Convertible debenture warrants 1,146,485 $0.039 44,444 44,444 Issued for conversion of debenture 666,666 $0.029 19,383 19,383 Issued for conversion of debenture 781,250 $0.821 641,098 641,098 Issued in payment of debenture interest 479,819 $0.029 13,950 13,950 Issued for settlement of debt 473,273 $0.594 281,321 281,321 Net loss for year (3,526,607) (3,526,607) Share subscriptions at December 31, 1993 485,900 485,900 ---------- --------- --------- ---------- --------- Balance December 31, 1993 43,839,679 8,108,637 485,900 (7,154,924) 1,439,613
SEE ACCOMPANYING NOTES F-10 USA VIDEO INTERACTIVE CORP. (A Development Stage Company) CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY) for the years ended December 31, 1986 to December 31, 1999 and January 1, 1992 (Date of Inception of Development Stage) to December 31, 1999 (Stated in US Dollars) --------------------
Deficit Accumulated During the Number Common Stock Common Share Development of Shares Price Amount Subscriptions Stages Total -------------- ------------ ---------- -------------- -------------- ------------- Issued for cash: Private placement 3,000,000 $0.732 2,196,354 (485,900) 1,710,454 Private placement 22,261,000 $0.183 4,074,420 4,074,420 Share purchase options 52,180 $0.366 19,101 19,101 Share purchase options 87,900 $0.439 38,612 38,612 Share purchase warrants 100,000 $0.549 54,909 54,909 Share purchase warrants 300,000 $0.498 149,352 149,352 Issued for conversion of debenture 78,125 $0.813 63,552 63,552 Reserved earnout shares acquired and cancelled (947,200) (947,200) Net loss for year (5,367,073) (5,367,073) ---------- ------ ---------- --------- ----------- ---------- Balance December 31, 1994 69,718,884 14,704,937 - (13,469,197) 1,235,740 Issued for settlement of debt 150,000 $0.255 38,249 38,249 Issued for settlement of debt 10,720 $0.182 1,952 1,952 Share consolidation - 1 share for 5 shares (55,903,643) Issued for cash: Private placement 510,000 $0.219 111,467 111,467 Issued for settlement of debt 7,574 $0.546 4,138 4,138
SEE ACCOMPANYING NOTES F-11 USA VIDEO INTERACTIVE CORP. (A Development Stage Company) CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY) for the years ended December 31, 1986 to December 31, 1999 and January 1, 1992 (Date of Inception of Development Stage) to December 31, 1999 (Stated in US Dollars) --------------------
Deficit Accumulated During the Number Common Stock Common Share Development of Shares Price Amount Subscriptions Stages Total ---------- ------------ ---------- -------------- -------------- ------------- Net loss for year (3,168,518) (3,168,518) Share subscriptions at December 31, 1995 394,791 ---------- ---------- ---------- ------------ ----------- Balance December 31, 1995 14,493,535 14,860,743 394,791 (16,637,715) (1,382,181) Issued for cash: Private placement 9,950,000 $0.088 875,623 (394,791) 480,832 Share purchase options 205,000 $0.183 37,585 37,585 Issued for settlement of debt 9,233,553 $0.088 812,575 812,575 Net loss for year (658,893) (658,893) Share subscriptions at December 31, 1996 106,827 ---------- ---------- ---------- ------------ ----------- Balance December 31, 1996 33,882,088 16,586,526 106,827 (17,296,608) (603,255) Issued for cash: Private placement 4,000,000 $0.072 288,933 (106,827) 182,106 Private placement 1,250,000 $0.235 293,448 293,448 Share purchase warrants 749,000 $0.079 59,513 59,513 Share purchase warrants 3,000,000 $0.108 325,051 325,051 Share purchase warrants 270,000 $0.116 31,205 31,205 Share purchase options 650,000 $0.072 46,952 46,952
SEE ACCOMPANYING NOTES F-12 USA VIDEO INTERACTIVE CORP. (A Development Stage Company) CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY) for the years ended December 31, 1986 to December 31, 1999 and January 1, 1992 (Date of Inception of Development Stage) to December 31, 1999 (Stated in US Dollars) --------------------
Deficit Accumulated During the Number Common Stock Common Share Development of Shares Price Amount Subscriptions Stages Total ---------- ------------ ---------- -------------- -------------- ----------- Net loss for year (678,156) (678,156) Share subscriptions at December 31, 1997 113,708 ---------- ---------- --------- ----------- -------- Balance December 31, 1997 43,801,088 17,631,628 113,708 (17,974,764) 229,428) Issued for cash: Private placement 6,000,000 $0.067 404,449 404,449 Share purchase warrants 2,000,000 $0.101 202,224 (75,835) 126,389 Share purchase warrants 550,000 $0.074 40,782 40,782 Share purchase warrants 300,000 $0.108 32,356 32,356 Share purchase warrants 2,655,000 $0.067 178,969 178,969 Share purchase options 3,450,000 $0.067 232,558 (37,873) 194,685 Net loss for year (981,598) (981,598) ---------- ---------- --------- ----------- -------- Balance December 31, 1998 58,756,088 18,722,966 - (18,956,362) (233,396)
SEE ACCOMPANYING NOTES F-13 USA VIDEO INTERACTIVE CORP. (A Development Stage Company) CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY) for the years ended December 31, 1986 to December 31, 1999 and January 1, 1992 (Date of Inception of Development Stage) to December 31, 1999 (Stated in US Dollars) --------------------
Deficit Accumulated During the Number Common Stock Common Share Development of Shares Price Amount Subscriptions Stages Total ---------- ------------ ------------ ------------- ---------------- ------------- Issued for cash: Private placement 2,000,000 $0.067 133,574 133,574 Private placement 1,000,000 $0.114 114,293 114,293 Private placement 500,000 $0.395 197,400 197,400 Private placement 750,000 $ 1.00 750,000 750,000 Share purchase warrants 3,820,000 $0.067 255,940 255,940 Share purchase warrants 25,000 $0.128 3,190 3,190 Share purchase warrants 1,250,000 $0.294 366,894 - 366,894 Share purchase options 4,265,000 $0.067 287,755 - 287,755 Share purchase options 550,000 $0.095 52,140 - 52,140 Share purchase options 66,000 $ 1.00 66,000 66,000 Net loss for the year (1,684,468) (1,684,468) ---------- ----------- -------- ------------- ----------- Balance, December 31, 1999 72,982,088 $20,950,152 $ - $ (20,640,830) $ 309,322 ========== =========== ======== ============= ===========
SEE ACCOMPANYING NOTES F-14 USA VIDEO INTERACTIVE CORP. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 (Stated in U.S. Dollars) ---------------------- Note 1 Nature and Continuance of Operations ------------------------------------ USA Video Interactive Corp. is a public company in the development stage listed on the Canadian Venture Exchange and NASD Bulletin Board and is a designer of high-tech internet streaming video and video-on-demand systems, services and solutions. These financial statements have been prepared on a going concern basis. The company has a working capital deficiency of $186,181 as at December 31, 1999 and has accumulated a deficit of $20,640,830 since inception. Its ability to continue as a going concern is dependent upon the ability of the company to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted, with any certainty, at this time. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern. Note 2 Summary of Significant Accounting Principles -------------------------------------------- The consolidated financial statements of the company have been prepared in accordance with generally accepted accounting principles in the United States. Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involved the use of estimates, which have been made using careful judgement. Actual results may differ from these estimates. The financial statements, in management's opinion, have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below: Organization ------------ USA Video Interactive Corp.'s corporate jurisdiction is the State of Wyoming and it is extra-provincially registered in British Columbia, Canada and Alberta, Canada. The company was incorporated in Alberta, Canada on April 18, 1986 as First Commercial Financial Group Inc. On September 1, 1989 the company changed its name to Micron Metals Canada Corp. and forward split its common shares on a one old for two new basis. By a purchase agreement dated November 21, 1991 and amended March 6, 1992, July 28, 1992 and September 15, 1992, the company acquired 100% of the outstanding shares of USA Video Inc., a corporation incorporated on January 29, 1990 in the state of Texas. On July 28, 1993 USA Video Inc. changed its name to USA Video Corporation. On December 24, 1991 the company incorporated a wholly owned subsidiary USA Video Corp. in the state of Nevada. On May 4, 1993 USA Video Corp. changed its name to USA Video (California) Corporation. USA Video (California) Corporation was inactive during the year ended December 31, 1999. F-15 USA Video Interactive Corp. (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 1999 and 1998 - Page 2 (Stated in U.S. dollars) ---------------------- Note 2 Summary of Significant Accounting Principles - (cont'd) -------------------------------------------- Organization - (cont'd) ------------ On April 6, 1992 the company changed its name to USA Video Corporation. On January 3, 1995 the company changed its name to USA Video Interactive Corp. and on February 16, 1995 the company continued its corporate jurisdiction from Alberta, Canada to the State of Wyoming. On February 23, 1995 the company consolidated its common shares on a five old for one new basis. On April 18, 1996, the company formed a joint venture partnership Adnet USA, LLC. The joint venture was inactive during the year ended December 31, 1999. On June 15, 1999, the company incorporated a wholly owned subsidiary Merging Rivers Media Corp ("Merging"). Merging was inactive during the year ended December 31, 1999. Development Stage Company ------------------------- The company is a development stage company as defined in Statement of Financial Accounting Standards No. 7. The company is devoting substantially all of its present efforts to the business of developing and testing a video-on-demand technology. For the purpose of providing cumulative amounts for the statements of operations and cash flows, these amounts consider only those losses for the period from January 1, 1992 to December 31, 1999, the period in which the company has undertaken a new development stage activity. Principles of Consolidation --------------------------- These consolidated financial statements include the accounts of USA Video Interactive Corp. and its wholly owned subsidiaries, USA Video (California) Corporation (an inactive company) and USA Video Corporation. The company accounts for its investment in these subsidiaries by using the purchase method of accounting. All significant inter-company transactions and balances have been eliminated on consolidation. The consolidated financial statements also include the accounts of Adnet USA LLC, a 50% owned inactive joint venture. Investments in joint ventures are accounted for using the proportionate consolidation method, whereby the company's proportionate share of revenues, expenses, assets and liabilities are included in the accounts. All inter-company balances and transactions have been eliminated on consolidation. Cash Equivalents ---------------- The company considers all highly liquid debt instruments capable of redemption within three months or less to be cash equivalents. Capital Assets and Amortization ------------------------------- Capital assets are recorded at historical cost. Amortization is calculated at the following rates: Office equipment - 5 years on a straight line basis Computer and Testing equipment - 3 years on a straight line basis Video server prototypes - 3 years on a straight line basis Leasehold improvements - 5 years on a straight-line basis Capital assets not put into use during the year are not amortized. F-16 USA Video Interactive Corp. (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 1999 and 1998 - Page 3 (Stated in U.S. dollars) - ------------------------ Note 2 Summary of Significant Accounting Principles - (cont'd) -------------------------------------------- Capital Assets and Amortization - (cont'd) ------------------------------- Amortization of capital assets in prior years was calculated using the graduated straight-line method over 7 years for all classes of capital assets. The new method using straight-line amortization over various periods for different classes was adopted to more accurately recognize the useful life of the assets, and has been applied retroactively to capital asset acquisitions of prior years. Patents ------- The company owns the patents for the Store and Forward Video System. The patents are being amortized on a straight-line basis over 17 years. Research and Development Costs ------------------------------ Research and development costs are expensed as incurred. Foreign Currency Translation ---------------------------- Foreign currency transactions are translated into U.S. dollars by the use of the exchange rate in effect at the date of the transaction. The company has operations in Canada and these accounts are translated using the temporal method. Under this method, monetary items are translated at the year-end exchange rate. Non-monetary items are translated at the historical exchange rate, unless such items are carried at market, in which case they are translated at the year-end exchange rate. Revenue and expense items are translated at the average exchange rate during the year. Income Taxes ------------ The company uses the liability method of accounting for income taxes pursuant to Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Loss per Share --------------- Loss per share computations are based on the weighted average number of shares outstanding during the year. Fair Market Value of Financial Instruments ------------------------------------------ The carrying value of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and due to related parties approximate fair value because of the short maturity of those instruments. F-17 USA Video Interactive Corp. (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 1999 and 1998 - Page 4 (Stated in U.S. dollars) - ------------------------ Note 3 Marketable Securities - Note 8 ---------------------
1999 Fair 1999 1998 Market Value Cost Cost -------------- --------------- --------------- Glassmaster Industries Inc. 3,000,000 common shares (1998: 2,850,000 common shares) $ 240,772 $ 192,727 Write-down to market value (220,072) (118,807) ---------- ---------- ---------- $ 20,700 $ 20,700 $ 73,920 ========== ========== ==========
Glassmaster Industries Inc. is related to the company by virtue of common directors. Note 4 Adnet USA LLC Joint Venture - Note 8 --------------------------- The company owns a 50% interest in a joint venture, which has incorporated a California limited liability company, Adnet USA LLC. The purpose of the joint venture company was to provide internet advertising and web page facilities to corporate customers. The company's joint venture partner is a related company by virtue of common directors. Joint venture expenses consist of the following:
January 1, 1992 (Date of Incep- tion of Develop- ment Stage) to December 31, 1999 1998 1997 1999 ---------------- --------------- --------------- ----------------- Amortization of capital assets $ - $ - $ 3,243 $ 5,660 Market consulting - 2,500 17,502 42,502 Office administration - - 3,412 4,162 Professional fees - - - 862 Public relations and advertising - - 8,376 11,121 Rent - - 2,976 7,832 Telephone - 1,189 16,434 31,265 Web site - 500 12,533 13,033 Write-off of capital assets - 12,245 45,462 57,707 --------- --------- -------- -------- Company's share of joint venture expenses $ - $ 16,434 $ 109,938 $ 174,144 ========= ========= ======== ======== Company's share of joint venture loss $ - $ 16,434 $ 109,938 $ 174,144 ========= ========= ======== ========
The company and its joint venture partner have agreed to abandon the joint venture and consequently Adnet USA LLC is inactive. F-18 USA Video Interactive Corp. (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 1999 and 1998 - Page 5 (Stated in U.S. dollars) ---------------------- Note 5 Prepaid Expenses ---------------- The company had entered into negotiations to purchase a 50% interest in a company for CDN$2,500,000 payable in stages. As at December 31, 1997, the company had advanced CDN$75,000 toward the purchase price of which CDN$50,000 was refundable if the agreement is not proceeded with and the balance of CDN$25,000 was non-refundable. As at December 31, 1998 the company decided not to proceed with the investment and consequently the non-refundable portion of CDN$25,000, (US$16,852) was written-off. The balance of CDN$50,000 (US$33,937), was included in prepaid expense at December 31, 1998 and is to be applied under the terms of a license agreement. By a license agreement dated April 14, 1998 and amended March 24, 1999, with the above-noted company, whereby the company had the exclusive right to sell a certain software application system until October 14, 1999. In consideration of this right, the company had agreed to order a minimum of $150,000 of systems during the period of the agreement. The minimum order amount was not met and the company was required to pay a penalty of 30% of the unordered amount. The advance of CDN$50,000 (US$33,937) included in prepaid expenses at December 31, 1998 was utilized during the year ended December 31, 1999 to pay a penalty for not ordering a minimum amount. Note 6 Capital Assets --------------
Accumulated Net Carrying Value Cost Amortization 1999 1998 --------------- ----------------- --------------- --------------- Office equipment $ 87,868 $ 19,842 $ 68,026 $ 63,029 Computer and testing equipment 336,676 40,864 295,812 26,252 Video server prototype 170,916 113,944 56,972 147,680 Leasehold improvements 15,607 - 15,607 - --------------- ----------------- --------------- --------------- $611,067 $174,650 $436,417 $236,961 =============== ================= =============== ===============
The effect of the change in amortization policy described in the summary of significant accounting principles was to decrease the amortization expense and the loss for the year ended December 31, 1999 by $4,307. The adjustment of $27,390 to apply retroactively the new method is included in the statement of operations for the year ended December 31, 1999. F-19 USA Video Interactive Corp. (A Development Stage Company} Notes to the Consolidated Financial Statements December 31, 1999 and 1998 - Page 6 (Stated in U.S. dollars) ---------------------- Note 7 Patents -------
Net Carrying Value 1999 1998 --------------- ---------------- Cost $ 76,395 $ 42,658 Accumulated amortization (17,329) (12,836) --------- --------- $ 59,066 $ 29,822 ========= =========
The patents consist of a US patent (granted), European patent (granted), Canadian patent (pending) and Japanese patent (pending). The US patent has expired and the patent office has declined a request to reinstate the patent. The company has appealed the denial of the patent reinstatement and believes that the matter will be resolved in its favour. There is a contingent loss of the net carrying amount of the US patent in the amount of $15,083 as at December 31, 1999. Note 8 Related Party Transactions - Notes 3, 4 and 13 -------------------------- The company has incurred costs paid to directors, former directors, officers, companies controlled by directors of the company, and companies with directors in common with the company as follows:
January 1, 1992 (Date of Incep- tion of Develop- ment Stage) to December 31, 1999 1998 1997 1999 --------------- --------------- ---------------- ------------------ Consulting fees $156,000 $ 84,611 $ 63,982 $1,218,044 Interest and bank charges 12,965 24,379 44,342 331,024 Interest on convertible debentures - - - 133,144 Management fees 24,000 27,000 174,025 1,940,845 Product marketing costs 214,500 82,000 - 296,500 Office and general - - - 236,989 Office assistance 66,000 21,739 14,328 102,067 Professional fees 6,980 5,270 5,508 105,252 Public relations 12,000 - - 12,000 Rent - - - 12,950 Research and development costs 82,500 24,000 - 525,698 Salaries and benefits - - - 219,177 Loss (gain) on sale of marketable securities 33,788 688 ( 64,213) ( 395,090) Gain on disposal of capital assets - - - ( 48,133) Severance pay - 90,000 - 90,000 Write-down of marketable securities 101,265 118,807 86,680 1,109,162 Write-down of advances 14,375 113,779 - 135,481 ------- ------- ------- --------- $724,373 $592,273 $ 324,652 $6,025,110 ======== ======== ========= ==========
F-20 USA Video Interactive Corp. (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 1999 and 1998 - Page 7 (Stated in U.S. dollars) ---------------------- Note 8 Related Party Transactions - Notes 3, 4 and 13 - (cont'd) -------------------------- Included in accounts receivable at December 31, 1998 is $12,590 due from companies related by virtue of having directors in common. Included in accounts payable at December 31, 1999 is $11,592 (1998: $19,372) in fees due to directors and companies controlled by directors of the company. Due to related parties at December 31, 1999 includes $43,301 (1998: $130,961) due to a director in respect to advances to the company that accrue interest at 1.25% per month, compound monthly, are unsecured and are payable on thirty days notice of demand. The balance of amounts due to related parties at December 31, 1999 in the amount of $145,565 (1998: $43,067) are due to directors of the company for unpaid fees for services. These amounts are non-interest bearing, unsecured and payable on demand. Note 9 Capital Stock - Note 13 ------------- Authorized: 250,000,000 common shares without nominal or par value 250,000,000 preferred shares without nominal or par value Commitments: Share Purchase Options The following common share purchase options were outstanding at December 31, 1999 entitling the holders thereof the right to purchase one common share for each option held:
Exercise Price Number of Options Per Share Expiry Date ------------------ -------------- --------------------- Directors 2,300,000 USD$ 1.00 July 16, 2001 Employees 1,275,000 CDN$ 0.10 January 31, 2001 144,000 USD$ 1.00 July 16, 2001 225,000 USD$ 1.00 November 25, 2001 200,000 USD$ 1.00 December 22, 2001 Consultants 95,000 CDN$ 0.10 October 20, 2000 550,000 CDN$ 0.14 March 9, 2001 540,000 USD$ 1.00 July 16, 2001 450,000 USD$ 1.00 November 25, 2001 550,000 USD$ 1.00 December 22, 2001 ---------- 6,329,000 ==========
F-21 USA Video Interactive Corp. (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 1999 and 1998 - Page 8 (Stated in U.S. dollars) ---------------------- Note 9 Capital Stock - Note 13 - (cont'd) ------------- Share Purchase Warrants The following share purchase warrants were outstanding at December 31, 1999 entitling the holders thereof the right to acquire one common share for each warrant held:
Number of Exercise Price Warrants Per Share Expiry Date --------- -------------- --------------------- 3,100,000 CDN$ 0.10 September 30, 2000 925,000 CDN$ 0.10 January 31, 2001 975,000 CDN$ 0.19 March 23, 2001 500,000 CDN$ 0.73 May 19, 2001 750,000 USD$ 1.10 July 15, 2001 --------- 6,250,000 =========
Note 10 Supplementary Cash Flow Information ----------------------------------- Investing and financing activities that do not have a direct impact on current cash flows are excluded from the statement of cash flows. The following transactions have been excluded:
January 1, 1992 (Date of Incep- tion of Develop- ment Stage) to Type of December 31, Issuance 1999 1998 1997 1999 - ----------------------------------------- ------------------ ------------------ ------------------ ------------------ In settlement of debt $ - $ - $ - $1,290,039 For payment of interest - - - 13,950 Conversion of debenture - - - 981,544 ------- ------ ------- ---------- $ - $ - $ - $2,285,533 ======= ====== ======= ==========
Note 11 Deferred Tax Assets ------------------- The Financial Accounting Standards Board issued Statement Number 109 in Accounting for Income Taxes ("FAS 109") which is effective for fiscal years beginning after December 15, 1992. FAS 109 requires the use of the asset and liability method of accounting of income taxes. Under the assets and liability method of FAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carryforwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. F-22 USA Video Interactive Corp. (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 1999 and 1998 - Page 9 (Stated in U.S. dollars) ---------------------- Note 11 Deferred Tax Assets - (cont'd) ------------------- The following table summarizes the significant components of the company's deferred tax assets:
Total ------------- Deferred Tax Assets Net operating loss carryforward $ 14,500,000 Capital asset amortization 120,000 ------------ $ 14,620,000 ============ Gross deferred tax assets $ 7,310,000 Valuation allowance for deferred tax asset (7,310,000) ------------ $ - ============
The amount taken into income as deferred tax assets must reflect that portion of the income tax loss carryforwards, which is likely to be realized from future operations. The company has chosen to provide an allowance of 100% against all available income tax loss carryforwards, regardless of their time of expiry. Note 12 Income Taxes ------------ No provision for income taxes has been provided in these financial statements due to the net loss. At December 31, 1999, the company has net operating loss carryforwards, which expire commencing in 2005 totalling approximately $14,500,000. The potential tax benefit of these losses, if any, has not been recorded in the financial statements. Note 13 Subsequent Events ----------------- i) Subsequent to December 31, 1999, the company issued the following common shares:
Number Exercise Price Nature of Cash of Shares Per Share Transaction Proceeds --------- -------------- ----------------------- ----------- 415,000 CDN$0.10 Share purchase options CDN$41,500 825,000 CDN$0.10 Share purchase warrants CDN$82,500 50,000 CDN$0.14 Share purchase options CDN$7,000 --------- ----------- 1,290,000 CDN$131,000 =========== 50,000 USD$1.00 Share purchase options USD$50,000 --------- =========== 1,340,000 =========
ii) On January 26, 2000, the company entered into private placement agreements to sell 250,000 units at US$4.00 per unit. Each unit consists of 1 common share and 1 share purchase warrant to purchase 1 common share at US$4.00 per share, exercisable until January 26, 2002. F-23 USA Video Interactive Corp. (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 1999 and 1998 - Page 10 (Stated in U.S. dollars) ---------------------- Note 13 Subsequent Events - (cont'd) ----------------- iii) On February 17, 2000, the company granted officers and a consultant share purchase options which entitle the holders thereof the right to purchase up to 900,000 common shares of the company at an exercise price US$5.00 per share. These options expire February 17, 2002 and are subject to regulatory approval. Note 14 New Accounting Standards ------------------------ In December 1997, the Accounting Standard Board Issued statement 3465, "Income Taxes", which establishes standards for the recognition, measurement, presentation and disclosure of income and refundable taxes. This statement is effective for fiscal years beginning on or after January 1, 2000. Adopting this standard will not have a material impact on the company's financial position, results of operations or cash flows. In April 1998, the Accounting Standards Executive committee issued SOP 98-5, "Reporting on the cost of start-up activities". This statement is effective for fiscal years beginning after December 15, 1998. Adopting this standard will not have a material impact on the company's financial position, results of operations or cash flows. In June 1998, the Financial Accounting Standards board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which standardized the accounting for derivative instruments. SFAS is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. Adopting this standard will not have a significant impact on the company's financial positions, results of operations or cash flows. Note 15 Contingent Liability -------------------- There is a contingent liability in respect to a default judgement entered against the company's subsidiary, USA Video Corporation, in Texas, USA with regard to the company's lease of premises in Dallas, Texas in the amount of $505,169 ($25,399 included in accounts payable at December 31, 1999). The company vacated its premises in Dallas, Texas during the year ended December 31, 1995 and a claim was made to the company for the total amount payable under the terms of the lease through the term of the lease, ending in 2002. Management of the company is of the opinion that the amount payable under the terms of this judgement is not determinable at this time as the landlords renting the property to another party may substantially mitigate the damages. Any settlement resulting from the resolution of this contingency will be accounted for during the year of the settlement. Note 16 Uncertainty Due to the Year 2000 Issue -------------------------------------- The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using the year 2000 date is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. Although the change in date has occurred, it is not possible to conclude that all aspects of the Year 2000 Issue that may affect the entity, including those related to customers, suppliers or other third parties, have been fully resolved. SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. USA VIDEO INTERACTIVE CORP. Date: March 21, 2000 By: /s/ Edwin Molina ------------------------------------ Edwin Molina, President Chief Executive Officer and Director 35 Item 15(b). Exhibits
Exhibit No. Description - ---------------- --------------------------------------------------------------- 3.1* Articles of Continuance (Wyoming) filed February 16, 1995 3.2* Articles of Amendment (Alberta) filed January 3, 1995 3.3* Articles of Amendment (Alberta) filed June 28, 1993 3.4* Articles of Amendment (Alberta) filed April 6, 1992 3.5* Articles of Amendment (Alberta) filed September 1, 1989 3.6* Articles of Incorporation (Alberta) filed April 18, 1986 3.7* Bylaws 4.1* Specimen Share Certificate for Common Shares 4.2* Form of Warrants 4.3* Share Option Plan 4.4* Form of Share Option Agreement (Directors) 4.5* Form of Share Option Agreement (Consultant/Employee) 10.1* Letter Agreement dated February 7, 2000 between VIANET and registrant 10.2 Client Referral Agreement dated May 3, 1999 between UUNET Technologies, Inc. and registrant 10.3 Co-Location Services Agreement dated June 3, 1999 between UUNET Technologies, Inc. and registrant 10.4 Alliance Partner Agreement dated November 11, 1999 between Exodus Communications, Inc. and registrant 21* List of Subsidiaries 27 Financial Data Schedule * Filed previously
EX-10.2 2 CLIENT REFERRAL AGREEMENT DATED 5/3/1999 EXHIBIT 10.2 [LOGO OF UUNET TECHNOLOGIES INC.] Client Referral Agreement This Client Referral Agreement (the "Agreement") is made this 3rd day of May, 1999, between UUNET Technologies Inc. ("UUNET"), a Delaware corporation, whose address is 3060 Williams Drive, Fairfax, Virginia 22031 and USA Video Interactive ("Company"), a Wyoming corporation, whose address is 70 Essex Street, West Mystic, CT, 06388. The parties hereto agree as follows: 1. CLIENT REFERRAL PROGRAM DESCRIPTION. Company will earn compensation under this Agreement for a referral submitted to UUNET only if all of the following conditions pertain: 1.1. A Lead Information Form (available at www.channel.uu.net/contracts/cr) has been submitted to UUNET's designated fax or mail address. 1.2. UUNET accepts the lead after determining that the prospect is neither an existing UUNET client not an existing prospect for these services. 1.3. A sale of the UUNET services for which the Lead Information Form was submitted is obtained within one hundred twenty (120) days of initial UUNET contract. 1.4. Acceptance of service order at UUNET's sole discretion. 2. COMPENSATION. Compensation rates for referrals are set forward at www.channel.uu.net/contracts/cr. Compensation for each referral shall be based on the compensation rate in effect on the date UUNET received the Company's Lead Information Form. UUNET reserves the right to change the rates effective upon posting to this URL. Payments will be made thirty days from the end of the month in which service provided by UUNET is operational and billable. UUNET reserves the right to charge back to Company any compensation paid in connection with a referred client that cancels or discontinues service within the first six months after service is operational and billable. 3. PRICING AND PRODUCTS. UUNET reserves the right to change its prices and to discontinue any service offering with no advance notice. Company may refer to UUNET's web site at www.usa.uu.net/products/access for current descriptions and pricing on all services. 4. RELATIONSHIPS OF PARTIES. No agency, partnership, joint venture or employment is created as a result of this Agreement. Neither party is authorized to bind the other in any respect whatsoever. 5. TERMINATION. Company's participation hereunder may be terminated with or without cause at any time either by Company or UUNET upon thirty days' written notice. If terminated without cause, UUNET will pay Company all amounts due and owing as of the effective date of such termination and will also pay Company compensation for any qualifying revenue received by UUNET within a 120-day period from the effective date of termination. Such payments shall constitute UUNET's sole obligation to Company following a termination and UUNET's only liability arising from the rights and obligations of the parties under this Agreement. 6. LIMITATION OF LIABILITY. NOTWITHSTANDING ANYTHING ELSE TO THE CONTRARY STATED OR IMPLIED HEREIN, NEITHER PARTY SHALL HAVE ANY LIABILITY WHATSOEVER FOR ANY INCIDENTAL, CONSEQUENTIAL, OR SPECIAL DAMAGES SUFFERED BY THE OTHER OR BY ANY ASSIGNEE OR OTHER TRANSFEREE OF THE OTHER, EVEN IF INFORMED IN ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES. 7. CONFIDENTIALITY. Each party's confidential or proprietary information ("Confidential Information") shall be held confidential by the other party. UUNET's performance under this Agreement, the quality of UUNET network performance, and any data provided by UUNET to Company regarding performance of the UUNET network shall be deemed UUNET Confidential Information. Neither party shall disclose the other party's Confidential Information to third parties without the other party's written consent, except as permitted pursuant to this Section. Each party shall disseminate the other party's Confidential Information among its employees only on a need-to-know basis and shall use such Confidential Information only for the purpose of performing its obligations hereunder. To the extent a party is required by applicable law, regulation, or a government agency Page 1 or court order, subpoena, or investigative demand, to disclose the existence or terms of this Agreement, or the other party's Confidential Information, such party shall use its reasonable efforts to minimize such disclosure and obtain an assurance that the recipient shall accord confidential treatment to such Confidential Information, and shall notify the other party contemporaneously of such disclosure. UUNET in its discretion may terminate this Agreement for cause upon ten days' notice and without penalty in the event of any breach of this Section. 8. NO USE OF UUNET TRADEMARKS. Company may not use the name, logo or any other trademarks or service marks of UUNET in any communications, advertising, signage, marketing materials, brochures or any other materials in any medium without UUNET's express advance written permission. Any such permitted use shall be in strict compliance with the use guidelines provided by UUNET. Neither party shall issue any press release, announcement or public statement with respect to this Agreement or the other party without the other party's advance written consent. 9. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding and agreement between the parties and supercedes any and all prior contemporaneous oral or written communications with respect to the subject matter hereof. This Agreement shall not be modified, amended or on any way altered except by an instrument in writing signed by the parties. 10. GOVERNING LAW. This Agreement and the rights of the parties hereunder shall be governed by and interpreted in accordance with the laws of the Commonwealth of Virginia, excluding its laws relating to conflicts of laws. The parties agree that any appropriate state or federal court located in Fairfax County, Virginia, shall have exclusive jurisdiction over any case or controversy arising hereunder, and shall be the proper forum in which to adjudicate such case or controversy. 11. NOTICE. Each notice required or permitted under this Agreement shall be given in writing. Such notice shall be personally delivered; sent by first class mail, postage prepaid and marked for delivery by certified or registered mail, return receipt requested; send by nationally recognized overnight courier; or sent by facsimile addressed to the parties listed below at their respective places of business, or at such other addresses of which notice has been given to the addressing party: If to Company: If to UUNET: USA Video Interactive Corp. UUNET Technologies Inc. ----------------------------- --------------------------------- 70 Essex Street 3060 Williams Drive ----------------------------- --------------------------------- West Mystic, CT 06388 Fairfax, VA 22031 ----------------------------- --------------------------------- Attention: General Counsel Attention: General Counsel ----------------- Fax: (860) 572-7753 Fax: (703) 206-5807 ----------------------- Such notice shall be deemed delivered upon personal delivery: five days after deposit in the US mail, one day after deposit with such overnight courier and upon actual confirmation of receipt of a facsimile. 12. WAIVER. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; not shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by law. 13. ASSIGNMENT. This Agreement shall not be assignable by Company without UUNET's prior written consent. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. Company UUNET Technologies Inc. /s/ Edwin Molina /s/ Bradley Wise - ----------------------------------- --------------------------------------- Signature Signature Edwin Molina Bradley Wise - ----------------------------------- --------------------------------------- Printed Name Printed Name President Director, Channel Services - ----------------------------------- --------------------------------------- Title Title May 3, 1999 5/11/99 - ----------------------------------- --------------------------------------- Date Date Page 2 EX-10.3 3 CO-LOCATION SERVICES AGREEMENT DATED 6/3/1999 EXHIBIT 10.3 [LOGO OF UUNET] UUNET Technologies, Inc. +1 800 258-4039(voice) 3060 Williams Drive +1 703 206-5629 (voice) Fairfax, VA 22031 +1 703 206-5601(fax) http://www.uu.net web-sales@uu.net UUNET is a registered trademark of, and the UUNET logo design and The Internet at Work are trademarks of, UUNET Technologies, Inc. UUNET Co-Location Services Agreement
Facility Location (Choose One) [X] Fairfax, VA [ ] San Jose, CA - ------------------------------ Equipment Space Options UUNET offers three types of equipment spaces. (Minimum three month Term Commitment.) Number of Cabinets Desired Equipment Space Options/1/ Monthly Fee Per Cabinet - ------------------------------------------------ -------------------------------------- ----------------------- [X] 1 Half Cabinet $ [*] - ---------------------------- [ ] Standard Cabinet $ [*] - ---------------------------- [ ] Large Cabinet $ [*] - ----------------------------
[ ] Install Expedite Fee: [*] (for install requests with less than two weeks -------------------- notice from date of request)/2/ On-Site Support/3/ and Installation Options - ---------------------------------------- On-Site Technical Support and Installation Services All Co-location customers receive On-Site Technical Support that consists of basic operational functions and diagnostic and selected equipment repair activities for select hardware models. On-Site Technical Support activities and procedures are described at http://www.uu.net/terms/hosting/colotech.html./4/ Customer may elect to have UUNET perform equipment installation by selecting this option on the Co-location Configuration Form. The first two hours of On- Site Technical Support per month are provided at no charge. Additional On-Site Technical Support is billed at [*]. On-Site Technical Support calls are billed in 15 minute increments, with a minimum call of 15 minutes. Internet Connectivity Options (Choose One) - ------------------------------------------ UUNET offers the following flexible Internet connectivity options. Connectivity is provided via a 100 Mbps Fast Ethernet Hand-off. [ ] Tiered Service -------------- Tiered services provides a specific amount of bandwidth to Customer's Space. Customer has unlimited use of this Internet bandwidth stream at a fixed monthly cost, but cannot exceed the specified bandwidth tier. Customer may increase the bandwidth tier at any time during the term of the contract, but must remain at that tier for at least one calendar month. After the first month at the new tier, Customer may decrease the bandwidth tier, but never below the tier for which Customer initially contracted. One-time Start-Up Fee $ [*]
Bandwidth Tier Monthly Fee Bandwidth Tier Monthly Fee Bandwidth Tier Monthly Fee - ---------------------------------------- ----------- -------------- ----------- -------------- ----------- [ ] 1.5 Mbps $ [*] [ ] 15 Mbps $ [*] [ ] 40 Mbps $ [*] [ ] 3 Mbps $ [*] [ ] 20 Mbps $ [*] [ ] 45 Mbps $ [*] [ ] 5 Mbps $ [*] [ ] 25 Mbps $ [*] [ ] 50 Mbps $ [*] [ ] 8 Mbps $ [*] [ ] 30 Mbps $ [*] [ ] 60 Mbps $ [*] [ ] 10 Mbps $ [*] [ ] 35 Mbps $ [*] [ ] 75 Mbps $ [*] [ ] 100 Mbps $ [*]
Burstable Service ----------------- Burstable Service provides unlimited use of a 10 Mbps, 45 Mbps, or 100 Mbps Internet connection. The monthly rate is based on Customer's sustained usage of this connection. Sustained usage is defined at the 96th percentile measurement of all bandwidth usage samples taken during the month.
[X] 10 Mbps Burstable Services [ ] 45 Mbps Burstable [ ] 100 Mbps Burstable Service One-time Start-Up Fee: [*] One-time Start-up Fee: [*] One-time Start-up Fee: [*]
Sustained Usage Monthly Fee Sustained Usage Monthly Fee Sustained Usage Monthly Fee - ----------------------------------------- ----------- ---------------- ----------- ----------------- ----------- 0.0 - 2.0 Mbps $ [*] 0.0 - 6.0 Mbps [*] 0.0 - 20.0 Mbps $ [*] 2.1 - 4.0 Mbps $ [*] 8.1 - 10.0 Mbps [*] 20.1 - 30.0 Mbps $ [*] 4.1 - 6.0 Mbps $ [*] 10.1 - 15.0 Mbps [*] 30.1 - 45.0 Mbps $ [*] 6.1 - 10.0 Mbps $ [*] 15.1 - 20.0 Mbps [*] 45.1 - 60.0 Mbps $ [*] $ [*] 20.1 - 30.0 Mbps [*] 60.1 - 100.0 Mbps $ [*] 30.1 - 45.0 Mbps [*] $ [*]
Cross-Connect Fee: Customer may provision network connectivity for "out-of-band" access. UUNET will charge a cross-connect fee for each out-of-band circuit that connects to Customer's cabinet./5/
Monthly Fee Start-up Charge ----------- --------------- Total Number of Cross Connects Required ______ [*] [*] Term Commitment: [ ] 1-year Term (5% discount) [ ] 2-year Term (10% discount) [ ] 3-year Term (15% discount) - --------------- Payment: If purchase order is required, provide PO# ________________ - ------- Billing Preferences: [ ] Bill my existing UUNET account number: ________________ [ ] Bill to a new account: _______________ - -------------------
PLEASE SIGN THIS AGREEMENT. Targeted install date of August 2, 1999 ________________________ /1/ Customer must purchase a minimum Bandwidth Tier of 1.5 Mbps for each Cabinet. /2/ Expedited install cannot be guaranteed. If UUNET fails to make the Space available within two weeks of Customer's request, Customer's sole and exclusive remedy shall be to receive a full refund of the Install Expedite Fee. /3/ Includes Domain Name Service (DNS) for one domain name. A Fee [*] will be charged for each additional DNS provided by UUNET. /4/ UUNET reserves the right to change On-Site Technical Support procedures upon posting of the procedural change to the URL or other notice to Customer. /5/ UUNET assumes no responsibility for monitoring, maintenance or repair of out-of-band circuits. "THE INTERNET AT WORK" [*] Information omitted and filed separately with the SEC pursuant to request for confidential treatment under rule 246-2 under the Securities Exchange Act of 1934, as amended. Co-Location GENERAL Terms and Conditions UUNET Technologies, Inc. ("UUNET") and Customer agree to the following terms and conditions as part of the Co-Location Services Agreement (the "Agreement"): 1. SERVICE. The cover page of this Agreement ("Cover Page") identifies the physical location ("Facility") of the Equipment storage space to be made available to Customer hereunder (the "Space"), and sets forth a description of the services and Internet connectivity (the "Services") to be provided in connection with the Space and all equipment installed in the Space (the "Equipment"). 2. CONTRACTORS. Customer acknowledges that certain installation, technical support, and consulting service may be provided by an unaffiliated third party contractor ("Contractor") to UUNET. Customer hereby authorizes UUNET to provide Contractor all Customer location, Equipment and contact information necessary to provide such services. In addition, MCI WORLDCOM, Inc. or its affiliates or subcontractors may perform some or all of UUNET's duties and/or obligations hereunder. 3. PAYMENT. 3.1 UUNET will invoice the Start-Up Charge on the Cover Page upon execution and delivery of this Agreement. Monthly Fees for Services and Space will commence when UUNET is prepared to provide Customer with Internet Connectivity to the Equipment. UUNET will invoice Monthly Fees monthly is arrears. UUNET reserves the right to change the rates for Services and Space provided under this Agreement at any time after the Initial Term or any subsequent term by providing written notice to Customer at least 60 days in advance of the effective date of the change. In the event of early cancellation during the Term Commitment, Customer will be required to pay 75% of the Monthly Fee for the Space and the Customer's then-current bandwidth tier for each month remaining in the Term. 3.2 Payment is due 30 days after the date of invoice. Accounts are in default if payment is not received within 30 days after date of invoice. If Customer's check is returned to UUNET unpaid, Customer shall be immediately in default and subject to a returned check charge of $25.00 from UUNET. UUNET reserves the right to terminate Customer's use of Space and the Services on any account unpaid 60 days after the date of invoice and, in the event of such unpaid account, terminate any other service provided by UUNET to Customer, or prohibit removal of Equipment from the Facility pending payment of all amounts owed o UUNET by Customer. The Monthly Fee for Space shall continue to accrue until Customer's Equipment is removed from the Space by Customer. An account in default is subject to an interest charge on the outstanding balance of the lesser of 1.5% per month or the highest rate permitted by applicable law. Customer agrees to pay UUNET's reasonable expenses, including attorneys' and collection agency fees, incurred in enforcing its rights under this Agreement. Prices are exclusive of any taxes which may be levied or assessed upon the Equipment or services provided hereunder. Any such taxes shall be paid by Customer. If Customer is exempt from otherwise applicable taxes, Customer must submit its tax identification number and exemption certificate at the same time it submits this Agreement. 4. USE OF SERVICES. 4.1 UUNET exercises no control over, and accepts no responsibility for, the content of the information passing through UUNET's host computers, network hubs and points of presence (the "UUNET Network"). All use of the UUNET Network and the Services must comply with the then-current version of the UUNET Acceptable Use Policy ("Policy") which is made a part of this Agreement and is available at the following URL www.uu.net/usepolicy. UUNET reserves the right to amend the policy from time to time, effective upon posting of the revised Policy at the URL or other notices to Customer. UUNET reserves the right to suspend the Services or terminate this Agreement effective upon notice for a violation of the Policy. Customer agrees to indemnify and hold harmless UUNET from any losses, damages, costs or expenses resulting from any third party claim or allegation ("Claim") arising out of or relating to use of the Space or Services, including any Claim which, if true, would constitute a violation of the Policy. 4.2 Customer, and not UUNET, has exclusive control over the content residing on Customer's server(s). Customer acknowledges that UUNET does not have access to the content residing on the server and is unable to exercise editorial or any other control over any and all content placed on the Customer's server(s). 4.3 UUNET will contact Customer to schedule an installation planning call. During that installation planning call, UUNET and Customer will schedule a mutually agreeable installation date, which will be no later than 60 days after the date of this Agreement is signed. UUNET reserves the right to cancel this Agreement if Customer is not using the service within 60 days of the date of this Agreement is signed. 4.4 Networks assigned from a UUNET net-block are non-portable. Network space allocated by UUNET must be returned to UUNET in the event Customer discontinues service. 5. PERMISSIBLE USE OF SPACE. 5.1 Customer may use the Space only for the purposes of installing, maintaining, and operating the Equipment. Access to the Facility is restricted to Customer's employees and agents. Customer will furnish to UUNET, and keep current a written list identifying a maximum of five individuals authorized to obtain entry to the Facility and access the Space. Customer agrees that no individual it authorizes to enter the Facility will have been convicted of a felony. Customer assumes responsibility for all acts or omissions of the individuals included on this list or authorized by Customer to enter the Facility, and agrees to indemnify and hold UUNET harmless from any Claim arising from the acts or omissions of these individuals. Customer's employees and agents will comply with all applicable laws and ordinances; with the standards and practices of the telecommunications industry; and with all UUNET or Facility security procedures, Facility rules, and safety practices. UUNET may revoke the entry privileges of any person who fails to comply with this Agreement, who is disorderly, or who UUNET reasonably suspects will violate this Agreement. 5.2 UUNET and its designees may observe the work activities of Customer's employees and agents in the Facility and may inspect at any time the Equipment brought into the Space. Customer's employees and agents shall not use any products, tools, materials, or methods that, in UUNET's reasonable judgment, might harm, endanger, or interfere with the Services, the Facility, or the personal or property of UUNET, its vendors or its other customers, UUNET reserves the right to take any reasonable action to prevent such potential harm. 5.3 UUNET will perform certain services which support the overall operation of the Facility, (e.g., janitorial services, environmental systems, maintenance) at no additional charge to Customer. Customer shall be required to maintain the Space in an orderly manner and shall be responsible for the prompt removal from the facility of all trash, packing materials, cartons, etc. that all Customer's employees or agents brought to or had delivered to the Facility. -2- 5.4 Customer may not make available space within the Space to any third party. If Customer makes space available to a third party, Customer shall be in breach of this Agreement and UUNET may pursue any legal or equitable remedy, including but not limited to the immediate termination of this Agreement. 5.5 Upon termination of this Agreement, Customer is responsible for arranging prompt removal of its Equipment from the Facility at Customer's sole risk and expense. 6. CONDUCT IN FACILITY 6.1 Customer will maintain and operate the Equipment in a safe manner, and keep the Space in good order and condition. No employees or agents of Customer will harm or allow any attempt to breach the security of the Facility, the Services, or any third party system or network at the Facility or accessed by means of the Services. 6.2 Customer agrees to use the common areas of the Facility for the purposes for which they are intended and abide by any rules governing such common areas. Such rules include, but are not limited to, a prohibition against smoking in the Facility. 6.3 Customer's employees and agents are prohibited from bringing any of the following materials into the Facility: wet cell batteries, explosives flammable liquids or gases, alcohol, controlled substances, weapons, cameras tape recorders, and similar equipment and materials. 6.4 Customer agrees not to alter, tamper with, adjust, or repair any equipment or property not belonging to Customer, and agrees not to erect signs or devices on the exterior of the storage cabinet or to make any construction changes or material alterations to the Space or the interior or external portions of the Facility devices on the exterior of the storage cabinet or to make any construction changes or material alterations to the Space or the interior or external portions of the Facility. 7. EQUIPMENT DEPLOYMENT. 7.1 Customer will furnish to UUNET, and keep current, an Equipment List (attached as Attachment A) identifying all Equipment installed in the Space UUNET reserves the right to verify installation of the Equipment on the Equipment List. All Equipment must fit within the Space unless agreed to by UUNET in an addendum to this Agreement. Customer agrees that power consumption will not exceed 20 amps 110 VAC per storage cabinet and that all Equipment is UL approved. Cabling used by Customer must meet national electrical and fire standards. Customer will be allowed to remove from the Facility only that Equipment listed on the then current version of Customer's Equipment List. 7.2 UUNET reserves the right to relocate Equipment within the Facility or to move Equipment to another facility with at least 45 days' written notice. Equipment moved or relocated at UUNET's initiative will be at UUNET's expense. Every commercially reasonable effort will be made to minimize downtime and service interruption if Equipment is moved or relocated. If Customer objects to the location of the new Facility, Customer may terminate this Agreement without penalty within sixty days of receiving notice of the new Facility's location. 7.3 Customer agrees to immediately remove or render noninfringing, at Customer's expense, any Equipment alleged to infringe any patent, trademark, copy right, or other intellectual property right. 7.4 If UUNET negligently or willfully damages any Equipment, UUNET will repair or replace the damaged item or, at UUNET's option, will reimburse Customer for the reasonable cost or repair or replacement. THIS SHALL BE CUSTOMER'S SOLE AND EXCLUSIVE REMEDY FOR ANY DAMAGE TO EQUIPMENT CAUSED BY OR ATTRIBUTABLE TO UUNET, ITS EMPLOYEES, OR AGENTS. 8. ASSIGNMENT. Neither party transfer any of its right or obligations under this Agreement without the express, prior written consent of the other party; provided, that wither party may assign or transfer this Agreement of any affiliate of such party upon advance written notice to the other party. This Agreement shall bind and inure to the benefit of the successors and permitted assigns of the parties. 9. INDEMNITY. Customer agrees to indemnify UUNET against actions by any person claiming an ownership or possessory interest, lien, trust, pledge, or security interest in any Equipment, including without limitation any attempt by such third party to take possession of the Equipment. 10. INSURANCE. 10.1 Customer agrees to maintain, at Customer's expense, during the entire time this Agreement is in effect for each Space: 10.1.1 Commercial General Liability Insurance in an amount not less than Two Million dollars ($2,000,000) per occurrence for bodily injury, personal injury and property damage; 10.1.2 Employer's Liability Insurance n an amount not less than One Million dollars ($1,000,000) per occurrence; and 10.1.3 Workers' compensation Insurance in an amount not less than that prescribed by statutory limits. 10.1.4 Commercial Automobile Liability Insurance applicable to bodily injury and property damage, covering owned, non-owned, leased and hired vehicles, in an amount not less than $1,000,000 per accident. 10.1.5 Umbrella or Excess Liability Insurance with a combined single limit of no less than $1,000,000 to apply over Commercial General Liability, Employee's Liability, and Automobile Liability Insurance. -3- 10.2 Prior to taking occupancy of the Space, Customer shall furnish UUNET with certificates of insurance which evidence the minimum levels of insurance set forth herein and which name UUNET as an additional insured. The Commercial General liability insurance shall contain the "Amendment of the Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes form a hostile fire. In the event the Facility's landlord, pursuant to a lease relevant to a particular Space, requires additional insurance, Customer hereby agrees to comply with the landlord's requirements under this lease, as the lease may be modified form time to time. 10.3 None of UUNET, UUNET's subsidiaries, parent companies, or affiliates shall insure to be responsible for any loss or damage to property of any kind owned or leased by Customer or by its employees and agents other than losses or damages resulting from negligence or willful acts of such parties. Any insurance policy covering the Equipment against loss or physical damage shall provide that underwriters have given their permission to waive their rights of subrogation against UUNET, UUNET subsidiaries, affiliates, the Facility landlord, and their respective directors, officers, and employees. 10.4 Customer will insure or self-insure against claims involving Customer's employees and agents. Customer agrees to release and indemnify UUNET against claims by any of Customer's employees and agents arising from dismissal, suspension, or termination of work, or from denial of entry to the Facility: and claim by an person arising from Customer's nonpayment for the Space or the Services. 11. SERVICE LEVEL AGREEMENT. The Service Level Agreement ("SLA") for this service, which is made a part of this Agreement, is set forth at http://www.uunet/terms/hosting/colosia.html and applies only to Customers agreeing to a Term Commitment of at least one year. UUNET reserves the right to amend the SLA from time to time effective upon posting of the revised SLA to the URL or other notice to Customer; provided, that in the event of any amendment resulting in an a material reduction of the SLA's service levels or credits. Customer may terminate this Agreement without penalty by providing UUNET written notice of termination during the 30 days following notice of such amendment. The SLA gets forth Customer's sole remedies for any claim relating to this services or the UUNET Network, including any failure to meet any guarantee set forth in the SLA. UUNET's records and data shall be the basis for all SLA calculations and determinations. Notwithstanding anything to the contrary, the maximum amount of credit in any calendar month under the SLA shall not exceed the Monthly Fee and/or Start-up Charge which, absent the credit, would have been charged for UUNET service that month. 12. CONSEQUENTIAL DAMAGE WAIVER AND LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, INCIDENT, PUNITIVE OR CONSEQUENTIAL DAMAGES THAT RESULT FORM CUSTOMER'S OR CUSTOMER'S USERS' USE OF THE UUNET NETWORK, AND THE SERVICE INCLUDING WITHOUT LIMITATION, ANY SUCH DAMAGES FOR LOSS OF DATA RESULTING FORM DELAYS, NON-DELIVERIES, MISDELIVERIES OR SERVICE INTERRUPTIONS. 13. NO WARRANTY. UUNET PROVIDES THE SPACE AND THE SERVICES AS IS. IN CONNECTION WITH THE SERVICES. UUNET (A) MAKES NO WARRANTIES WHETHER EXPRESS OR IMPLIED, AND (B) DISCLAIMS ANY WARRANTY OF TITLE, MERCHANTABILITY, NONINGRINEMENT AND FITNESS FOR A PARTICULAR PURPOSE AND WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE, OR TRADE PRACTICE IN THE EVENT THAT UUNET PROVIDES CUSTOMER WITH PRODUCTS IN CONJUNCTION WITH THE SERVICES, FOR EXAMPLE THIRD PARTY SOFTWARE PRODUCTS, UUNET ALSO PROVIDES SUCH PRODUCTS AS IS WITHOUT WARRANTY OF ANY KIND, WHETHER EXPRESS OR IMPLIED. UUNET SHALL HAVE NO LIABILITY FOR FAILURE OF ANY PRODUCT OR SERVICE IT PROVIDES, UUNET DOES NOT MONITOR OR EXERCISE CONTROL OVER THE CONTENT OF THE INFORMATION RESIDING ON CUSTOMER'S OWN RISK. UUNET SPECIFICALLY DENIES ANY RESPONSIBILITY FOR THE ACCURACY OR QUALITY OF INFORMATION OBTAINED THROUGH ITS SERVICES. 14. NO ESTATE OR PROPERTY INTEREST. Customer acknowledges that it has been granted only a license to occupy the Space and that it has not been granted any real property interests in the Space of the Facility. Payments by Customer under this Agreement do not create or vest in Customer (or in any other person) any leasehold estate, easement, ownership interest, or other property right or interest of any nature in any part of the Facility. The parties intend that Equipment whether or not physically affixed to the Facility, shall not be construed to be fixtures. Customer (or the lessor of the Equipment, if applicable) will report the Equipment as its personal property wherever required by applicable laws, and will pay all taxes levied upon such Equipment. 15. FORCE MAJEURE. Neither party shall be liable of any delay or failure in performance due to Force Majeure, which shall include without limitation, acts of God, earthquake, labor disputes, riots, war, fire, epidemics, acts or omissions of vendors or suppliers, equipment failures, transportation difficulties, or other events which are beyond it reasonable control. 16. DAMAGE TO THE SPACE. 16.1 If the Space is damaged due to a Force Majeure event, UUNET shall give prompt notice to Customer of such damage, and may temporarily relocate Equipment to new Space or a new Facility, if practicable. If the Facility's landlord or UUNET exercises an option to terminate a particular lease due to damage or destruction of the Space, or if UUNET decides not to rebuild the Space, this Agreement shall terminate as of the date of the damage. Monthly Fees for Space and Services shall proportionately abate for the perfect form the date of such damage. 16.2 If neither the landlord of the Facility no UUNET exercises the right to terminate, UUNET shall repair the particular Space to substantially the same condition it was in prior to the damage, completing the same with reasonable speed. In the event that UUNET shall fail to complete the repair within a reasonable time period. Customer shall have the option to terminate this Agreement with respect to the affected Space, which option shall be the sole remedy available to Customer against UUNET under this Agreement relating to such failure. If the Space or any portion thereof shall be rendered untenable by reason of such damage , the Monthly Fee for Space and Services shall proportionately abate for the period from the date of such damage to the date when such damage shall have been repaired. 17. PUBLICITY. Neither party may use the other party's name, trademarks, tradenames or other proprietary identifying symbols without the prior written approval of the other party. -4- 18. CONFIDENTIALITY. Each party's confidential or proprietary information disclosed hereunder ("Confidential Information") shall be held confidential by the receiving party. UUNET's performance under this Agreement, the quality of UUNET Network performance, and any data provided by UUNET to Customer regarding performance of the UUNET Network shall be deemed UUNET Confidential Information. Neither party shall disclose the other party's Confidential Information to third parties without he other party's written consent, except as permitted pursuant to this Section. Each party shall disseminate the other party's Confidential Information among its employees only on a need-to-know basis and shall use such Confidential Information, and shall notify the other party contemporaneously of such disclosure . UUNET in its discretion, may terminate this Agreement for cause upon ten days' notice and without penalty in the event of any breach by Customer of this Section. 19. AGREEMENT SCOPE. 19.1 This Agreement shall be governed by and constructed in accordance with the laws of the Commonwealth of Virginia, irrespective of its choice of law principles. any action arising hereunder shall be brought in either the state or federal courts for the county of Fairfax, Virginia, and each of the parties shall submit itself to the jurisdiction of such courts for purposes of any action and waives any rights to removal and change of venue. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof nor shall any single or partial exercises of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by law. 19.2 This Agreement, including any Attachments hereto, sets forth the entire agreement between UUNET and Customer with respect to the subject matter within and supersedes all previous representations, understanding or agreements and shall, prevail notwithstanding any variance with terms and conditions of any order submitted. Acceptance of this Agreement by UUNET may be subject, in UUNET's sole discretion, to completion of a satisfactory credit check with respect to Customer. AGREED AND ACCEPTED BY CUSTOMER: Signature: /s/ Edwin Molina Customer Name: USA VIDEO INTERACTIVE CORP. ---------------- --------------------------- Printed Name: Edwin Molina Customer Address: 70 ESSEX ST. ------------- ------------------------ Title: President MYSTIC, CT -------------------- ------------------------ Date: 6/3/99 06355 --------------------- ------------------------ -5- Attachment A Customer Equipment List* Customer Name: USA VIDEO INTERACTIVE CORP. --------------------------- Dimensions Number Manufacturer Model #/Type (height x width x length) Installed - ------------ ------------ ------------------------- --------- USA NT/UNIX VOD2000 10.5" x 19" x 24" 1 - ------------ ------------ ------------------------- --------- - ------------ ------------ ------------------------- --------- - ------------ ------------ ------------------------- --------- - ------------ ------------ ------------------------- --------- - ------------ ------------ ------------------------- --------- - ------------ ------------ ------------------------- --------- - ------------ ------------ ------------------------- --------- - ------------ ------------ ------------------------- --------- - ------------ ------------ ------------------------- --------- - ------------ ------------ ------------------------- --------- - ------------ ------------ ------------------------- --------- * Customer will furnish to UUNET, and keep current , a list of all Equipment installed in the Space. This Equipment List is part of the Co-Location Services Agreement. UUNET reserves the right to verify installation of the Equipment identified on this list. All Equipment must fit within the Equipment storage cabinet or storage shelf provide. Customer agrees that power commitments will not exceed 20 amps 110 VAC per storage cabinet and that the Equipment is UL approved. Cabling used by Customer must meet national electrical and fire standards. Customer will provide to UUNET an updated Equipment List within five business days whenever the Equipment on this list changes. -6- EX-10.4 4 ALLIANCE PARTNER AGREEMENT DATED 11/11/1999 EXHIBIT 10.4 EXODUS COMMUNICATIONS, INC. ALLIANCE PARTNER AGREEMENT This Alliance Partner Agreement (this "Agreement") is made and effective as of Nov. 11, 1999 (the "Effective Date"), by and between Exodus Communications, Inc., a Delaware corporation ("Exodus"), and USA Video Interactive, a Wyoming corporation ("Alliance Partner"). 1. AUTHORITY Subject to the terms and conditions of this Agreement, Exodus hereby authorizes Alliance Partner to (i) demonstrate and market the Exodus Services (as defined below) and (ii) solicit orders for the Exodus Services pursuant to Exodus' standard Services Agreement in the form provided by Exodus to Alliance Partner from time to time and Exodus' then-current price schedules. For purposes of this Agreement, the term "Exodus Services" means Exodus' monthly recurring facilities, bandwidth and managed services listed on Exodus' price lists as of the Effective Date, other than (i) Exodus professional services; (ii) equipment rentals, leases and purchases; (iii) services with non-recurring charges; (iv) services and products which Exodus receives from a third party and is required to pay such third party on a per customer basis, including, but not limited to, telecommunications services and equipment; (v) services provided by subsidiaries and affiliates of Exodus; (vi) any other services identified in writing by Exodus. 2. ALLIANCE PARTNER OBLIGATIONS 2.1 Marketing and Solicitation. During the term of this Agreement, Alliance Partner will use its commercially reasonable efforts to (i) market and solicit orders for Exodus Services to Alliance Partner's customers, prospective customers and others; and (ii) cooperate in joint marketing efforts as reasonably requested by Exodus. Alliance Partner shall use and disseminate only current forms of written Exodus sales and promotional materials. 2.2 Use of Exodus Trademarks. In connection with the performance of its obligations under this Agreement, Alliance Partner may use certain Exodus trademarks as authorized in writing by Exodus from time to time (the "Exodus Marks"). Exodus hereby grants to Alliance Partner a non-exclusive, revocable right during the term of this Agreement to use the Exodus Marks in the performance of Alliance Partner's authorized obligations pursuant to this Agreement. The Exodus Marks may not be used on Alliance Partner's products in any way. Alliance Partner agrees to submit to Exodus, in advance of any proposed use, samples of its use of the Exodus Marks for review. If in the reasonable opinion of Exodus such proposed use is unacceptable, Alliance Partner shall be prohibited from using the Exodus Marks as proposed. 2.3 Relationship with Exodus. Alliance Partner acknowledges and agrees that the relationship between it and Exodus is that of independent contractors, and nothing in this Agreement shall be construed as making Alliance Partner or any of its employees an employee, partner or representative except as may be expressly provided in this Agreement. Alliance Partner may, however, represent itself as an authorized Exodus Alliance Partner and solicitation agent for Exodus Services. Alliance Partner has neither the express nor implied authority to accept orders from customers on behalf of Exodus nor to enter into or modify contracts, whether oral or written, on behalf of Exodus. Alliance Partner shall not represent that its products or services are affiliated with or endorsed by Exodus. 2.4 Training. Alliance Partner may participate in the Exodus Alliance Partner Program training activities as may be made available by Exodus from time to time. Except as otherwise agreed to in writing by Exodus, such participation shall be at Alliance Partner's sole cost and expense. 2.5 Exodus Services Warranties. Alliance Partner shall not make any warranties, representations or statements regarding Exodus Services other than those contained in Exodus' written marketing literature and promotional materials. 1 2.6 Reporting. Alliance Partner will provide written reports to Exodus no later than the last day of each month during the term of this Agreement. Such reports will list the names of all potential customers that Alliance Partner has solicited on behalf of Exodus and will indicate the status of each solicitation. 2.7 Competitive Activities. Alliance Partner agrees to notify Exodus prior to entering into any agreements with any third parties to provide services similar to those hereunder for such third parties or to assist any third party in activities that are competitive with Exodus Services or Exodus' business. 3. EXODUS OBLIGATIONS; SOLICITATION FEES 3.1 Marketing and Solicitation Information. Exodus shall make available to Alliance Partner all pertinent sales and marketing information and assistance, including, but not limited to, current price and data information, sales aids, counseling and assistance, including periodic visits by Exodus sales and marketing personnel. 3.2 Use of Alliance Partner Trademarks. In connection with the performance of its obligations under this Agreement, Exodus may use the Alliance Partner name and certain other Alliance Partner trademarks, (the "Alliance Partner Marks") (i) on the Exodus Web site to identify Alliance Partner as an authorized Alliance Partner and briefly describe Alliance Partner's business; and (ii) as otherwise authorized in writing by Alliance Partner from time to time. Alliance Partner hereby grants to Exodus a non-exclusive, revocable right during the term of this Agreement to use the Alliance Partner Marks in the performance of Exodus' authorized obligations pursuant to this Agreement. Except for the limited use of the Alliance Partner Marks on the Exodus Web site, Exodus agrees to submit to Alliance Partner, in advance of any proposed use, samples of its use of the Alliance Partner Marks for review. If in the reasonable determination of Alliance Partner any use or proposed use is unacceptable, Exodus shall be prohibited from using the Alliance Partner Marks as proposed. 3.3 Training. Exodus will conduct, at its expense, initial training for Alliance Partner, and periodic training as deemed reasonably necessary by Exodus. 3.4 Solicitation Fees. In consideration of the performance of Alliance Partner's obligations under this Agreement, Exodus will pay to Alliance Partner an amount equal to ten percent (10%) of all Exodus Services fees received by Exodus from a Qualified Exodus Customer (as defined below) during the period commencing on the date Exodus first begins providing Exodus Services to a Qualified Exodus Customer and ending on the first (1 st ) anniversary of such date. For purposes of this Agreement, the term "Qualified Exodus Customer" shall mean an Exodus customer (i) who became an Exodus customer as a direct result of Alliance Partner's solicitation of customer on behalf of Exodus, as determined in good faith by Exodus and (ii) has agreed to purchase Exodus Services for a period of not less than one (1) year. Exodus will tender any payments owed Alliance Partner pursuant to this Agreement not later than sixty (60) days after the end of each calendar quarter for applicable Exodus Services fees received from a Qualified Exodus Customer during the quarter. Exodus may offset any monies owed Exodus by Alliance Partner with any solicitation fees Exodus owes Alliance Partner. 3.5 No Obligation to Provide Services. Nothing in this Agreement shall be construed in any way to require Exodus to provide Exodus Services to any potential customer, whether or not solicited by Alliance Partner pursuant to this Agreement. Exodus reserves the right to determine whether, and under what terms, it will provide Exodus Services to any potential customer. 4. TERM AND TERMINATION 4.1 Term. The initial term of this agreement shall be for a period of one (1) year from the Effective Date and will renew automatically for additional one (1) year terms unless either party provides the other party written notice at least thirty (30) days prior to the end of the term that such party does not want to renew this Agreement. 4.2 Termination. (a) Either party may terminate this Agreement for convenience at any time by providing thirty (30) days' prior written notice to the other party. 2 (b) Either party will have the right to terminate this Agreement if: (i) the other party breaches any term or condition of this Agreement and fails to cure such breach within ten (10) days after written notice of the same; (ii) the other party becomes the subject of a voluntary petition in bankruptcy or any voluntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors; or (iii) the other party becomes the subject of an involuntary petition in bankruptcy or any involuntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, if such petition or proceeding is not dismissed within sixty (60) days of filing. 4.3 No Liability for Termination. Neither party will be liable to the other for any termination or expiration of this Agreement in accordance with its terms. 4.4 Effect of Termination. Upon the effective date of expiration or termination of this Agreement: (a) Within thirty (30) days after such expiration or termination, each party will return all Confidential Information (as defined below) of the other party in its possession at the time of expiration or termination and will not make or retain any copies of such Confidential Information except as required to comply with any applicable legal or accounting record keeping requirement; and (b) Exodus will continue to tender any solicitation fees owed to Alliance Partner pursuant to the terms and conditions of this Agreement. 5. CONFIDENTIAL INFORMATION 5.1 Confidential Information. Each party acknowledges that it will have access to certain confidential information of the other party concerning the other party's business, plans, customers, technology, and products, including the terms and conditions of this Agreement ("Confidential Information"). Confidential Information will include, but not be limited to, each party's proprietary software and customer information, and in the case of Exodus will include all non-public information Exodus provides to Alliance Partner. Each party agrees that it will not use in any way, for its own account or the account of any third party, except as expressly permitted by this Agreement, nor disclose to any third party (except as required by law or to that party's attorneys, accountants and other advisors as reasonably necessary), any of the other party's Confidential Information and will take reasonable precautions to protect the confidentiality of such information. 5.2 Exceptions. Information will not be deemed Confidential Information hereunder if such information: (i) is known to the receiving party prior to receipt from the disclosing party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (ii) becomes known (independently of disclosure by the disclosing party) to the receiving party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (iii) becomes publicly known or otherwise ceases to be secret or confidential, except through a breach of this Agreement by the receiving party; or (iv) is independently developed by the receiving party. 6. NO WARRANTIES; LIMITATION OF LIABILITY 6.1 No Warranties. EXODUS DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY AND ALL EXPRESS AND/OR IMPLIED WARRANTIES REGARDING THE EXODUS SERVICES OR ANY MATERIALS PROVIDED BY EXODUS TO ALLIANCE PARTNER PURSUANT TO THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NONINFRINGEMENT, AND ANY WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE, OR TRADE PRACTICE. 6.2 Limitation of Liability. IN NO EVENT WILL EXODUS BE LIABLE TO ALLIANCE PARTNER OR OTHERS FOR ANY LOST REVENUE, LOST PROFITS, REPLACEMENT GOODS, LOSS OF TECHNOLOGY, RIGHTS OR SERVICES, INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES ARISING FROM OR RELATED TO THIS AGREEMENT, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE. 7. MISCELLANEOUS 7.1 No Licenses or Transfer of Rights. Except for the limited rights granted herein by Exodus and Alliance Partner relating to use of the Exodus Marks and Alliance Partner Marks, respectively, nothing in this Agreement shall (i) serve to transfer to Alliance Partner any intellectual property rights in or to the Exodus Services, Exodus Marks or other intellectual property owned or claimed by Exodus; or (ii) serve to transfer to Exodus any 3 intellectual property rights in or to the Alliance Partner Marks. As between Exodus and Alliance Partner, (i) Alliance Partner acknowledges and agrees that Exodus has sole right, title and interest in and to all Exodus Services, Exodus Marks and Exodus intellectual property and rights therein and thereto; and (ii) Exodus acknowledges and agrees that Alliance Partner has sole right, title and interest in and to all Alliance Partner Marks and Alliance Partner intellectual property and rights therein and thereto. 7.2 Governing Law. This Agreement is made under and will be governed by and construed in accordance with the laws of the State of California, United States of America (except that body of law controlling conflicts of law). 7.3 Arbitration. Any dispute relating to the terms, interpretation or performance of this Agreement (other than claims for preliminary injunctive relief or other pre-judgment remedies) will be resolved at the request of either party through binding arbitration. Arbitration will be conducted in Santa Clara County, California, under the rules and procedures of the Judicial Arbitration and Mediation Society ("JAMS"). The parties will request that JAMS appoint a single arbitrator possessing knowledge of online services agreements; however the arbitration will proceed even if such a person is unavailable. 7.4 Force Majeure. Neither party will be liable for any failure or delay in its performance under this Agreement due to any cause beyond its reasonable control, including act of war, acts of God, earthquake, flood, embargo, riot, sabotage, labor shortage or dispute, governmental act or failure of the Internet, provided that the delayed party: (a) gives the other party prompt notice of such cause, and (b) uses its reasonable commercial efforts to correct promptly such failure or delay in performance. 7.5 Severability. In the event any provision of this Agreement is held by a tribunal of competent jurisdiction to be contrary to the law, the remaining provisions of this Agreement will remain in full force and effect. 7.6 Waiver. The waiver of any breach or default of this Agreement will not constitute a waiver of any subsequent breach or default, and will not act to amend or negate the rights of the waiving party. 7.7 Assignment. Neither party may assign its rights or delegate its duties under this Agreement either in whole or in part without the prior written consent of the other party, except that this Agreement may be assigned in whole as part of a corporate reorganization, consolidation, merger, or sale of substantially all of its assets, provided that it notifies such other party at least thirty (30) days prior to the effective date of such event. Any attempted assignment or delegation without such consent will be void. This Agreement will bind and inure to the benefit of each party's successors and permitted assigns. 7.8 Notices. Any notice or communication required or permitted to be given hereunder may be delivered by hand, deposited with an overnight courier, sent by confirmed facsimile, or mailed by registered or certified mail, return receipt requested, postage prepaid, in each case to the address of the receiving party indicated below, or at such other address as may hereafter be furnished in writing by either party hereto to the other. Such notice will be deemed to have been given as of the date it is delivered, mailed or sent by facsimile or overnight courier, whichever is earlier.
Exodus Communications, Inc. Alliance Partner USA Video Interactive Corp. 2831 Mission College Boulevard Address: 70 Essex Street Santa Clara, CA 95054 Mystic, CT 06355 Fax: (408) 346-2206 Fax: (860) 572-7753 Attention: Vice President, Finance Attention: Edwin Molina Copy to: General Counsel
7.9 Entire Agreement; Counterparts. This Agreement, including all documents incorporated herein by reference, constitutes the complete and exclusive agreement between the parties with respect to the subject matter hereof, and supersedes and replaces any and all prior or contemporaneous discussions, negotiations, understandings and agreements, written and oral, regarding such subject matter. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together shall constitute one and the same instrument. 4 7.10 Relationship of Parties. Exodus and Alliance Partner are independent contractors and this Agreement will not establish any relationship of partnership, joint venture, employment, franchise or agency between Exodus and Alliance Partner. Neither Exodus nor Alliance Partner will have the power to bind the other or incur obligations on the other's behalf without the other's prior written consent, except as otherwise expressly provided herein 7.11 Survival. The following provisions will survive any expiration or termination of the Agreement: Sections 2.7, 3.4, 3.5, 4.3, 4.4, 5, 6 and 7. IN WITNESS WHEREOF, the parties hereto have executed this Agreement by causing their duly authorized representatives to sign below as of the day and year first above written. EXODUS COMMUNICATIONS, INC. ALLIANCE PARTNER USA Video Interactive Corp. ----------------------------------- (name) Signature: /s/ S. Arif Razvi Signature: /s/ Anton Drescher ---------------------- ------------------------ Print Name: S. Arif Razvi Print Name: Anton Drescher Title: Worldwide Program Manager Title: Chief Financial Officer 2831 Mission College Boulevard Address: 70 Essex Street Santa Clara, CA 95054 Mystic, CT 06355 Phone: (408) 346-2200 Phone: (860) 572-1560 Fax: (408) 346-2206 Fax: (860) 572-7753 5 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MODIFIED FINANCIAL REPORTS AT DECEMBER 31, 1999, 1998 AND 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR YEAR YEAR DEC-31-1999 DEC-31-1998 DEC-31-1997 JAN-01-1999 JAN-01-1998 JAN-01-1997 DEC-31-1999 DEC-31-1998 DEC-31-1997 417,666 2,618 23,751 20,700 73,920 160,940 17,661 21,049 16,211 0 0 0 0 0 0 499,868 168,449 200,902 611,067 275,351 202,491 174,650 39,390 11,117 995,351 435,232 418,354 686,029 668,628 647,782 0 0 0 0 0 0 0 0 0 20,950,152 18,722,966 17,631,628 (20,640,830) (18,956,362) (17,861,056) 309,322 (233,396) 418,354 20,500 0 0 20,500 0 0 19,199 0 0 0 0 0 1,645,414 956,933 631,992 0 0 0 12,965 24,665 46,164 (1,657,078) (981,598) (678,156) 0 0 0 (1,657,078) (982,698) (678,156) 0 0 0 0 0 0 (27,390) 0 0 (1,684,468) (981,598) (678,156) (0.03) (0.02) (0.02) 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----