-----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, VlebHqwXiyrXVvun8bR5otltXHu9cpf8PlrCahMk1zJDlNC6hN2gysSRAd6pVIa1 5tguD+yfY898A0Y6g4vRfA== 0001032210-00-001097.txt : 20000522 0001032210-00-001097.hdr.sgml : 20000522 ACCESSION NUMBER: 0001032210-00-001097 CONFORMED SUBMISSION TYPE: 10-12G/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20000519 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: 640594 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. 3 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- Amendment No. 3 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 06-15763-91 ------------------------------- ---------------------- (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.............................................. 32 Item 3. Properties......................................................... 35 Item 4. Security Ownership of Certain Beneficial Owners and Management..... 35 Item 5. Directors and Executive Officers................................... 37 Item 6. Executive Compensation............................................. 39 Item 7. Certain Relationships and Related Transactions..................... 41 Item 8. Legal Proceedings.................................................. 42 Item 9. Market Price of and Dividends on USA Video's Common Equity and Related Stockholder Matters........................................ 44 Item 10. Recent Sales of Unregistered Securities............................ 45 Item 11. Description of Securities to be Registered......................... 48 Item 12. Indemnification of Directors and Officers.......................... 50 Item 13. Financial Statements and Supplementary Data........................ 52 Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................... 82 Item 15(a). Financial Statements............................................... 82 Item 15(a). Exhibits........................................................... 82
ITEM 1. Business Description of Business Introduction ------------ USA Video Interactive Corporation (hereinafter "USA Video") provides an array of products and services that allow businesses and individuals to transmit video data through the Internet and other local and wide area networks, while maintaining superior video quality at the receiving end. USA Video's key areas of market focus are education, training, and entertainment for institutions, corporations, and consumers. The key technologies that create business opportunity for USA Video are the following: Video compression technology, which allows large video files to be greatly reduced in size to optimize use of available bandwidth. In the absence of compression, video files are much too large to be efficiently streamed or downloaded. Even with high bandwidth connections, compression is necessary for timely product delivery. The goal of compression innovation is to minimize the video file size while retaining as much of the original video quality as possible; and Store and Forward Video-on-Demand ("VoD") technology, a patented technique for transmitting video over switched (telephone-like) networks and allowing the user to view the video using videocassette recorder (VCR)-like controls (play, pause, stop, etc.). Store and Forward VoD is the mechanism by which the delivery of compressed video is managed and, together with compression technology, facilitates the delivery of video to an end user in a timely and interactive fashion. The products and services made possible by these technologies and which form the basis of USA Video's business operations are as follows: . End-to-end systems for converting and delivering live or recorded video from an analog source (e.g., camera, videotape, cable hookup) to the end user's viewing device (computer or television) via a variety of network options (e.g., Internet, Intranet, satellite, wireless). These systems are all inclusive, including hardware, software, assembly, training, documentation, installation, and post-installation maintenance support; . Content management and encoding services, which involve maintaining digital video libraries and encoding (that is, digitizing and compressing) content to populate these libraries on a video server, a significant undertaking for many schools and corporate training departments; . Content creation and editing services, which involve a variety of video production services to develop content where none exists; . Web site development to support video streaming systems, involving programming and authoring services for web sites with a primary purpose of delivering video; . Hosting for web-based video delivery, which involves set up and ongoing maintenance of a video service on USA Video-owned or leased equipment; . Event support, which includes all labor, travel, equipment transport, editing, encoding, and delivery associated with a live webcast or post- event video broadcast. USA Video's products and services generate revenues that can be categorized as follows: (A near-term (3 to 6 months) projected revenue breakdown is in parentheses. However, the longer term 3 revenue forecast will likely shift more toward recurring revenues from technology and content licensing fees and advertising.) The basis for this projection is the number of existing proposals for video distribution systems and related engineering services (the first two items below). Currently, USA Video has 18 proposals submitted to prospective clients, with 4 more in development, for a total of about $50,000,000 in potential revenue. This has been a primary business development focus in recent months. The main limitation of this projection is tied to the rapidly evolving business environment at USA Video. Within this environment, a single successful event, such as an internationally viewed webcast, could shift the projected revenue percentages such that more are realized from the fifth and sixth items below. Likewise, a large-scale hardware adaptation of proprietary technology could greatly increase licensing fees. The below projections apply to the time of this submission, but could change in the next year. 1. Sales of hardware, software, and peripheral system components (25%); 2. Engineering services associated with system development, integration, installation, training, and support (25%); 3. Software development services (10%); 4. Licensing fees for proprietary USA Video technologies (10%); 5. Licensing and distribution of wholly owned content or on a shared revenue basis with content providers (10%). 6. Services and fees to host web-based video delivery services (10%); 7. Services and fees to support events (5%) 8. Revenues from advertising contained within content and associated with web hosting and event support (5%). There can be no guarantee that current discussions with clients will result in actual sales. Further, as disclosed in this document under "Outlook: Issues and Uncertainties," absent significant revenues, USA Video's auditors have expressed doubt about USA Video's ability to continue as a going concern. In addition, since USA Video has just recently emerged from the development stage, it has not generated a profit and expects to continue to incur net losses for the foreseeable future. USA Video's net losses for the years ended December 31, 1999, 1998 and 1997 were $1,657,078, $981,598 and $678,156, respectively. As a percentage of revenues, net losses were approximately 800% in 1999. As of December 31, 1999, the deficit accumulated during the development stages totaled $20,640,830. USA Video expects to continue to increase its marketing and sales expenses from $420,000 in 1999 to $1.6 million in 2000 (including $250,000 of infrastructure expenses associated with sales and marketing) and $4.1 million in 2001; product development expenses from approximately $100,000 in 1999 to $900,000 in 2000 and $1.3 million in 2001; and general and administrative expenses from approximately $1.1 million in 1999 to $1.5 million in 2000 and $4.6 million in 2001. As a result of these increased expenditures, USA Video will need to generate significant additional revenue and/or raise funds to achieve profitability. Cognizant of these circumstances, USA Video is fully engaged in all of the above product and service areas. It has agreements in place with Internet Service Providers (ISPs) to offer hosting services to its clients. It owns the equipment and has the personnel resources necessary to perform all of the listed services. The capital necessary to develop and test its prototype end-to-end video system was expended early in 2000, then this prototype was subsequently sold to a customer, negating the capital outlay. Details on the individual components of this system, including its video encoders and servers, are described in the section entitled "USA Video's Technology." All of its future capital expenditures for such systems will be customer driven. No revenues were generated in 1997 and 1998. In 1999, USA Video generated revenues of $20,500 from a sale to Enersphere, half of which is attributable to sale of media server hardware, software and peripheral components, and half is attributable to engineering services. Year-to-date in 2000, USA Video has generated revenues of $240,000 from sales to Inetcable ($165,000); Polomania ($15,000); and a proprietary client ($60,000) who wishes not to be identified by USA Video for competitive reasons. Breakdowns of these sales are provided in the "Management Discussion and Analysis" section of this document under the subheading "Revenues." Evolution of USA Video ---------------------- . April 18, 1986, USA Video was incorporated as First Commercial Financial Group Inc. in the Province of Alberta, Canada. . September 1, 1989, USA Video changed its name to Micron Metals Canada Corp. and forward split its common shares on a two for one basis. . November 1991, USA Video 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. 4 . December 24, 1991, USA Video incorporated a wholly-owned subsidiary, USA Video Corp., in the State of Nevada. . April 6, 1992, USA Video changed its name to USA Video Corporation. . May 4, 1993, USA Video Corp, a subsidiary of USA Video changed its name to USA Video (California) Corporation. . July 28, 1993, USA Video Inc, a subsidiary of USA Video changed its name to USA Video Corporation. . January 3, 1995, USA Video changed its name to USA Video Interactive Corp. . February 16, 1995 USA Video continued its corporate jurisdiction from the Province of Alberta to the State of Wyoming. . February 23, 1995, USA Video consolidated its common shares on a one for five basis. . July, 1998, USA Video created the USA Video Interactive Programming division. . June 14, 1999, USA Video incorporated another wholly-owned subsidiary, Merging Rivers Media Corporation, Inc., in the State of Wyoming. . May 10, 2000, Merging Rivers Media Corp changed its name to USA Video Productions, Inc., with the intention of increasing USA Video's emphasis on content production and webcasting. During 1999, USA Video 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, USA Video Productions, Inc. (formerly Merging Rivers Media Corp.), 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. USA Video is a public company emerging from the development stage listed on the Canadian Venture Exchange under the trading symbol "US" and on the pink sheets operated by the National Quotation Bureau. A development stage company is one where substantial efforts are devoted to establishing a new business but the planned principal business has not commenced or has commenced but has not generated significant revenues. This describes USA Video through 1999. However, a shift has occurred and USA Video is now focused on marketing and selling its products and services and as such expects revenues to significantly increase in 2000. USA Video is essentially "emerging" from its development stage by fully implementing its principal business. USA Video'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. USA Video's Technology ---------------------- USA Video's technology falls into two major categories: . Proprietary technologies that facilitate efficient video transmission (also called streaming) through various fixed or switched networks. These technologies include the company's Wavelet compression techniques and its Store and Forward Video-on-Demand technology. (Wavelet options include those developed by USA Video engineers or licensed from third parties and modified and improved by USA Video engineers.) 5 . Engineering and scientific expertise to integrate and employ these proprietary technologies for various system and service related applications, as defined in the "Introduction" section. Licensing of proprietary technology is part of USA Video's business model. When we deliver a video distribution system, the system incorporates this technology and the customer pays a license fee. On the other hand, if the technology is integrated into the equipment of a third party (e.g. another manufacturer's video server), USA Video still collects a licensing fee. USA Video's team of engineers and scientists can customize tailored systems to meet client needs. The following table indicates the application of these technology areas to the products and services defined in the "Introduction" section: Product or Service Proprietary Technology Engineering Expertise - ------------------ ---------------------- --------------------- End-to-end video distribution Yes Yes systems Content management and Yes Yes encoding Content creation and editing No Yes Web site development No Yes Hosting for web-based video Yes Yes delivery Event support Yes Yes The application of these two technology areas to these products and services are discussed further in the following two subsections. A third subsection, End-to- End Video Distribution Systems, is included because of the significant percentage (50%) of near-term revenue that this area of business is expected to generate. (Note: End-to-end video systems are associated with the first two revenue sources addressed in the Introduction.) 6 Proprietary Technologies. USA Video's proprietary technologies include 1) ------------------------ Wavelet compression and 2) Store and Forward Video-on-Demand. These technologies are incorporated into the company's products, such as its end-to-end video distribution systems. In addition, it uses these technologies in performing services such as encoding content or providing event support. Whether these technologies are included in systems or used to provide services, revenues are generated for the licensing of the intellectual property. A brief discussion of each of these technologies follows. Wavelet Compression. Although USA Video's business is not constrained to a particular compression technique, advanced Wavelet compression technology is integral to the marketing of its product and services. Since Wavelet compression significantly reduces the amount of data used to represent video images without reducing the image quality, this technique provides more efficient streaming of video, regardless of network bandwidth, than do competing technologies. Furthermore, unlike compression using the Discrete Cosine Transform (e.g., MPEG), which segments the original image and can create a visually unpleasant blockiness, Wavelet processing is applied across the entire image, allowing higher compression ratios without blockiness. For these reasons, USA Video integrates Wavelet coders-decoders (codecs) into its products and continues to pursue advanced research and development in order to further improve the technique. Store and Forward Video-on-Demand. USA Video has designed and patented this technology for the delivery of video programs on an "on-demand" basis. This capability allows a user located remotely from a video source to control the viewing of selected video over the Internet (or other network) using VCR-like controls. Unlike the pay-per-view model where the video is run to completion without the possibility of pausing once it is started, this technology provides a two-way connection, allowing the user to manage the content delivery. Engineering and Scientific Expertise. USA Video has a team of highly ------------------------------------ educated and experienced engineers, scientists, software developers, and system architects. Currently, 2 scientists, 2 engineers, 5 software developers and 2 system architects are employed in full-time or consultant status. The team's extensive experience in providing tailored systems to customer needs is currently being applied to development of USA Video's end-to-end video streaming systems and to solving difficult architecture and infrastructure problems encountered while implementing these systems at different customer sites. For example, this team pioneered innovative methods of delivering a video broadcast over a satellite network in order to meet one client's requirements. As implied above, USA Video continues to work on advancing the Wavelet compression technology and is developing a version of Wavelet that will function under the Unix operating system associated with many high-end workstations and servers (e.g., Sun, Hewlett-Packard, Compaq). This version will complement USA Video's current Windows-based technology. End-to-End Video Distribution Systems. As implied by the term "end-to-end," ------------------------------------- USA Video's system process begins with an analog video content source, such as a camera or videotape, and finishes with the source video being viewed on a user's computer that can be located across the room or across the country. There is no requirement for any of these components to reside side-by-side. System components contributing to this total process are as follows: 7 Encoder - Digitizes and compresses the video signal to allow its transmission across a network. When video is compressed using USA Video's Wavelet technology, there is sufficient data reduction to allow the video to be forwarded to its destination as a live broadcast. Alternatively, the data can be stored to disk for future start-to-finish viewing or VoD. During the encoding process, parameters such as image size, frames per second, and compression method, are adjusted to make use of available delivery bandwidth. For high bandwidths, higher streaming rates are targeted to produce higher fidelity video at the user end. However, setting parameters to increase video fidelity results in a larger video file size, thus requiring more disk storage space. Server - Stores the digitized and compressed video and manages the delivery of video to users (either live or after the fact). The number of simultaneous users supported by a single server can be determined by dividing the total delivery capacity of the server by the available streaming rate which is determined by the user's connectivity (modem, DSL, T1, etc.). For example, a typical USA Video server has a delivery capacity of 80 Mbit/second. For this server, a streaming rate of 56 Kbit/second will allow almost 1500 users, while a streaming rate of 1 Mbit/second will support only 80 users. Up to the specified maximum number of users, video quality is not impacted by number of users. Exceeding this maximum is avoided by preventing hookup once the maximum has been reached. An unlimited number of users can be supported by connecting multiple servers in parallel within a single system. Distribution Network - The connectivity for distribution of the video data. This is not part of the system; however, USA Video customizes system components to optimize the use of the existing network, no matter what the method (e.g., Internet, satellite, fiber-optic cable, phone line) or available bandwidth. For example, because quality degradation and latency are issues in networks with many signal routing nodes, USA Video pioneered satellite delivery methods specifically to minimize this impact. Client - A computer or television equipped to process encoded video. For a computer, this equipment could be a web browser, a standard Windows Media Player, and a Wavelet decoder plug-in provided by USA Video. To access the video, the computer user would simply click on a web page link. The video distribution system is flexible and scalable, meaning that it can be configured and sized to meet individual client requirements. For example, a small school wanting to eliminate its space consuming videotape library may require a single encoder and server (with peripheral components), while an Internet broadcast company desiring 500 live broadcast streams over a satellite link would require a much more complex system. Whatever the requirement, two USA Video functional components are at the core of each video distribution system. For each of these components, USA Video begins with mature off-the-shelf hardware obtained from companies with which it has business relationships, then it customizes and packages this hardware to meet the specific video distribution needs of its clients. The two components are: WebCaster Live (TM) Encoder - This component receives analog video inputs, encodes (i.e., digitizes and compresses) the input data, and forwards the encoded output stream to the video server. There can be multiple encoders in a single system. The Wavelet compression algorithm is normally embedded within the encoder software. Hurricane Mediacaster (TM) Video Server - This component stores the video received from the encoder and manages its delivery. Two general categories of delivery are provided: multicast and unicast. A multicast delivers a start-to-finish stream to which multiple users can tune in and is analogous to broadcast TV. A unicast delivers a stream to a single user over a dedicated connection, allowing this user to view the video start-to-finish or using VoD controls. The Hurricane Mediacaster can perform "uplink" and "downlink" roles in an end-to-end system where the video has to be transmitted over a distance. In one implementation, the uplink server sends a multicast via the connecting network (e.g., the satellite link) to a downlink server. The downlink server then delivers either a multicast or unicast to users via a separate network (Internet, Intranet, wireless, etc.) for viewing. For the Webcaster Live, USA Video customizes off-the-shelf PC hardware (i.e., no specific business relationship exists). For the Hurricane Mediacaster, USA Video customizes baseline servers from SeaChange or Cyberstorage, depending on the application. USA Video has OEM relationships with both of these companies. Within the next year, USA Video anticipates generating $12,500,000 in revenues from sales of its end-to-end video distribution systems, as well as associated technology licensing and customer support. This projection is based on winning 25% of the contracts for which proposals have been submitted or are in a preliminary stage (totaling $50,000,000, as enumerated in the Introduction). There can be no guarantee that current discussions with clients will result in actual sales. Further, as disclosed in this document under "Outlook: Issues and Uncertainties," absent significant revenues, USA Video's auditors have expressed doubt about USA Video's ability to continue as a going concern. In addition, since USA Video only began emerging from development stage this year, it has not generated a profit and expects to continue to incur net losses for the foreseeable future. 8 Research & Development ---------------------- Prior to 1999, USA Video conducted seven years of research and development of its compression VoD technology. In 1999, USA Video'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 USA Video and will not be borne by its customers. USA Video 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 ----------- USA Video controls multiple jurisdictional patents important for protecting Video-on-Demand technology and developing Video-on-Demand systems. Ownership of these patents is believed to bring value to USA Video, both through potential future licensing income and as an aid in developing future marketing opportunities. However, the patents are not critical to the current development of business. USA Video applied for an exclusive U.S. patent for its Store and Forward VoD technology on February 1, 1990. Corresponding overseas applications were filed in 1992. USA Video was granted U.S. Patent # 5,130,792 on July 14, 1992. The market for this technology has since expanded and USA Video is investigating the applicability of its patent to the multiple 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 due in 1995. USA Video has further investigated reasons for this administrative oversight and determined that additional factors beyond its control were present. USA Video has appealed the denial of the patent reinstatement. A final determination regarding reinstatement should occur in 2000, according to statements by Patent Office representatives. 9 In 1999, USA Video received approval of its Store and Forward VoD 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, and are similar in scope to the US patent claims. USA Video's patent counsel believes that these patents may cover technology for transmitting video on the Internet. If so, infringing video transmissions that either originate or are received in any of these five countries may be covered by the European patents. Identical patents are pending in Canada and Japan. USA Video is in the process of arranging to enforce its patents through licensing agreements. In addition, USA Video is prepared to enforce its patents through litigation. These patents can be valuable both as a source of licensing revenue, and by providing a market advantage for expansion into Europe. USA Video's Video-on-Demand patent has been extensively searched by USA Video's patent attorneys to determine its strength. It is believed that the patent will be difficult for infringers to challenge the validity of the patent, and that the claims of USA Video's patent are broad enough to possibly be of significant value in the market. However, it is not possible at the present time to quantify the potential value of the patent. The scope of the market for licensing of USA Video's Video-on-Demand patent will be determined by how expansive the market for encoded video products becomes, how many major industry players develop profitable VoD markets, and the technology used to implement the products. USA Video intends to vigorously defend its existing patents from infringement and continue to apply for additional patents in the global market place. Evolution of the Industry - ------------------------- Until recently, Video-on-Demand 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. However, there were several hurdles to successful deployment of VoD to homes, including: . Lack of sufficient bandwidth to support the expected two-way data transfer requirements; . Slow digital upgrades to cable systems and therefore a limited clientele for the service; . Insufficient numbers of set-top boxes and the high cost of these units; . Dissimilar interfacing requirements; and . No appealing features of the service other than user control over video delivery. Considering the cost of a set-top box, $250 and up, minimal available content, and the lack of sufficient features to make the system attractive, consumers were content to continue renting tapes for their VCRs and subscribing to a cable service. 10 The advent of the Internet and all of its interactive features refocused attention on interactive video using computers and television, of which VoD is one of many parts. However, most Internet interactions involve transfer of relatively small files such as data requests, text, and small uncomplicated images. On the other hand, uncompressed video files are massive, and bottlenecks can result from the inadequate availability of bandwidth used to relay content to end users. Now, with more and more bandwidth being installed and the price per unit of bandwidth dropping, the potential for market acceptance of digital video distribution is closer to reality. USA Video's experience in the industry leads it to believe that the cost of bandwidth and supporting equipment, such as cable modems, will continue to decrease even more dramatically over the next two years, bringing expanded use of high bandwidth applications to the general market. Until then, improved compression techniques allow the use of existing bandwidth, even telephone lines, to achieve some of the same features. Even when high-bandwidth applications become available to the general market, compression will continue to be important for the following reasons: . Video files are huge (a full-length movie can be many gigabytes); therefore, uncompressed video data would tax any available bandwidth configuration well into the foreseeable future. . The combination of more available bandwidth, greater computing power, and aggressive compression will allow the current broadcast quality standard to be approached, which to date has not been achieved by any compression method. . The video quality standard will continue to evolve (initially high-definition television) and will demand even more sophisticated compression techniques. In short, the market conditions are ripe for mainstream VoD acceptance, as validated by experts in the field: . According to Nathan G. Muller of Strategic Information Resources, average sales of VoD are more than 12 times greater than sales of pay-per-view services. . 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. (Note: Neither of the above reports was prepared for USA Video, nor were the preparing parties compensated by USA Video.) According to Veronis, Suhler & Associates, in terms of 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. According to Veronis, Suhler & Associates, 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. This is the current market upon which USA Video is focusing its attention. 11 Competitive Conditions ---------------------- USA Video competes in the Video-on-Demand, streaming video, video systems, and Internet services markets involving transmission of data by wired and wireless methods, including satellite, radio and other signals, telephone lines, cable, etc. Where once the market was relatively limited, video via the Internet is now very widespread. Many large companies (i.e., Microsoft, IBM, and others), which had been relatively small players in the field are now entering in a very significant way. Although USA Video is now being recognized for its technology as evidenced by the number of unsolicited requests for proposals, its current market share would rank it very low among competitors, because the company is only beginning to receive broad market awareness. However, USA Video believes it has an advantage over its competitors in three primary areas: . Wavelet compression technology, which is quickly becoming an established alternative to the MPEG method. Reference: http://webview.com/pub/1999/08/13/feature/index3.html . Its patented video streaming technology, which provides high fidelity digital video to modem users (28.8k and 56k) as well as high-bandwidth users (cable modems, DSL, etc.); and . Its ability to tailor and scale systems to meet the various needs of a diverse client base in education, corporate, and consumer markets. Efficient compression is a significant advantage in both low and high bandwidth applications. For low bandwidth, Wavelet delivers high fidelity video when others methods cannot. For high bandwidth, a Wavelet-encoded video file provides greater frame rates and picture sizes (that is, high quality video) than a file of equal size encoded using another compression method. USA Video believes there are a handful of dominant players in the Internet video field, including Real Networks, Microsoft (via its Windows Media Player), Broadcast.com, Akamai (formerly Intervu), and several others. Because of the extreme interest in the field, many mergers are underway and major players change fairly regularly. USA Video believes that the fluid nature of the industry will allow newcomers to thrive and emerge in leadership positions if they have technically superior, cost effective, properly marketed products and services. USA Video's goal is to exploit a market opportunity, and this opportunity is customized video systems. Although there are many companies developing system components, such as video servers, compression methods, and delivery infrastructure, USA Video's engineers and system architects design and develop video streaming systems to meet the needs of its clients and integrate these systems into the clients' business models and infrastructures. There is a very large market for this expertise, as many diverse customers convert to digital content formats. USA Video currently has more than 20 proposals to prospective clients and over 100 active leads for such systems. 12 General Development of the Business Development Plan - ---------------- An integral part of USA Video's strategy is to develop as a market leader to take advantage of the demand for its products and services. USA Video'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 total packaged systems; . Use the technology itself, as well as more traditional advertising and marketing, to create an industry-wide awareness of USA Video'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 USA Video's technology. The major industry markets targeted are education, 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 can 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 13 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. USA Video has fully operational systems in the following two markets: . Education - Client is Project Learn (www.learn.K12.ct.us). . Entertainment - Client is Inetcable.com (www.inetcable.com). In addition, USA Video is targeting the following markets: airport security; sports; college; public education; home entertainment; and advertising markets. 14 Marketing Plan - -------------- USA Video's focus is to expand market awareness of the products and services identified in the "Introduction" and "USA Video's Technology" sections of this document. USA Video intends to demonstrate the value of its technology and technical expertise to the industry by: . Selling and deploying initial end-to-end video distribution systems in education, corporate, and entertainment markets; . Validating the robustness, versatility, and reliability of these systems through close post-delivery relationships with clients; and . Leveraging these deployment successes into additional sales of systems and USA Video's other products and services. USA Video believes the initial appeal of its system will be based on the following: . The ability to provide on-demand access to a client's specialized content, be it educational video resources, corporate records and training resources, government archive retrieval and legislative activities, or other specialized areas. . The ease with which users can view digital video information whenever desired, eliminating the need for videocassettes and other analog formats. . The adaptability of each system to available budgets in the public and corporate sectors. USA Video is using a number of market models to gain market entry with sales of video systems, content, and services. One successful model is to work with education or entertainment content providers and to convert the videos from tape directly to encoded digital media. This gives USA Video the ability to sell complete turnkey systems that include content, which should generate a distinct stream of licensing revenue. A sales model for clients not interested in owning and maintaining their own systems is for USA Video to host the video application on its system and offer this as a service. This model dramatically reduces the upfront costs to companies interested in the technology but not able to afford a total system. These companies would make small periodic payments rather than a one-time large payment, which may be a more economical entree into digital video technology. In addition, these companies do not have to train employees on new hardware and software, and no new management or maintenance of hardware and networks is required. The downside of this model is that the company has less control of the overall content development and delivery process. USA Video believes the majority of near-term sales will come from video distribution systems. However, these sales provide a one-time revenue source, excluding content and technology licensing. Therefore, as greater market awareness of USA Video's capabilities is achieved, USA Video will pursue recurring revenue generating opportunities, including: . Technology licensing; . Content licensing; and . Advertising associated with content and site hosting. 15 Diversification of USA Video's products and services will prevent the loss of any one revenue stream from impacting the overall business. Another marketing direction will be to develop a complete line of off-the- shelf systems and services, to be advertised on USA Video's website. While product customization is currently a corporate strength, it also hinders volume sales and quick turn-around. USA Video's website will feature a questionnaire that allows potential customers to define system or service requirements, then submit these requirements for staff evaluation. A timely response to the customer will identify the system or service best suited to their needs. As USA Video identifier common system demand it will be possible to have these configurations prepared and ready for delivery. In terms of target markets, USA Video will focus its efforts on those markets it believes will not only benefit greatly from its technology, but which are likely to be the most receptive to its products and services, notably the: . Educational sector; . Corporate sector; . Government sector; and . Entertainment sector. USA Video believes market share will be achieved through: . Direct competition in the marketplace; . Affiliations with other companies with dominant positions in their fields; and . High-profile, capital-intensive marketing and advertising campaigns. 16 Plan of Operation Over the Next Twelve Months Corporate Agreements - -------------------- During 1999, USA Video 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 Merging Rivers Media consultants retained to manage this subsidiary did not produce the agreed-upon results, and their contracts were terminated in October and November of 1999. USA Video has brought legal action against one of the consultants for violations of contract. Currently, this subsidiary is inactive. USA Video is in active negotiations with a number of companies to establish business relationships of mutual benefit. USA Video believes that agreements with the following companies will help facilitate its success in the marketplace: VIANET: USA Video has an agreement with Vianet Technologies, which is a ------ research company that has developed a Wavelet technology that USA Video uses. As part of this agreement, USA Video will develop a Unix-compliant Wavelet codec, allowing for expansion of the market to include Unix-based operating systems. The following are main terms of the agreement: Objective: The parties agreed to work together to develop a Unix Wavelet product. Licensing: The end resulting decoding codecs will be licensed to USA Video at an exclusive level for marketing to Unix-based educational and corporate training market applications. Payment: USA Video agreed to a 50/50 revenue split or per unit cost, whichever is greater, for all Unix-based decoding applications sold with the Vianet Unix decoding codec included. Ownership of the Source Code: Ownership of the source code and resultant decoding codec remains solely that of Vianet. Technical Support: Both parties will contract with the other when necessary for technical support and assistance at competitive technical support rates. Development Costs: USA Video committed to paying 50% of the development costs of the ported unix decoding codec. 17 Liability: Neither party shall be liable to the other party for any indirect, special, incidental or consequential damages. Duration: Unless terminated earlier by either party on 30 days prior written notice to the other party (subject to the terminating party fulfilling all outstanding commitments and obligations), the term of the agreement commenced on February 7, 2000 and will continue in effect for twelve consecutive months. Thereafter, the agreement will be renewed annually by mutual agreement. Default: In the event either party defaults in its performance, the other party must provide written notification to the defaulting party of the default. If the defaulting party fails to correct the default within 30 days, the other party, upon written notice to the defaulting party, may terminate the agreement and recover whatever damages may be recoverable by operation of law. UUNET - Client Referral Agreement: USA Video has signed an agreement with --------------------------------- UUNET to receive compensation for client referrals to UUNET. To date, no revenue has been generated by USA Video from the agreement. The following are main terms of the agreement: Compensation: Compensation for referrals is based on the compensation rate in effect on the date UUNET receives the referral form from USA Video. UUNET reserved the right to change the rates. Payments are made thirty days from the end of the month in which service provided by UUNET is operational and billable. UUNET reserved the right to charge back to USA Video any compensation paid in connection with a referred client that cancels service within the first six months after service is operational and billable. Pricing and Products: UUNET reserved the right to change its prices and to discontinue any service offering with no advance notice. Termination: USA Video's participation in the client referral program may be terminated with or without cause at any time either by USA Video or UUNET upon 30 days' written notice. If terminated without cause, UUNET will pay USA Video all amounts due as of the effective date of termination and will pay compensation for any qualifying revenue received by UUNET within a 120 day period from the effective date of termination. Liability: 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. UUNET Co-Location Services Agreement: USA Video 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 USA Video's turnkey system. 18 The following are the main terms of the agreement: Payment: USA Video must pay the following for use of UUNET's equipment and services: 1. Equipment Space - a monthly fee for use of one half-cabinet; 2. On-Site Support and Installation - no charge for the first two hours, but an hourly charge for any additional time billed in 15 minute increments, with a minimum call of 15 minutes. 3. Internet Connectivity - one time start-up fee and a monthly fee thereafter based on USA Video's sustained usage of the connection. UUNET reserved the right to change the rates for services and space provided under the agreement by providing written notice to USA Video at least 60 days in advance of the effective date of the change. If USA Video cancels during the term commitment, USA Video will be required to pay 75% of the monthly fee for the space and the then- current bandwidth tier for each month remaining in the term. Indemnity: USA Video agreed to indemnify UUNET against actions by any person claiming an ownership or possessory interest, lien, trust, pledge, or security interest in any equipment. Insurance: USA Video agreed to maintain, during the term of the agreement for each space, the following insurance: 1. commercial general liability insurance - $2 million or more per occurrence for bodily injury, personal injury and property damage; 2. employer's liability insurance - $1 million or more per occurrence; 3. workers' compensation insurance 4. commercial automobile liability insurance - applicable to bodily injury and property damage in an amount of $1 million or more per occurrence; and 5. umbrella or excess liability insurance - $1 million or more to apply over commercial general liability, employee's liability and automobile liability insurance. Consequential Damage Waiver and Limitation of Liability: Neither party is liable for any indirect, incident, punitive or consequential damages that result from customer's or customer's users' use of the UUNET network and the service including any damages for loss of data resulting from delays, non-deliveries, misdeliveries or service interruptions. No Warranty: UUNET provides the space and service as is and assumes no liability for the for the content of USA Video's information residing on its equipment or transmitted through its facilities. Publicity: Neither party may use the other party's name, trademarks, tradenames other proprietary identifying symbols without the prior written approval of the other party. 19 Confidentiality: Each party's confidential or proprietary information disclosed is held confidential by the receiving party. UUNET's performance under the agreement, the quality of UUNET network performance, and any data provided by UUNET to USA Video regarding the performance of the UUNET Network is deemed UUNET Confidential Information. Neither party may disclose the other's confidential information to third parties without the other party's written consent. Each party may disseminate the other party's confidential information among its employees only on a need-to-know basis and may use the confidential information only for the purpose of performing its obligations under the agreement. To the extent a party is required by applicable law, regulation or by a government agency or court order, subpoena, or investigative demand, to disclose the existence or terms of the agreement, or the other party's confidential information, the party may use its reasonable efforts to minimize the disclosure and obtain an assurance that the recipient will accord confidential treatment to the confidential information, and must notify the other party contemporaneously of the disclosure. UUNET, in its discretion, may terminate the agreement for cause upon 10 days' notice and without penalty in the event of any breach by USA Video of this confidentiality terms of the agreement. Duration: The term of the agreement was 3 months beginning in June 1999 and ending in September 1999. The contract is now on-going and does not have a specific term or expiration date. USA Video must maintain a minimum rate of use of the services and make timely payments for the UUNET equipment and services being utilized in order to avoid termination of the agreement. EXODUS COMMUNICATIONS: USA Video 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. The following are main terms of the agreement: Authority: Exodus has authorized USA Video to demonstrate and market the Exodus Services and solicit orders for the Exodus services, which include monthly recurring facilities, bandwidth and managed services listed on Exodus' price lists. USA Video's Obligations: The following are USA Video's obligations: 1. Marketing and Solicitation - USA Video will use its commercially reasonable efforts to market and solicit orders for Exodus services to USA Video customers, using only current forms of written Exodus sales and promotional materials. 2. Use of Exodus Trademarks - USA Video may use certain Exodus trademarks as authorized in writing by Exodus from time to time. 20 3. Relationship with Exodus - USA Video acknowledged and agreed that the relationship between it and Exodus is that of independent contractors. USA Video may represent itself as an authorized Exodus Alliance Partner and solicitation agent for Exodus services. 4. Reporting - USA Video must provide monthly written reports to Exodus listing the names of all potential customers that USA Video has solicited on behalf of Exodus and indicating the status of each solicitation. 5. Competitive Activities - USA Video agrees to notify Exodus prior to entering into any agreements with any third parties to provide services similar to those in the agreement for third parties or to assist any third party in activities that are competitive with Exodus' business. Exodus Obligations: The following are USA Video's obligations: 1. Marketing and Solicitation - Exodus must make available to USA Video all pertinent sales and marketing information and assistance, including current price and data information, sales aids, counseling and assistance, including periodic visits by Exodus sales and marketing personnel. 2. Use of Alliance Partner Trademarks - In connection with the performance of its obligations under the agreement, Exodus may use the USA Video name and certain other USA Video trademarks on its Web site to identify USA Video as an authorized partner and as otherwise authorized in writing by USA Video from time to time. 3. Training - Exodus will conduct, at its expense, initial training for USA Video and periodic training as necessary. 4. Solicitation Fees - Exodus will pay to USA Video an amount equal to 10% of all Exodus services fees received by Exodus form a qualified Exodus customer. 5. No Obligation to Provide Services - Nothing in the agreement requires Exodus to provide services to any potential customer, whether or not solicited by USA Video pursuant to the agreement. Duration: The initial term of the agreement is for a period of 1 year from the Effective Date (November 11, 1999) and will renew automatically for an additional 1 year term unless either party provides the other party written notice at least 30 days prior to the end of the term that the party does not want to renew the agreement. Termination: Either party may terminate the agreement for convenience at any time providing 30 days' prior written notice to the other party. Either party has the right to terminate the agreement if (i) the other party breaches the agreement and fails to cure the breach within 10 days after written notice of the breach, (ii) the other party becomes 21 the subject of a voluntary petition in bankruptcy or any involuntary proceeding relating to insolvency, receivership, liquidation or composition for the benefit of creditors. Confidential Information: Each party acknowledged 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 each party's proprietary software and customer information. Each party agreed that it will not use in any way except as expressly permitted by the agreement any of the other party's confidential information and will take reasonable precautions to protect the confidentiality of the information. No Warranties: Exodus does not make any and all express and/or implied warranties regarding the Exodus services or any materials provided by Exodus to USA Video pursuant to the agreement. Limitation of Liability: In no event will Exodus be liable to USA Video 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 the agreement. Plan of Operation Over the Next Twelve Months --------------------------------------------- USA Video's products and services are ready to go to market and generate revenues for the company. USA Video anticipates that future expenditures in its products and services will be largely customer-driven. USA Video has approximately $500,000 in cash and liquid assets available to fund its business plan. However, it will also be necessary for USA Video to sell additional common stock in order for it to put its business plan into operation. Specifically, USA Video must raise the funds necessary to market and sell its products and services and continue research and development. There can be no guarantee that USA Video will be able to raise funds on acceptable terms, or at all. If USA Video succeeds in raising additional funds through the sale of common stock, the ownership interest of holders of existing shares of USA Video's common stock will be diluted. The principal aspects of the business plan for the next 12 months include the following: Within the next year, USA Video anticipates generating $12,500,000 in revenues from sales of its end-to-end video distribution systems, as well as associated technology licensing and customer support. This projection is based on winning 25% of the contracts for which proposals have been submitted or are in a preliminary stage (totaling $50,000,000, as enumerated in the Introduction). As an emerging development stage company, USA Video generated only $20,500 in revenues in 1999 and no revenues prior to 1999. USA Video has not been profitable and does not anticipate generating a profit this year. USA Video has budgeted $4 million of cash expenditures for the current year. This level of expenditure is consistent with supporting full execution of USA Video's business plan. There may be unforeseeable circumstances that could result in expenditures below budget. To the extent actual costs associated with sales are lower than anticipated, for example, or to the extent that R&D efforts result in much more rapid technical progress than anticipated, budgets for R&D, service infrastructure and other expenses may not be fully expended. To summarize: . Sales & marketing $1.6 million * . Research & development 0.9 million . Service infrastructure** 0.5 million . Working capital / other 1.0 million ----------- . Total $4.0 million =========== * Includes $250,000 of infrastructure expenses associated with sales and marketing. ** In literal terms, "product support." 22 Principal aspects of the business plan for the next 12 months include the following: . Organizational Expenses $0.22 million . Marketing and Sales Expenses 1.6 million . Product Support Expenses (referred to in 0.5 million the USA Video budget as "Service Infrastructure") . Administrative Expense 0.18 million . Product Development and Acquisition * --- . Research and Development (includes 0.9 million $250,000 of associated infrastructure expenses) . Employees 0.6 million ------------ Total $4.0 million ============= * It is no longer part of USA Video's plan to have third-party development of our products, but instead to develop products in-house, through joint ventures or through licensing agreements the cost of which would pass through to customers. USA Video's products and services are primarily PC-based; however our business plan includes expansion into other hardware/operating system markets, such as Apple and Unix. Development and demonstration of capabilities on these systems, which is prerequisite to successful marketing, will require purchase of related servers. 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, USA Video will incur expenses for salaries for marketing and sales personnel and for Internet access, travel and advertising. USA Video 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. Infrastructure Expenses: USA Video will incur expenses for renting and furnishing office space, for acquiring computers and software, for telephone and cable lines, and satellite related equipment. Infrastructure expenditures will need correspond to the growth in the business operations and the commensurate increase in the number of employees. Product Support Expense: The Company will incur expenses to hire personnel to provide technical support for customers who purchase its VoD product. 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. 23 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 The Company operates in a highly competitive business, which has a number of inherent risks. These may be summarized as follows: 1. USA Video Has Not Produced a Profit and Cannot Be Certain That It Will ---------------------------------------------------------------------- Produce a Profit or Remain Profitable If It Does Generate a Profit. USA Video is - ------------------------------------------------------------------ not profitable and may never become profitable. If it does achieve profitability, USA Video cannot be certain that it will remain profitable nor that profits will increase in the future. USA Video's auditors have expressed doubt about the company's ability to continue as a going concern. At this time, USA Video has not achieved profitability and, in fact, expects to incur net losses for the foreseeable future. USA Video's net losses for the years ended December 31, 1999, 1998 and 1997 were $1,657,078, $981,598 and $678,156, respectively. As a percentage of revenues, net losses were approximately 800% in 1999. No revenue was generated in 1998 or 1997. USA Video's limited operating history contributes to the difficulty of predicting the company's potential to generate a profit. USA Video expects to continue to increase its marketing and sales expenses from $420,000 in 1999 to $1.6 million in 2000 (including $250,000 of infrastructure expenses associated with sales and marketing) and $4.1 million in 2001; product development expenses from approximately $100,000 in 1999 to $900,000 in 2000 and $1.3 million in 2001; and general and administrative expenses from approximately $1.1 million in 1999 to $1.5 million in 2000 and $4.6 million in 2001. As a result of these increased expenditures, USA Video will need to generate significant additional revenue and/or raise funds to achieve profitability. 2. USA Video May Not Be Able to Compete Effectively Against the Intense -------------------------------------------------------------------- Competition From a Multitude of Competitors Which Will Limit the Amount of - -------------------------------------------------------------------------- Market Share USA Video Captures. USA Video may not be able to compete - ------------------------------- effectively against its major competitors. USA Video's products and services compete against several hundred competitors, including many large companies such as Microsoft and IBM. As a company emerging from the development stage, USA Video's current market share would rank it very low, because it is only beginning to receive broad market awareness. Some of USA Video's competitors have greater financial, marketing and other resources than those of USA Video. With few barriers to entering the marketplace, existing and future competitors may be able to institute and sustain lower prices and imitate features of USA Video's products or services, resulting in a reduction of USA Video's share of the market. With this level of current and future competition, it is impossible to project a market share. 24 3. USA Video Relies On New Products and Services Which are Expensive to -------------------------------------------------------------------- Maintain and Have Not Proven to Generate Revenue. Given that USA Video's - ------------------------------------------------ business and financial plans focus on products and services which are relatively new, there can be no assurance that existing sales levels can be maintained or that increased sales levels can be achieved. Specifically, USA Video's end-to- end video distribution systems comprise computers, hardware peripherals, network devices, and software. In order to ensure that the products and services remain current, development and testing must be an ongoing process. To maintain relevance in the market, USA Video needs to make periodic investments in the latest hardware and infrastructure components. In addition, research and development, particularly in the advancement of compression techniques, will be a continuing expense that licensing revenues may not support in the foreseeable future. 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, such as customer support and help desk services, and outside financing may not be available to supplement revenues. Additionally, USA Video's new products and services rely on new products and services from other vendors, which further increases risk. For example, USA Video is considering several third party software packages that allow the transfer of data to be done on a secure and confidential basis. The products under consideration are in various stages of development. The primary risks associated with reliance on such new technologies are 1) premature release of the technology for consumer application prior to sufficient testing, 2) stability of the developing corporation and therefore its ability to support its product, and 3) better and less expensive technology developed by a competing interest. 4. USA Video's Technologies May Become Obsolete If Not Continually --------------------------------------------------------------- Improved, Making the Company Vulnerable to Losing Its Main Sources of Revenue. - ----------------------------------------------------------------------------- USA Video may not be competitive and maintain a level of demand for its products and services sufficient to support its business operations if it is unable to continue to advance its technologies, such as its Wavelet and Store and Forward Video technologies. USA Video may incur significant expenses in developing new technologies. USA Video's technologies could be surpassed by a competing technology. USA Video will have to continue to make significant investments in research and development to ensure its products and services remain competitive. 5. USA Video May Not Be Able to Maintain a Competitive Position Due to ------------------------------------------------------------------- the Pace at Which the Marketplace is Changing. The demand for USA Video's - --------------------------------------------- products and services may rapidly decline if the marketplace for its products and services changes. USA Video's success is dependent on its ability to adjust to change and meet new demands. Since the marketplace for USA Video's products and services is relatively new, USA Video may not be able to predict the changes that will occur and may not be able to modify or update its products and services in time to prevent a decline in its share of the market. 6. The Instability of the Internet May Impact a USA Video Customer's ----------------------------------------------------------------- Ability to Utilize USA Video's Products and Services. The Internet may not be - ---------------------------------------------------- able to support the demands placed on it by continued growth. USA Video is highly dependent on the Internet to provide its products and services to the marketplace. Clients that employ the Internet for transfer of video data could experience service degradation or latency because of overworked search engines. In this case, the tendency of a dissatisfied customer might be to blame the video system provider rather than the ISP. 25 7. USA Video Depends Upon a Small Number of Key Persons to Implement Its --------------------------------------------------------------------- Business Plan, the Loss of Any of Whom May Affect the Business Operations of - ---------------------------------------------------------------------------- the Company. USA Video 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 of service and technical support necessary to achieve and maintain a competitive market position. USA Video does not have an employment agreement with any of its employees, and, as a result, there is no assurance that the key employees will continue to manage USA Video's affairs in the future. USA Video has not obtained key man insurance with respect to such employees. The key employees are as follows: Edwin Molina, President and Chief Executive Officer Anton J. Drescher, Chief Financial Officer and Secretary Anthony J. Castagno, Executive Vice President Ronald L. Patton, Chief Technical Officer Daniel J. Sciro, Vice President of Sales William Meyer, Chief Operating Officer Kent Norton, Chief Information Officer Matthew W. Kinnaman, Vice President, Strategic Innovation 8. USA Video's Marketing Plan is Based Upon a Number of Assumptions Which ---------------------------------------------------------------------- If Invalid Could Result in Lower Revenues Than Anticipated. USA Video's internal - ---------------------------------------------------------- marketing plan may not meet its objectives if the assumptions upon which it is based prove to be invalid or incorrect. In general, the assumptions of the marketing plan are as follows: . The appeal of USA Video's end-to-end video distribution systems will continue to generate client interest; . Market size estimates cited in the "Evolution of the Industry" section are valid; . Competition is not suppressed by an overwhelming technical breakthrough by one of the major players in the field; and . USA Video's technology continues to keep pace with industry standards and with the products of its competitors. Marketing expenditures are to be funded partly from the proceeds of equity private placements, the exercise of stock options and warrants and cash flow from operations. Poor market acceptance of USA Video's products and services or other unanticipated events may result in lower revenues than anticipated, making the planned expenditures on marketing and promotion unachievable. 9. USA Video May Not Be Able to Retain Key Personnel If It Is Unable to -------------------------------------------------------------------- Adequately Compensate Them Which Could Affect Its Competitive Position. USA - ---------------------------------------------------------------------- Video may not generate sufficient revenue to compensate its highly skilled employees and thereby may not be able to maintain its competitive position. USA Video has attracted experienced engineers and scientists in their respective fields, as well as experts in marketing, sales, and production management. The corporation's ability to retain this caliber of personnel will depend upon its ability to provide adequate compensation for this talent, which in turn depends on generation and maintenance of sales volume. 26 10. USA Video May Be Unable to Control the Quality or Reliability of the -------------------------------------------------------------------- Products and Services It Receives from Third Parties. USA Video utilizes the - ---------------------------------------------------- services of third party contractors to provide certain technical services, telecommunications hardware, computers, software and communication lines and is directly affected by the quality of the goods and services provided by, and the reputations of, those third parties. The products and services USA Video receives from third parties may be inadequate or unreliable which could have a negative impact on USA Video's sales of its products and services. USA Video utilizes the following third party vendors: . SeaChange Systems - Baseline Video Servers . Cyberstorage Systems - Baseline Video Servers . PVI Systems, Inc. - Systems engineering consulting . Vianet Technologies - Baseline Wavelet algorithms Additionally, there can be no assurance that USA Video will successfully maintain relationships and affiliations with third parties on terms satisfactory to USA Video. An unanticipated termination of a relationship with a third party could adversely affect USA Video's results of operations. 11. USA Video Has Not Acquired Liability Insurance Which Places the Burden ---------------------------------------------------------------------- of Paying Damages for Liability Claims Solely on USA Video. USA Video has not - ---------------------------------------------------------- acquired liability insurance with respect to the provision of its products and services. Without insurance to cover damages resulting from liability claims stemming from its products or services, USA Video must shoulder any award of damages against it which could significantly affect its business operations if the award is substantial. 12. Government Regulation of the Internet May Negatively Impact USA --------------------------------------------------------------- Video's Ability to Provide the Marketplace With Its Products and Services. The - ------------------------------------------------------------------------- laws and regulations applicable to the Internet directly impact USA Video because its products and services are heavily dependent on the Internet as a communications and commercial medium. These laws and regulations are still evolving and unclear and have the potential of damaging its business. No specific laws are pending that will have a negative impact on the Internet. However, any of the following laws pertaining to the Internet, if enacted, could potentially have a negative impact on the marketplace for USA Video's products and services due to either an impact on an Internet audience or an impact on the clients who use USA Video's products and services to convey their video images through the Internet to an audience: . regulating the price of accessing the Internet; . taxing transactions that occur over the Internet could; . regulation of content on the Internet; . privacy on the Internet; and . intellectual property ownership. A number of proposals have been made at the federal, state and local levels 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 USA Video's operations. 27 13. If USA Is Unable to Raise Additional Capital, It May Not Be Able to ------------------------------------------------------------------- Continue as a Going Concern. USA Video typically needs more capital than it has - --------------------------- available to it or can expect to generate through the sale of its products and services. At this time, USA Video does not have sufficient cash resources to continue its operations for the next twelve months. USA Video has had to raise and will continue to need to raise, by way of debt and equity financing, $3.5 million to $4 million to meet its needs over the next 12 months. There is no guarantee that USA Video will be able to continue to raise the funds needed for its business. Failure to raise the necessary funds in a timely fashion will limit USA Video's ability to sustain its business. 14. Year 2000 Issues May Have a Material Adverse Effect on USA Video's ------------------------------------------------------------------ Operations. USA Video's products did not require any significant modifications - ---------- for the Year 2000. However, USA Video 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 USA Video 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. USA Video 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 USA Video's business operating results. 15. USA Video May Be Unable to Protect Its Intellectual Property, Trade ------------------------------------------------------------------- Secrets and Know-How Which Would Remove a Barrier to Competition and May - ------------------------------------------------------------------------ Directly Affect the Amount of Revenue the Company Generates. Although USA Video - ----------------------------------------------------------- employs various methods, including trademarks, patents, copyrights and confidentiality agreements with employees, consultants and third party businesses, to protect its intellectual property and trade secrets, there can be no assurance that USA Video 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 USA Video's operations. Additionally, USA Video may not receive a favorable ruling on the reinstatement of its lapsed patent for its Store and Forward VoD. 16. USA Video May Be Found Liable for Infringement Which May Expose It to --------------------------------------------------------------------- Payment of Significant Damages and Invalidation of Its Proprietary Rights. USA - ------------------------------------------------------------------------- Video's business activities may infringe upon the proprietary rights of others and those parties may assert infringement claims against USA Video. Should that occur, the claims and any resultant litigation could subject USA Video 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's time and attention from USA Video's business. 28 Risks Related to USA Video's Securities 1. Issuance of Additional Shares by USA Video May Have the Effect of ----------------------------------------------------------------- Diluting the Interest of Shareholders. Any additional issuances by USA Video - ------------------------------------- from its authorized but unissued shares may have the effect of diluting the percentage interest of existing shareholders. Out of the 250,000,000 authorized common shares of USA Video, 175,487,911, or 70%, remain 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 USA Video are issued. There are outstanding warrants and options whose holders may acquire additional common shares. USA Video fully intends to issue additional common shares or preferred shares in order to raise capital to fund its business operations and growth objectives. 2. Board of Directors Authority to Set Rights and Preferences of ------------------------------------------------------------- Preferred Stock May Prevent a Change in Control by Shareholders of Common Stock. - ------------------------------------------------------------------------------- Preferred shares may be issued in series from time to time with such designation, rights, preferences and limitations as the Board of Directors of USA Video determines by resolution and without shareholder approval. This is an anti-takeover measure. The Board of Directors has exclusive discretion to issue preferred stock with rights that may trump those of common stock. The Board of Directors could use an issuance of Preferred Stock with dilutive or voting preferences to delay, defer or prevent common stockholders from initiating a change in control of the company or reduce the rights of common stockholders to the net assets upon dissolution. Preferred stock issuances may also discourage takeover attempts that may offer premiums to holders of USA Video's common stock. 3. Concentration of Ownership of Management and Directors May Reduce the --------------------------------------------------------------------- Control by Other Shareholders Over USA Video. The executive officers and - -------------------------------------------- directors of USA Video own or exercise full or partial control over more than 20% of USA Video's outstanding common stock. As a result, other investors in USA Video's common stock may not have as much influence on corporate decision making. In addition, the concentration of control over USA Video's common stock in the executive officers and directors could prevent a change in control of USA Video. 4. Stockholders Do Not Have the Authority to Call a Special Meeting ---------------------------------------------------------------- Thereby Discouraging Takeover Attempts. Pursuant to USA Video's by-laws, By-law - -------------------------------------- 10.03, only the Board of Directors, the Chairman of the Board or the President of USA Video have the power to call a special meeting of the stockholders thereby limiting the ability of stockholders to effect a change in control of USA Video. 5. USA Video Does Not Anticipate Paying Dividends to Common Stockholders --------------------------------------------------------------------- in the Foreseeable Future Which Makes Investment in USA Video's Stock - --------------------------------------------------------------------- Speculative or Risky. USA Video has not paid dividends on its common stock and - -------------------- does not anticipate paying dividends on its common stock in the foreseeable future. The Board of Directors has sole authority to declare dividends payable to USA Video's stockholders. The fact that USA Video has not and does not plan to pay dividends indicates that the company must use all of its funds generated by operations for reinvestment in its operating activities and also emphasizes, as noted elsewhere in the Form 10, that the company may not continue as a going concern. Investors also must evaluate an investment in USA Video solely on the basis of anticipated capital gains. 29 6. USA Video's Common Stock May Be Ineligible to Trade on the OTC -------------------------------------------------------------- Bulletin Board Which May Have a Negative Impact on the Price of the Stock. USA - ------------------------------------------------------------------------- Video has received extensive comments from the Securities and Exchange Commission (the "SEC") on its Form 10 registration statement filed with the SEC. Although USA Video intends to use its utmost efforts to resolve all of the SEC's comments prior to being ineligible to trade on the OTC Bulletin Board, a significant probability exists that it will not be able to resolve all comments to the SEC's satisfaction in time. The price of USA Video's common stock will more than likely decline if its common stock is not able to trade on the OTC Bulletin Board. If USA Video's stock becomes ineligible to trade on the OTC Bulletin Board, its stock will remain ineligible until such time as it resolves all comments to the SEC's satisfaction and reapplies for inclusion on the OTC Bulletin Board. 7. Requirements of the SEC With Regard to Low-Priced "Penny Stock" -------------------------------------------------------------- Securities May Adversely Affect the Ability of Stockholders to Sell Their Stock - ------------------------------------------------------------------------------- in the Secondary Market. "Penny stocks" are low-priced, and usually highly - ----------------------- speculative, stock selling at less than $5.00 per share. USA Video'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 USA Video's securities and may adversely affect the ability of stockholders to sell their stock in the secondary market. 8. Limited Liability of Executive Officers and Directors May Discourage -------------------------------------------------------------------- Stockholders From Bringing a Lawsuit Against Them. USA Video's by-laws contain - ------------------------------------------------- provisions that limit the liability of directors for monetary damages and provide for indemnification of officers and directors. These provisions may discourage stockholders from bringing a lawsuit against officers and directors for breaches of fiduciary duty and may also reduce the likelihood of derivative litigation against officers and directors even though such action, if successful, might otherwise have benefited the stockholders. In addition, a stockholder's investment in USA Video may be adversely affected to the extent that costs of settlement and damage awards against officers or directors are paid by USA Video pursuant to the indemnification provisions of the articles of incorporation and by-laws. The impact on a stockholder's investment in terms of the cost of defending a lawsuit may deter the stockholder form bringing suit against one of USA Video's officers or directors. 30 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. 31 ITEM 2. Financial Information Selected Financial Data As discussed in the section of this Form 10 entitled Evolution of the Company, USA Video was in its development stage through 1999. However, a shift has occurred and USA Video is now focused on marketing and selling its products and services and as such expects revenues to significantly increase in 2000. USA Video is essentially "emerging" from its development stage by fully implementing its principal business. The following selected financial data reflects the fact that USA Video was in its development stage through 1999 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.
- ------------------------------------------------------------------------------------------------------------------------------------ January 1, 1992 (Date of Inception of Development Stage) to Item 1999 1998 1997 1996 1995 December 31, 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Revenue $ 20,500 $ 0 $ 0 $ 0 $ 0 $ 20,500 - ------------------------------------------------------------------------------------------------------------------------------------ Income / Loss ($1,684,468) ($ 981,598) ($ 678,156) ($ 658,983) ($ 3,168,518) ($ 18,786,880) - ------------------------------------------------------------------------------------------------------------------------------------ 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. USA Video'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. Status of Joint Venture and Subsidiary USA Video owns a 50% interest in a joint venture named Adnet USA LLC, which was incorporated as a California limited liability company. Formed in 1997, the purpose of Adnet USA LLC was to provide internet advertising and web page facilities to corporate customers. USA Video's joint venture partner is a related company by virtue of common directors. USA Video's expenses related to the joint venture were $174,144. USA Video and its joint venture partner agreed to abandon the joint venture and consequently Adnet USA LLC is inactive. The remaining investment in Adnet USA LLC is recorded at $Nil. See Note 4 of the Notes to the Consolidated Financial Statements. On June 14, 1999, Merging Rivers Media Corp was formed as a wholly owned subsidiary of USA Video, but the consultants retained to manage the subsidiary did not produce the agreed-upon results, and their contracts were terminated in October and November of 1999. No expenses resulted from the termination of these agreements. However, a lawsuit is pending against one of the consultants. For further details, please see the section below entitled "Legal Proceedings" for details of the case (USA Video Interactive Corp. and Merging Rivers Media Corp. v. Rafael O. Quezada). USA Video has brought legal action against one of the consultants for violations of contract. Merging Rivers Media Corp has been inactive for the last several months. USA Video accounts for its investment in Merging Rivers Media Corp on a consolidated basis. On May 4, 2000, Merging Rivers Media Corp changed its name to USA Video Productions Inc. USA Video intends to use the subsidiary to bring high quality content production and webcasting to the Internet. The subsidiary is planning to offer a complete end-to-end solution for bringing events to the public via the Internet. 32 Revenues No revenues were generated in 1997 or 1998. In 1999, revenues of $20,500 were generated from a sale to Enersphere, of which 50% is attributable to the sale of media server hardware, software and peripheral system components ("hardware / software") and 50% is attributable to engineering services associated with system development, integration, installation, training and support ("engineering services"). The following revenue has been booked for contracts signed in year 2000:
- ------------------------------------------------------------------------------------------------------- Client Item(s) Revenue % % hardware / engineering software services - ------------------------------------------------------------------------------------------------------- Inetcable Technology (hardware / software $165,000 50 50 & services) for video compression, streaming, decompression, software management and system integration. - ------------------------------------------------------------------------------------------------------- Polomania Media server system, services 15,000 50 50 - ------------------------------------------------------------------------------------------------------- (Proprietary Media server system, three 60,000 50 50 client) * encoding suites, services - ------------------------------------------------------------------------------------------------------- ----------- - ------------------------------------------------------------------------------------------------------- Total $240,000 50 50 - -------------------------------------------------------------------------------------------------------
* Client considers its identity with respect to the purchase, deployment and use of this technology to be competitive and proprietary, and USA Video has agreed not to disclose it. This agreement is not material to USA Video's continuation as a going concern. The following revenue is anticipated to be booked during the second quarter for contracts signed in year 2000:
- ------------------------------------------------------------------------------------------------------- Client Item(s) Revenue % hardware % engineering / software services - ------------------------------------------------------------------------------------------------------- LearningStation.com Video server system $ 45,000 50 50 with satellite downlink capability - ------------------------------------------------------------------------------------------------------- ApplicationStation.com Three video server 135,000 50 50 systems with satellite downlink capability - ------------------------------------------------------------------------------------------------------- ---------- - ------------------------------------------------------------------------------------------------------- Total $180,000 50 50 - -------------------------------------------------------------------------------------------------------
Net Losses At this time, USA Video has not achieved profitability and, in fact, expects to incur net losses for the foreseeable future. USA Video's net losses for the years ended December 31, 1999, 1998 and 1997 were $1,657,078, $981,598 and $678,156, respectively. As a percentage of revenues, net losses were approximately 800% in 1999. No revenue was generated in 1998 or 1997. 33 Expenses During the period 1997 to 1999, USA Video incurred significantly increased General and Administrative, Product Marketing, and Research and Development costs associated with its progressively increasing focus on developing products to compete in specific identified market segments and bringing those products to market. As follows, Table A identifies General/Administrative, Product Marketing, Research and Development, and Management Fee expenses incurred during 1999, 1998 and 1997 by USA Video. Table B identifies and discusses those year-to-year changes which management believes are of material benefit to understanding the conduct of business. In Table B, Related Parties and Other categories have been combined, where applicable, to reflect year-to-year total dollar and percentage increase for a given item. Table A -------
Expenses 1999 1998 1997 - -------- ---- ---- ---- General / Administrative Amortization of Capital Assets $ 108,869 $ 38,473 $ 1,362 Consulting Fees Related Parties 156,000 82,111 63,982 Other 26,713 License Fees & Penalty 58,937 -- -- Office & General - Other 135,894 32,919 15,661 Office Assistance Related Parties 66,000 21,739 10,916 Other 21,926 19,142 -- Printing 111,410 21,786 -- Professional Fees Related Parties 6,980 5,270 5,508 Other 50,631 43,341 59,639 Rent - Other 41,212 33,214 14,302 Telephone & Utilities 66,681 34,322 9,026 Travel & Entertainment 91,384 26,072 6,038 Web Site Costs 65,116 11,891 5,539 Other * 67,415 38,537 47,085 ---------- -------- -------- 1,048,455 408,817 265,771 Product Marketing Related Parties 214,500 82,000 Other 207,643 127,553 85,865 Research & Development Related Parties 82,500 24,000 Other 10,837 2,668 Management Fees - Related Parties 24,000 27,000 174,025 ---------- -------- -------- Total $1,587,935 $669,370 $528,329 ========== ======== ========
* Includes amortization of patents, automobile expenses, filing fees, insurance, membership fees, public relations, repairs and maintenance, and transfer agent fees. Table B ------- 1998 to 1999
- ------------------------------------------------------------------------------------------------------------------------------- ITEM $ INCREASE PERCENTAGE INCREASE DISCUSSION (DECREASE) (DECREASE) - ------------------------------------------------------------------------------------------------------------------------------- Amortization of 70,396 190 Increase in fixed assets attributable to focus on growing Capital Assets principal aspects of the business. - ------------------------------------------------------------------------------------------------------------------------------- Consulting Fees 73,889 90 Increased due to regulatory filings and administrative charges. - ------------------------------------------------------------------------------------------------------------------------------- License Fees & 58,937 N/A Principally a one-time penalty for default on an exclusive Penalty sales agreement. Balance for software licensing fee. - ------------------------------------------------------------------------------------------------------------------------------- Office & General 102,975 313 Associated with increased office and administrative activities supporting business growth efforts. - ------------------------------------------------------------------------------------------------------------------------------- Telephone & Utilities 32,359 94 Increased manpower and general growth in business activities. - ------------------------------------------------------------------------------------------------------------------------------- Travel & 65,312 251 Primarily travel to technical and general contractual Entertainment business meetings with clients, potential clients, vendors, equipment and software manufacturers, investor groups. - ------------------------------------------------------------------------------------------------------------------------------- Web Site Costs 53,225 448 Design and maintenance of the usvo.com website to support investor relations and to promote USA Video presence and image. - ------------------------------------------------------------------------------------------------------------------------------- Printing 89,624 411 Cost of annual report and proxy preparation for annual meeting of shareholders, as well as production of literature for ongoing shareholder and client communications. - ------------------------------------------------------------------------------------------------------------------------------- Product Marketing 212,590 101 Increased demand for marketing talent and associated marketing activities to identify and analyze appropriate market segments and move product. - ------------------------------------------------------------------------------------------------------------------------------- Research & 69,337 289 Necessity of continuing to develop, refine and enhance Development product offerings to ensure competitiveness in the market and support overall business plan. - -------------------------------------------------------------------------------------------------------------------------------
1997 to 1998
- --------------------------------------------------------------------------------------------------------------------------- ITEM $ INCREASE PERCENTAGE INCREASE DISCUSSION (DECREASE) (DECREASE) - --------------------------------------------------------------------------------------------------------------------------- Amortization of 37,111 2725 Increase in fixed assets attributable to focus on Capital Assets growing principal aspects of the business. - --------------------------------------------------------------------------------------------------------------------------- Travel & 20,034 332 Technical staff to meet with sources of new Entertainment technologies and management staff to meet with equity investors and potential equity investors. - --------------------------------------------------------------------------------------------------------------------------- Printing 21,786 N/A Primarily related to preparation of materials for shareholders for equity investors. - --------------------------------------------------------------------------------------------------------------------------- Rent 18,912 132 Expansion of facilities to accommodate business growth. - --------------------------------------------------------------------------------------------------------------------------- Product Marketing 123,688 49 Support of efforts to move initial products to market. - --------------------------------------------------------------------------------------------------------------------------- Research & 21,332 800 Development, deployment and assessment of baseline Development technology. - --------------------------------------------------------------------------------------------------------------------------- Management Fees (147,025) (544) Substantial reduction due to the fact that the previous president is no longer associated with USA Video and to the fact that USA Video has elected to allocate fees according to specific areas of activity in which individuals perform services. - ---------------------------------------------------------------------------------------------------------------------------
Compensation Expenses for Stock Options Granted to Management On January 2, 1990, USA Video established a Share Option Plan. The Share Option Plan accompanies this Form 10 as Exhibit 4.3. Under the terms of the plan, officers, directors and employees may be granted options to purchase common shares of USA Video at the closing price of the company's common stock on the date of the grant, with no option being granted below $0.067 per share. The options may be granted with varying terms until expiry, with a maximum term of 5 years. There are no specific vesting requirements under the plan. The aggregate number of securities reserved for issuance under the terms of the plan may not exceed 10% of the outstanding listed securities of USA Video and the aggregate number of securities reserved for issuance to any one party may not exceed 5% of the outstanding listed securities of the company. USA Video grants stock options at exercise prices equal to the fair market value of the company's stock at the date of the grant. USA Video has not incurred any expense for stock-based compensation but has elected to follow APBO No. 25 and provide pro forma information. See Note 9 of the Notes to the Consolidated Financial Statements contained in this Form 10 under Item 13 containing financial statements. Had compensation cost been determined based on the fair value at the grant dates for those options issued to directors, employees, and consultants, USA Video's net loss and loss per share would have been increased to the pro forma amounts indicated below:
1999 1998 1997 ---------- ---------- --------- Loss As reported $1,684,468 $ 981,598 $678,156 Pro forma $5,420,133 $1,193,652 $816,184 Loss per share As reported $ 0.03 $ 0.02 $ 0.02 Pro forma $ 0.08 $ 0.02 $ 0.02
Liquidity and Capital Resources The independent accountants have expressed the opinion that USA Video may not be capable of continuing its existence as a going concern. Management understands and acknowledges that it will be necessary to raise approximately $3.5 million to $4 million over the next 12 months of working capital in order to continue in business as a going concern. The threat to USA Video's continuation in business as a going concern will only be removed when revenues have reached a level that sustain USA Video's business operations. USA Video 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, USA Video generated $2,227,186, $977,630 and $937,126 in 1999, 1998 and 1997, respectively, through sales of its common stock. USA Video has approximately $500,000 in cash and liquid assets on hand and believes this is sufficient to fund current operations for three to four months. Subsequently, management currently anticipates raising an additional $3.5 million to $4 million through private offerings, which will be sufficient to finance operations for the next 12 months, as specifically set forth in the following: . Organizational Expenses $0.22 million . Marketing and Sales Expenses 1.6 million . Product Support Expenses (referred to in 0.5 million the USA Video budget as "Service Infrastructure") . Administrative Expense 0.18 million . Research and Development (includes 0.9 million $250,000 of associated infrastructure expenses) . Employees 0.6 million ------------- Total $4.0 million ============= Management's current expectation is that, assuming it can raise the aforementioned $3.5 million to $4 million through private offerings, continuing operations for the longer-term will be supported either through growth in revenues from sales of products and services, or through a return to the equity markets for additional funding, the level of which management cannot accurately anticipate at this time due to the unpredictability of longer-term sales performance. However, management would expect such additional funding requirements to exceed $4 million. There is no guarantee that management will be able to raise equity funds on terms acceptable to USA Video, if at all. There is a contingent liability in respect to a default judgment entered against USA Video's subsidiary, USA Video Corporation, in Texas, with regard to USA Video's lease of premises in the amount of $505,169. A claim was made to USA Video for the total amount payable under the terms of the lease through the term of the lease, which commenced in 1995 and will end in 2002. Any settlement resulting from the resolution of this contingency will be accounted for during the year of the settlement. Exposure to Market Risk ----------------------- USA Video believes its exposure to overall foreign currency risk is immaterial. USA Video 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. USA Video reports its operations in US dollars and its currency exposure, although considered by USA Video 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 USA Video will be denominated in US dollars. As USA Video 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. USA Video is not exposed to the effects of interest rate fluctuations as it does not carry any long-term debt. From a quantitative point of view, USA Video has had a foreign exchange gain of $15,308, $70,328 and $5,074 in 1999, 1998 and 1997, respectively. In addition, there is no material foreign exchange market risk exposure because, although held in Canadian bank accounts, 90% of USA Video's cash deposits are in U.S. currency. 34 ITEM 3. Properties In aggregate, USA Video spends approximately $59,868.00 on leases of office space per year. USA Video headquarters and executive offices are located at 70 Essex Street, Unit 1C, Mystic, Connecticut 06355 and the telephone number is (800) 625-2200. USA Video leases 1,547 square feet on an annual basis from Wharf Building Associates at a monthly rent fee of $1,509.00, or $18,108.00 for the year. USA Video also has additional office space at 100 Essex Street, Unit 1A, Mystic, Connecticut 06355. USA Video leases 1,116 square feet on an annual basis from Mystic Shipyard, LLC at a monthly rent fee of $1,700.00, or $20,400.00 for the year. USA Video 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. USA Video leases 800 square feet on a month-to-month basis from Graystone Property Management Ltd. at a monthly rent fee of U.S. $1,780.00, or $21,360.00 for the year. The Company paid a security deposit of U.S. $20,500.00 upon leasing the property. USA Video 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 USA Video. ITEM 4. Security Ownership of Certain Beneficial Owners and Management The following table sets forth as of April 28, 2000, the outstanding common shares of USA Video owned of record or beneficially by each Executive Officer and Director and by each person who owned of record, or was known by USA Video to own beneficially, more than 5% of USA Video common shares, and the shareholdings of all Executive Officers and Directors as a group. As of April 28, 2000, USA Video had 74,512,089 shares of common stock issued and outstanding.
- --------------------------------------------------------------------------------------------------------- Name Shares Owned Percentage of Shares Owned - --------------------------------------------------------------------------------------------------------- Edwin Molina (1) 5,117,924 6.61% President, Chief Executive Officer and member of the Board of Directors - --------------------------------------------------------------------------------------------------------- Anton J. Drescher (2) 5,387,885 7.08% Chief Financial Officer, Secretary and member of the Board of Directors - --------------------------------------------------------------------------------------------------------- Ronald L. Patton (3) 852,000 1.14% Chief Technical Officer - --------------------------------------------------------------------------------------------------------- Anthony J. Castagno (4) 1,792,700 2.38% Executive Vice President - --------------------------------------------------------------------------------------------------------- Gerhard J. Drescher (5) 267,598 0.36% Director - --------------------------------------------------------------------------------------------------------- Norman Bonin (6) 62,000 0.08% Director - --------------------------------------------------------------------------------------------------------- Daniel Sciro (7) 2,468,600 3.28% Vice President, Sales - --------------------------------------------------------------------------------------------------------- William Meyer (8) 250,000 0.34% Chief Operating Officer - --------------------------------------------------------------------------------------------------------- Kent Norton (9) 125,000 0.17% Chief Information Officer - --------------------------------------------------------------------------------------------------------- Matthew W. Kinnaman (10) 150,000 0.20% Vice President, Strategic Innovation - --------------------------------------------------------------------------------------------------------- ALL EXECUTIVE OFFICERS & DIRECTORS AS A 16,473,707 20.20% GROUP (10 Persons) (11) - ---------------------------------------------------------------------------------------------------------
35 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 1,735,000 warrants that are currently exercisable. Mr. Molina's address is the same as USA Video executive offices in Mystic, Connecticut. 2) Includes 1,000,000 options and 550,000 warrants that are currently exercisable. Mr. Drescher's address is the same as USA Video corporate office in Vancouver, British Columbia. 3) Includes 300,000 options and 80,000 warrants. Mr. Patton's address is the same as USA Video's executive offices in Mystic, Connecticut. 4) Includes 300,000 options and 470,000 warrants. Mr. Castagno's address is the same as USA Video's executive offices in Mystic, Connecticut. 5) Includes 50,000 options that are currently exercisable. Mr Drescher's address is the same as USA Video's corporate office in Vancouver, British Columbia. 6) Includes 50,000 options that are currently exercisable. Mr Bonin's address is the same as USA Video corporate office in Vancouver, British Columbia. 7) Includes 150,000 options and 610,000 warrants that are currently exercisable. Mr. Sciro's address is the same as USA Video's executive offices in Mystic, Connecticut. 8) Includes 250,000 options that are currently exercisable. Mr. Meyer's address is the same as USA Video's executive offices in Mystic, Connecticut. 9) Includes 125,000 options that are currently exercisable. Mr. Norton's address is the same as USA Video's executive offices in Mystic, Connecticut. 10) Includes 150,000 options that are currently exercisable. Mr. Kinnaman's address is the same as USA Video's executive offices in Mystic, Connecticut. 11) Includes 3,575,000 options and 3,445,000 warrants that are currently exercisable. USA Video's executive offices are located at 70 Essex Street, Mystic, Connecticut, 06355. USA Video's corporate offices are located at #507, 837 West Hastings Street, Vancouver, B.C., V6C 3N6. There are no arrangements known to USA Video the operation of which may result in a change of control of USA Video. 36 ITEM 5. Directors and Executive Officers The following table sets forth the name, age and position of each director and executive officer of USA Video:
- ------------------------------------------------------------------------------------------------------- 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 Executive Vice President since 1998 - ------------------------------------------------------------------------------------------------------- Ronald L. Patton 45 Chief Technical Officer since 1999 - ------------------------------------------------------------------------------------------------------- Daniel L. Sciro 34 Vice-President, Sales since 1998 - ------------------------------------------------------------------------------------------------------- William Meyer 46 Chief Operating Officer since 2000 - ------------------------------------------------------------------------------------------------------- Kent Norton 40 Chief Information Officer since 2000 - ------------------------------------------------------------------------------------------------------- Matthew W. Kinnaman 39 Vice President, Strategic Innovation since 2000 - -------------------------------------------------------------------------------------------------------
Gerhard Drescher, Anton Drescher, Edwin Molina and Norman Bonin were elected directors of USA Video 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 USA Video 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 USA Video he was a Senior Administrator with Adnet USA LLC, a private California company involved in Internet advertising, from May 1996 to June 1998. Mr. Molina was also a Senior Administrator with Future Link Systems Inc., a Vancouver Stock Exchange listed company involved in development of compression technology, from January 1988 to June 1992. Mr. Molina works a minimum of 60 hours per week on USA Video 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 USA Video. Anton J. Drescher - Chief Financial Officer, Secretary and Director - ------------------------------------------------------------------- Mr. Drescher has been Chief Financial Officer of USA Video since December 1994. 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. He has been a Certified Management Accountant since 1981. He has been a director and Secretary/ Treasurer of Future Link Systems Inc. a public company listed on the Canadian Venture Exchange which was involved in the development of compression technology since 1997; Director and Secretary/Treasurer of Interlink Systems Inc. (formerly Glassmaster Industries, Inc.), a public company listed on The Canadian Dealing Network involved in glass laminants waste disposal and mineral exploration, since 1996; President of Westpoint Management Consultants Limited, a public company listed on the Canadian Venture Exchange British Columbia company involved in taxation and public markets, since 1979; President of Harbour Pacific Capital Corp., a private British Columbia company involved in regulatory filings for businesses in Canada, since 1998; and director and President of International Tower Hill Mines Limited, a private British Columbia company involved in mineral exploration. Mr. Drescher works between 40 and 60 hours per week on USA Video activities. He spends significantly less time supervising professionals working on the accounts of his clients at his other businesses. Gerhard Drescher and Anton Drescher are brothers. 37 Gerhard J. Drescher - Director - ------------------------------ Mr. Drescher has been a director of USA Video 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. Norman J. Bonin - Director - -------------------------- Mr. Bonin has been a director of USA Video since June 1998. Mr. Bonin is President and a director of Direct Disposal Corp., a private British Columbia company engaged in waste management, since 1993. He has been a director of Future Link Systems Inc. since 1998. Anthony J. Castagno - Executive Vice President - ---------------------------------------------- Mr. Castagno joined USA Video in 1999 as a Vice President. In April, 2000, he transitioned from Chief Operating Officer to Executive Vice President. Mr. Castagno provided business development, investment and marketing strategy in his role as Chief Operating Officer of USA Video. His duties included directing and overseeing all technology activities of USA Video, 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. He also serves as President of The Rowe Group, an independent consulting firm specializing in marketing, investor and media relations. Prior to starting The Rowe Group in 1997, he headed a three-state public relations and marketing organization for approximately 17 years for Northeast Utilities, a large public utility in the northeastern U.S. Mr. Castagno teaches a course on mass media and communications at the University of Connecticut and has authored numerous articles and reference materials. Mr. Castagno works between 40 and 60 hours per week on USA Video activities. He spends significantly less time supervising professionals working on the accounts of his clients at The Rowe Group. Ronald L. Patton - Chief Technical Officer - ------------------------------------------ Mr. Patton joined USA Video in January 1999 as a Vice President. Prior to joining USA Video, Mr. Patton was a Vice President of Analysis and Technology from 1998 to 1999. Prior to that he was Senior Vice President of Sonalysts, Inc. for approximately 20 years. Both companies are involved in high-tech video and audio services. Mr. Patton works a minimum of 60 hours per week on USA Video business. His duties include directing and overseeing all technology activities of USA Video, 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 joined USA Video in June 1998 as Vice President. Mr. Sciro was President of PC Telecom Corp., Global Telecommunications Systems Corp., and Digital Numeric Systems Corp. for more than 5 years before joining USA Video. The three companies were involved in telecommunications. As President, Mr. Sciro was involved with the development and deployment of global telecommunication technologies for clients. Mr. Sciro works a minimum of 60 hours per week on USA Video business. 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 team of sales professionals. William Meyer - Chief Operating Officer - --------------------------------------- Mr. Meyer joined USA Video in April 2000 as its Chief Operating Officer. As Chief Operating Officer, Mr. Meyer will direct and oversee all technology activities of USA Video, 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. He has specialized knowledge of motivational techniques, strategic planning, digital audio/video systems, high capacity data storage, television production facilities, computer networks, satellite transmission systems and the Internet. Mr. Meyer has over 20 years of experience in the following areas: operations management; engineering; and marketing and consulting for television and digital information systems. He is skilled in planning, budgeting and managing multiple projects for growth using proven methods and effective communications. He has held the following positions over the past six years: Director of Network Operations and Engineering for Paxson Communications Corporation, a company involved in supporting television networks; Operations Manager of Corporate Engineering for Paxson Communications Corporation. Mr. Meyer has a BA from Central Michigan University. Kent Norton - Chief Information Officer - -------------------------------------------------- Mr. Norton joined USA Video in May 2000 as Chief Information Officer. He is responsible for expanding the company's Internet activities, including providing streaming video and Video on Demand and designing a secure data network for USA Video Interactive's worldwide deployments. Prior to joining USA Video, Mr. Norton was Director of Technology and Information Systems with beenz.com, which is creating a universal, incentive-based currency for on-line merchants. Previously, he was senior manager for Computer Sciences Corporation, where he designed a global technical support infrastructure for the company's "help desks" around the world. He also has 10 years experience in senior technology positions with Sonalysts and General Dynamics. Mr. Norton has in-depth knowledge and experience in multiple UNIX environments, including Linux; all aspects of data networking including LANs, WANs, security and administration; software development, integration and design including open-source software development, integration and design; global IT infrastructures and business requirements; and commercial design, development and deployment of Internet and business-focused e-systems and products. He holds a Bachelor of Science degree in Civil & Structural Engineering from the University of Cincinnati. Matthew W. Kinnaman - Vice President, Strategic Innovation - --------------------------------------------------------------------------- Mr. Kinnaman joined USA Video in May 2000 as Vice President of Strategic Innovation. He works closely with USA Video's technical and marketing groups to create technological innovation strategies to move USA Video into the rapidly advancing arena of Internet streaming media. Prior to his appointment at USA Video, Mr. Kinnaman was at Gilder Technology Group, which, with Forbes Magazine, co-publishes George Gilder's influential investment strategy newsletter, the Gilder Technology Report. While at Gilder Technology Group, Mr. Kinnaman was Editorial Director of Conferences, working directly with Gilder on the production of the Telecosm Conference. He also served as Director of Research and Communication for Harvard Business School professor Clayton Christensen's "Innovation Partnership," and as Editorial Director for Christensen's "Disruptive Innovation Conference." Clayton Christensen is author of the best seller, The Innovator's Dilemma, and has recently launched Innosight LLC (www.innosight.com). 38 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 USA Video 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) 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 USA Video 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 USA Video 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 USA Video 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 $194,300.00. 39 The following table sets forth certain information concerning grants of stock options pursuant to stock option plans to the Named Executive Officer during the year ended December 31, 1999. OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term - ----------------------------------------------------------------------------------------------------------------------- % of Total Options / Number of SARs Market Securities Granted to Price Underlying Employees on Options/SARs in Fiscal Exercise Date of Expira- Granted Year (1) Price Grant tion ($/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 USA Video'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 USA Video's common stock. 40 Compensation of Directors Directors receive no compensation for their service as such, although they do receive reimbursement for consulting services provided to USA Video. 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 USA Video, 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. USA Video has no obligation or policy to grant stock options to directors. Employment Contracts USA Video 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. On April 27, 2000, USA Video executed an employment agreement with William Meyer, USA Video's new Chief Operating Officer (attached to this Form 10 as Exhibit 10.5). The agreement provides for a two year term and guarantees a base starting salary of $120,000.00 annually. Mr. Meyer will also be eligible to receive a bonus as determined by USA Video's Board of Directors. The agreement also contains a provision granting Mr. Meyer the option to purchase 250,000 shares of USA Video's common stock, exercisable for a period of 5 years. Mr. Meyer will be reimbursed for his expenses associated with commuting between Florida and Connecticut for a period of 3 months. If the agreement is terminated for cause, USA Video will have no further obligations to Mr. Meyer except to pay his base salary and all other benefits accrued through the date of termination. If the agreement is terminated without cause or if Mr. Meyer terminates the agreement for good reason, he is entitled to receive all base salary due for the balance of the term of the agreement within 30 days of the date of termination. Mr. Meyer agreed to keep secret all confidential matters of USA Video and its affiliates. The agreement also contains an indemnification provision that indemnifies Mr. Meyer against any and all judgments, fines, settlement amounts and reasonable expenses incurred in connection with any action or proceeding by reason of the fact that Mr. Meyer is an officer of USA Video. No other director or executive officer has signed an employment agreement with USA Video. USA Video 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 USA Video 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 USA Video, and no owner of five percent or more of USA Video'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. In 1999, each of the following executive officers received $120,000 in fees for services rendered as specified: Edwin Molina - $24,000 in management fees; $96,000 in product marketing fees. Anton Drescher - $120,000 in consulting fees. Ronald Patton - $60,000 in product marketing fees; $60,000 in product development fees. Anthony Castagno - $36,000 in consulting fees; $36,000 in office assistance fees; $12,000 in public relations fees; $36,000 in product marketing fees. Certain Business Relationships ------------------------------ No directors or nominee for director is or has been during USA Video'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 USA Video in excess of 5% of either company's revenues or assets. USA Video owns a 50% interest in a joint venture named Adnet USA LLC, which was incorporated as a California limited liability company. Formed in 1997, the purpose of Adnet USA LLC was to provide internet advertising and web page facilities to corporate customers. USA Video's joint venture partner is a related company by virtue of common directors. USA Video's expenses related to the joint venture were $174,144. USA Video and its joint venture partner agreed to abandon the joint venture and consequently Adnet USA LLC is inactive. 41 Indebtedness of Management -------------------------- There are no persons who are directors, executive officers of USA Video, 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 USA Video in an amount in excess of $60,000. ITEM 8. Legal Proceedings The following are pending legal proceedings in which USA Video is a party: 1. USA Video Interactive Corp. v. Wegener Communications, Inc. ----------------------------------------------------------- This case was commenced by USA Video 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 USA Video five percent of the value of any orders from customers referred to it by USA Video. In reliance on this agreement, USA Video 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 USA Video 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 in excess of $75,000.00 and in an amount deemed equitable and appropriate by the court. 2. USA Video Interactive Corp. and Merging Rivers Media Corp. v. Rafael -------------------------------------------------------------------- O. Quezada - ---------- This case was commenced by USA Video 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, USA Video entered into a Confidentiality and Non-Disclosure Agreement with the defendant, prohibiting him from disclosing and using USA Video confidential information without prior written consent of USA Video. The Agreement also provided that USA Video would retain all publication and ownership rights to all intellectual property. In mid-June, 1999, USA Video and Merging Rivers entered into a Consulting Agreement with the defendant which provided that the defendant was to represent Merging Rivers and USA Video to clients and prospective clients for purposes of selling video and other multimedia advertising. At the end of July, 1999, USA Video provided a laptop computer to the defendant containing proprietary information. 42 The defendant later registered domain names and trademarks in his own name, charging the expenses to USA Video. While a consultant to USA Video 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 USA Video. Following termination of his consulting agreement with USA Video and his employment with Merging Rivers, the defendant interfered with a business relationship between USA Video and one of its customers. The plaintiffs are seeking full compensatory and consequential damages, an award of treble damages, and other equitable relief in an amount in excess of $75,000.00 and deemed equitable and appropriate by the court. 3. 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 USA Video, 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 USA Video 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 USA Video's Executive Officers and Directors, USA Video 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. 43 ITEM 9. Market Price of and Dividends on USA Video'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 pink sheets operated by the National Quotation Bureau since May 3, 2000. 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. The amount of common stock of USA Video subject to outstanding options or warrants to purchase is 12,958,000 shares. The amount of common stock of USA Video that could be sold pursuant to Rule 144 of the Securities Act of 1933 is 72,247,089. As of April 22, 2000, there were 74,512,089 common shares outstanding, held by 1,118 shareholders of record and by various broker/dealers on behalf of an indeterminate number of street 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. 44 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, USA Video concluded an offering of units. Each unit consisted of one common share and one warrant to acquire an additional share at $4.00 per share by January 26, 2002. On completion of the offering, a total of 190,000 units were issued at $4.00 per unit for total proceeds of $760,000.00. 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. USA Video limited the manner of the offering. The investors included four (4) directors/executive officers and one (1) employee. If the foregoing exemptions are not available, USA Video believes that $120,000.00 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 purchaser. b) During the period ended February, 2000, USA Video 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. USA Video has made publicly available financial and disclosure information with its filings to the Canadian Venture Exchange. USA Video limited the manner of the offering. The investors included executive officers, directors and employees and there were less than five (5) non- accredited investors. USA Video 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, USA Video 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. USA Video limited the manner of the offering. The investors included two (2) directors/executive officers, four (4) accredited individual investors and five (5) sophisticated individual investors. If the foregoing exemptions are not available, USA Video 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, USA Video 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. USA Video limited the manner of the offering. The investors included five (5) directors/executive officers, two (2) employees, four (4) accredited individual investors, and three (3) sophisticated individual investors. If the foregoing exemptions are not available, USA Video 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, USA Video 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, 45 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. USA Video limited the manner of the offering. The investors included three (3) directors/executive officers, one (1) employee, three (3) accredited individual investors, and two (2) sophisticated individual investors. If the foregoing exemptions are not available, USA Video 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, USA Video 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 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. USA Video limited the manner of the offering. The investors included four (4) directors/executive officers, two (2) employees, two (2) accredited individual investors, and one (1) sophisticated individual investor. If the foregoing exemptions are not available, USA Video 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, USA Video 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 USA Video's written share option plan, a copy of which USA Video has provided to its participants. h) During the year ended December 31, 1999, USA Video 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. USA Video has made publicly available financial and disclosure information with its filings to the Canadian Venture Exchange. USA Video limited the manner of the offerings. The investors included executive officers, directors and employees and there were less than ten (10) non-accredited investors. USA Video 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, USA Video 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. USA Video limited the manner of the offering. The investors included six (6) directors/executive officers, five (5) accredited individual investors and two (2) sophisticated individual investors. If the foregoing exemptions are not available, USA Video 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. 46 j) During the year ended December 31, 1998, USA Video 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. USA Video has made publicly available financial and disclosure information with its filings to the Canadian Venture Exchange. USA Video limited the manner of the offerings. The investors included executive officers, directors and employees and there were less than five (5) non-accredited investors. USA Video 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, USA Video 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 USA Video's written share option plan, a copy of which USA Video has provided to its participants. l) In October 1997, USA Video 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. USA Video limited the manner of the offering. The investors included two (2) directors/executive officers and one (1) accredited individual investor. If the foregoing exemptions are not available, USA Video believes that $47,000.00 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. m) In June 1997, USA Video concluded an offering of units. Each unit consisted of one warrant to acquire an additional share at $0.067 per share by June 27, 1999. On completion of the offering, a total of 2,500,000 units were issued at $0.072 per unit for total proceeds of $180,583.00. 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. USA Video limited the manner of the offering. The investors included five (5) directors/executive officers. If the foregoing exemptions are not available, USA Video 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) In February 1997, USA Video concluded an offering of units. Each unit consisted of one warrant to acquire an additional share at $0.067 per share by June 27, 1999. On completion of the offering, a total of 1,500,000 units were issued at $0.072 per unit for total proceeds of $108,350.00. 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. USA Video limited the manner of the offering. The investors included five (5) directors/executive officers, two (2) employees, one (1) accredited individual investor and two (2) sophisticated individual investors. If the foregoing exemptions are not available, USA Video 47 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. o) During the year ended December 31, 1997, USA Video 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 USA Video's written share option plan, a copy of which USA Video has provided to its participants. p) During the year ended December 31, 1997, USA Video 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. USA Video has made publicly available financial and disclosure information with its filings to the Canadian Venture Exchange. USA Video limited the manner of the offerings. The investors included executive officers and directors and there were no non-accredited investors. USA Video 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. Liquidation Rights: Upon liquidation, each outstanding common share entitles the holder thereof to receive such assets of USA Video as are remaining and distributable. Limitations on Shareholders Effecting a Change in Control: Pursuant to USA Video's by-laws, By-law 10.03, only the Board of Directors, the Chairman of the Board or the President of USA Video have the power to call a special meeting of the stockholders thereby limiting the ability of stockholders to effect a change in control of USA Video. 48 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. This is an anti-takeover measure. The Board of Directors has exclusive discretion to issue preferred stock with rights that may trump those of common stock. The Board of Directors could use an issuance of Preferred Stock with dilutive or voting preferences to delay, defer or prevent common stockholders from initiating a change in control of the company or reduce the rights of common stockholders to the net assets upon dissolution. Preferred stock issuances may also discourage takeover attempts that may offer premiums to holders of USA Video's common stock. Stock Options ------------- A total of 7,343,000 stock options, convertible on a one for one basis, were outstanding as at April 28, 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 $ 5.00 625,000 (1) April 28, 2000 April 28, 2002 (2) $ 2.00 (1) These options are subject to Regulatory Acceptance. (2) The expiry date for 250,000 of the 625,000 options granted to William Meyer is April 28, 2005. 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 5,615,000 warrants, convertible on a one for one basis, were outstanding as a April 28, 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 $ 1.10 190,000 January 26, 2002 $ 4.00 49 The Board of Directors may determine and from time to time 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. ITEM 12. Indemnification of Directors and Officers Pursuant to Title 17, Section 17-16-851 of the Wyoming Statutes, a corporation may indemnify an individual who is a party to a proceeding if: 1. He or she is a director against liability incurred in the proceeding if he or she conducted himself or herself in good faith; 2. He or she reasonably believed that his or her conduct was in or at least not opposed to the corporation's best interests; and 3. In the case of any criminal proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful; or 4. He or she engaged in conduct for which broader indemnification has been made permissible under a provision of the articles of incorporation. A corporation may not indemnify a director under this section, absent a court order, in connection with a proceeding by or in the right of the corporation or in connection with any proceeding with respect to conduct for which he or she was adjudged liable on the basis that he or she received a financial benefit to which he or she was not entitled. Pursuant to Title 17, Section 17-16-852 of the Wyoming Statutes, a corporation must indemnify a director who was wholly successful in the defense of any proceeding to which he or she was a party in his or her capacity as director of the corporation against reasonable expenses incurred by him or her in connection with the proceeding. As provided in Section 17-16-853 of the Wyoming Statutes, a corporation may advance funds to pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding because he or she is a director. Pursuant to Title 17, Section 17-16-855 of the Wyoming Statutes, a corporation may not indemnify a director under Section 17-16851 unless authorized for a specific proceeding after a determination has been made that indemnification of the director is permissible. Pursuant to Title 17, Section 17-16-856 of the Wyoming Statutes, a corporation may indemnify and advance expenses to an officer of the corporation who is a party to a proceeding because he is an officer of the corporation to the same extent as a director and if eh or she is not a director, to such further extent as may be provided by the articles of incorporation, the bylaws, a resolution of the board of directors or contract. An officer may not be indemnified for liability in connection with a proceeding by or in the right of the corporation other than for reasonable expenses incurred in connection with the proceeding. Nor may an officer be indemnified for liability arising out of conduct that constitutes receipt by him or her of a financial benefit to which he or she it not entitled, an intentional infliction of harm on the corporation or the shareholders, or an intentional violation of criminal law. 50 USA Video's bylaws limit the liability of directors and officers for any loss, damage or expense to USA Video 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 USA Video 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 USa Video. These provisions in the bylaws do no 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 USA Video, 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 USA Video or USA Video stockholders, for any transaction from which the director or officer derived an improper personal benefit, for improper transactions between the director or officer and USa Video 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. USA Video has signed an employment agreement with William Meyer, its new Chief Operating Officer. The employment agreement contains in indemnification provision which includes the following: . USA Video will indemnify the Executive against any and all judgments, fines, amounts paid in settlement and reasonable expenses, including attorney fees, incurred in connection with any action or proceeding by reason of the fact that the Executive is or was a director, officer, employee, representative or agent of USA video; provided, however, that no indemnification shall be made to the Executive if an adverse judgment or other final adjudication establishes that the acts of the Executive were committed in bad faith or were the result of active and deliberate dishonesty or gross negligence and, in either case, were material to the cause of action. . In addition, the Executive shall be entitled to indemnification by USA Video against any liability or damage, including attorney's fees and liabilities under federal and state securities laws, arising from any act or omission by the Executive provided that the act or omission was reasonably believed to be within the scope of the Executive's authority or was taken upon advice of the accountants or legal counsel for the Company. . The indemnification of the Executive shall continue after the Executive has ceased to be a director, officer, employee, representative or agent of USA Video and shall inure to the benefit of the Executive's heirs, executors, administrators and legal representatives. There is no pending litigation or proceeding involving USA Video directors or officers as to which indemnification is being sought, nor is USA Video aware of any pending or threatened litigation that may result in claims for indemnification by an director or officer. 51 ITEM 13. Financial Statements and Supplementary Data - -------------------------------------------------------------------------------- TERRY AMISANO LTD. AMISANO HANSON - -------------------------------------------------------------------------------- KEVIN HANSON, C.A. CHARTERED ACCOUNTANTS - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT To the Stockholders, USA Video Interactive Corp. We have audited the accompanying consolidated balance sheets of USA Video Interactive Corp. (A Development Stage Enterprise) 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 United States 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. We believe that our audit provides a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the consolidated financial position of USA Video Interactive Corp. as at December 31, 1999 and 1998 and the consolidated results of its operations 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, 1998, in accordance with generally accepted accounting principles in the United States. The accompanying consolidated financial statements referred to above have been prepared assuming that the company will continue as a going concern. As discussed in Note 1 to the financial statements, the company is in the development stage, and has no established source of revenue and is dependent on its ability to raise capital from shareholders or other sources to sustain operations. These factors, along with other matters as set forth in Note 1, raise substantial doubt that the company will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Vancouver, Canada "AMISANO HANSON" March 13, 2000 Chartered Accountants Suite 604 - 750 West Pender Street, Vancouver B.C., Canada, V6C 2T7 TELEPHONE: (604) 689-0188 FACSIMILE: (604) 689-9773 EMAIL: amishan@istar.ca -52- 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 - related party - Note 3 20,700 73,920 Accounts receivable - related parties - Note 8 - 12,590 - other 17,661 8,459 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 - related parties - Note 8 $ 11,592 $ 19,372 - other 485,571 475,228 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 -53- 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 --------- --------- --------- ----------- General and Administrative Expenses Amortization of capital assets 108,869 38,473 1,362 232,764 Amortization of goodwill - - - 228,023 Amortization of patents 4,493 2,508 2,170 17,329 Automobile expenses - 5,127 - 51,974 Consulting fees - related parties - Note 8 156,000 82,111 63,982 1,218,044 - other - - 26,713 701,233 Delivery costs - - - 56,042 Equipment rental - - - 95,136 Filing fees 13,897 8,326 6,581 87,996 Insurance 3,309 928 - 56,041 License fees and penalty 58,937 - - 58,937 Management fees - related parties - Note 8 24,000 27,000 174,025 1,940,845 Membership fee 6,250 - - 6,250 Office assistance - related parties - Note 8 66,000 21,739 10,916 102,067 - other 21,926 19,142 - 36,906 Office and general - related parties - Note 8 - - - 236,989 - other 135,894 32,919 15,661 625,241 Printing 111,410 21,786 - 273,823 Product marketing costs - related parties - Note 8 214,500 82,000 - 296,500 - other 207,643 127,553 85,865 492,048
SEE ACCOMPANYING NOTES -54- (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 ---- ---- ---- ---- Professional fees -related parties - Note 8 6,980 5,270 5,508 105,252 - other 50,631 43,341 59,639 642,223 Public relations - related parties - Note 8 2,000 - 31,118 12,000 - other 24,934 13,050 - 363,213 Rent - related parties - Note 8 - - - 12,950 - other 41,212 33,214 14,302 466,776 Repairs and maintenance - 2,638 - 20,817 Research and development costs - related parties - Note 8 82,500 24,000 - 525,698 - other 10,837 - 2,668 3,206,559 Salaries and benefits - related parties - Note 8 - - - 219,177 - other - - - 1,579,578 Telephone and utilities 66,681 34,322 9,026 519,632 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 11,891 5,539 82,546 ---------- -------- -------- ----------- (1,587,935) (669,370) (528,329) (15,424,093) ---------- -------- -------- ----------- Provision for Doubtful Accounts Write-down of advances - related parties - Note 8 (14,375) (113,779) - (135,481) - other (7,000) (16,852) - (23,852) ---------- -------- -------- ----------- (21,375) (130,631) - (159,333) ---------- -------- -------- -----------
SEE ACCOMPANYING NOTES -55- 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 ---- ---- ---- ---- Other General Expense Severance pay - related party - Note 8 - (90,000) - (90,000) ------- ------- ------- --------- Non-operating Income (Loss) Interest income 11,715 - - 16,735 Foreign exchange gain 15,308 70,328 5,074 266,967 Gain (loss) on sale of marketable securities - related parties - Note 8 (35,788) (688) 64,213 393,090 Gain on disposal of capital assets - related parties - Note 8 - - - 48,133 - other - 77 - 18,989 Gain on settlement of accounts payable - - - 197,228 Gain on write-off of accounts payable 73,926 - 26,760 142,428 ------- ------- ------- --------- 65,161 69,717 96,047 1,083,570 ------- ------- ------- --------- Interest Expense General - related parties - Note 8 (12,965) (24,379) (44,342) (331,024) - other - (286) (1,822) (212,314) Interest on convertible debentures - related parties - Note 8 - - - (133,144) - other - - - (27,497) ------- ------- ------- --------- (12,695) (24,665) (46,164) (703,979) ------- ------- ------- ---------
SEE ACCOMPANYING NOTES -56- 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 ---- ---- ---- ---- Non-operating Expenses Oil well closure costs - - (3,092) (79,702) Write-down of capital assets - (1,408) - (745,520) Write-off of resource properties - - - (717,789) Write-off of goodwill - - - (640,639) ----------- --------- --------- ------------ - (1,408) (3,092) (2,183,650) ----------- --------- --------- ------------ Loss before Other Items (1,558,813) (846,357) (481,538) (17,476,184) Cumulative effect on prior years of changing to a different amortization method - Note 6 (27,390) - - (27,390) Loss on Equity Accounted Investment - Note 4 - (16,434) (109,938) (174,144) Write-down of marketable securities - related party - Note 8 (101,265) (118,807) (86,680) (1,109,162) ----------- --------- --------- ------------ Net loss $(1,684,468) $(981,598) $(678,156) $(18,786,880) =========== ========= ========= ============ Basic 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 -57- 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 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 Share subscriptions at (906,750) (906,750) 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 -58- 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 Date of Number Common Stock Common Share Development Issuance of Shares Price Amount Subscriptions Stages Total -------- --------- ----- ------ ------------- ------ ----- Issued for cash: Private placement May 1, 1992 3,000,000 $0.141 422,081 422,081 Private placements Various 1,625,669 $0.629 1,022,518 1,022,518 Share purchase options Various 450,000 $0.041 18,621 (6,923) 11,698 Share purchase options Various 371,000 $0.414 153,521 153,521 Share purchase warrants Various 700,000 $0.166 115,865 115,865 Share purchase warrants Various 283,250 $0.414 117,210 117,210 Convertible debenture warrants Various 8,297,320 $0.041 343,347 343,347 Issued for conversion of debenture Various 8,297,320 $0.031 257,511 257,511 Issued for settlement of debt Apr. 14, 1992 1,031,332 $0.093 96,023 96,023 Issued for settlement of debt Various 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 -59- 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 Date of Number Common Stock Common Share Development Issuance of Shares Price Amount Subscriptions Stages Total -------- --------- ----- ------ ------------- ------ ----- Issued for cash: Private placement Mar. 4, 1993 500,000 $0.395 197,705 197,705 Private placement Mar. 4, 1993 1,000,000 $0.465 465,188 465,188 Private placement May 5, 1993 2,328,615 $0.636 1,480,436 (154,181) 1,326,255 Issue costs (18,938) (18,938) Private placement Jul 13, 1993 50,000 $1.287 64,351 64,351 Share purchase options Various 2,521,320 $0.388 977,407 977,407 Share purchase options Various 150,000 $0.465 69,778 69,778 Share purchase warrants Various 50,000 $0.644 32,175 32,175 Convertible debenture warrants Various 1,146,485 $0.039 44,444 44,444 Issued for conversion of debenture Various 666,666 $0.029 19,383 19,383 Issued for conversion of debenture Various 781,250 $0.821 641,098 641,098 Issued in payment of debenture interest Various 479,819 $0.029 13,950 13,950 Issued for settlement of debt Jan. 7, 1993 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 -60- 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) --------------------
Date of Number Common Stock Common Share Issuance of Shares Price Amount Subscriptions -------- --------- ----- ------ ------------- Issued for cash: Private placements Various 3,000,000 $0.732 2,196,354 (485,900) Private placements Various 22,261,000 $0.183 4,074,420 Share purchase options Various 52,180 $0.366 19,101 Share purchase options Various 87,900 $0.439 38,612 Share purchase warrants Feb. 2, 1994 100,000 $0.549 54,909 Share purchase warrants Mar. 21, 1994 300,000 $0.498 149,352 Issued for conversion of debenture Jul. 5, 1994 78,125 $0.813 63,552 Reserved earnout shares acquired and cancelled Net loss for year ---------- ---------- ------------- Balance December 31, 1994 69,718,884 14,704,937 - Issued for settlement of debt Jan. 12, 1995 150,000 $0.255 38,249 Issued for settlement of debt Jan. 12, 1995 10,720 $0.182 1,952 Share consolidation - 1 share for 5 shares Feb. 23, 1995 (55,903,643) Issued for cash: Private placements Various 510,000 $0.219 111,467 Issued for settlement of debt Feb. 5. 1995 7,574 $0.546 4,138 Deficit Accumulated During the Development Stages Total ------ ----- Issued for cash: Private placements 1,710,454 Private placements 4,074,420 Share purchase options 19,101 Share purchase options 38,612 Share purchase warrants 54,909 Share purchase warrants 149,352 Issued for conversion of debenture 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 (13,469,197) 1,235,740 Issued for settlement of debt 38,249 Issued for settlement of debt 1,952 Share consolidation - 1 share for 5 shares Issued for cash: Private placements 111,467 Issued for settlement of debt 4,138
-61- 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) --------------------
Date of Number Common Stock Common Share Issuance of Shares Price Amount Subscriptions -------- --------- ----- ------ ------------- Net loss for year Share subscriptions at December 31, 1995 394,791 ---------- ---------- ---------- Balance December 31, 1995 14,493,535 14,860,743 394,791 Issued for cash: Private placements Various 9,950,000 $0.088 875,623 (394,791) Share purchase options Various 205,000 $0.183 37,585 Issued for settlement of debt Jun. 14, 1996 9,233,553 $0.088 812,575 Net loss for year Share subscriptions at December 31, 1996 106,827 ---------- ---------- ---------- Balance December 31, 1996 33,882,088 16,586,526 106,827 Issued for cash: Private placements Various 4,000,000 $0.072 288,933 (106,827) Private placement Dec. 17, 1997 1,250,000 $0.235 293,448 Share purchase warrants Various 749,000 $0.079 59,513 Share purchase warrants Various 3,000,000 $0.108 325,051 Share purchase warrants Various 270,000 $0.116 31,205 Share purchase options Various 650,000 $0.072 46,952 Deficit Accumulated During the Development Stages Total -------------- ------------- Net loss for year (3,168,518) (3,168,518) Share subscriptions at December 31, 1995 394,791 ----------- ---------- Balance December 31, 1995 (16,637,715) (1,382,181) Issued for cash: Private placements 480,832 Share purchase options 37,585 Issued for settlement of debt 812,575 Net loss for year (658,893) (658,893) Share subscriptions at December 31, 1996 106,827 ----------- -------- Balance December 31, 1996 (17,296,608) (603,255) Issued for cash: Private placements 182,106 Private placement 293,448 Share purchase warrants 59,513 Share purchase warrants 325,051 Share purchase warrants 31,205 Share purchase options 46,952
-62- 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) --------------------
Date of Number Common Stock Common Share Issuance of Shares Price Amount Subscriptions -------- --------- ----- ------ ------------- Net loss for year Share subscriptions at December 31, 1997 113,708 ---------- ---------- ------- Balance December 31, 1997 43,801,088 17,631,628 113,708 Issued for cash: Private placements Various 6,000,000 $0.067 404,449 Share purchase warrants Various 2,000,000 $0.101 202,224 (75,835) Share purchase warrants Various 550,000 $0.074 40,782 Share purchase warrants Apr. 24, 1998 300,000 $0.108 32,356 Share purchase warrants Various 2,655,000 $0.067 178,969 Share purchase options Various 3,450,000 $0.067 232,558 (37,873) Net loss for year ---------- ---------- ------- Balance December 31, 1998 58,756,088 18,722,966 - Deficit Accumulated During the Development Stages Total ------ ----- Net loss for year (678,156) (678,156) Share subscriptions at December 31, 1997 113,708 ----------- ------- Balance December 31, 1997 (17,974,764) (229,428) Issued for cash: Private placements 404,449 Share purchase warrants 126,389 Share purchase warrants 40,782 Share purchase warrants 32,356 Share purchase warrants 178,969 Share purchase options 194,685 Net loss for year (981,598) (981,598) ----------- -------- Balance December 31, 1998 (18,956,362) (233,396)
-63- 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) --------------------
Date of Number Common Stock Common Share Issuance of Shares Price Amount Subscriptions -------- --------- ----- ------ ------------- Issued for cash: Private placement Feb. 24, 1999 2,000,000 $0.067 133,574 Private placement Apr. 17, 1999 1,000,000 $0.114 114,293 Private placement Jun. 28, 1999 500,000 $0.395 197,400 Private placement Sept. 1, 1999 750,000 $ 1.00 750,000 Share purchase warrants Various 3,820,000 $0.067 255,940 Share purchase warrants Jul. 12, 1999 25,000 $0.128 3,190 Share purchase warrants Various 1,250,000 $0.294 366,894 Share purchase options Various 4,265,000 $0.067 287,755 Share purchase options Various 550,000 $0.095 52,140 Share purchase options Various 66,000 $ 1.00 66,000 Net loss for the year ---------- ----------- ------------- Balance, December 31, 1999 72,982,088 $20,950,152 $ - ========== =========== ============= Deficit Accumulated During the Development Stages Total ------ ----- Issued for cash: Private placement 133,574 Private placement 114,293 Private placement 197,400 Private placement 750,000 Share purchase warrants 255,940 Share purchase warrants 3,190 Share purchase warrants 366,894 Share purchase options 287,755 Share purchase options 52,140 Share purchase options 66,000 Net loss for the year (1,684,468) (1,684,468) ----------- ---------- Balance, December 31, 1999 $ (20,640,830) $ 309,322 =========== ==========
-64- 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 ment Stage) to Years ended December 31, 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 - related parties 35,788 688 (64,213) (393,090) Gain on disposal of capital assets - related parties - - - (48,133) - other - (77) - (18,989) 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 - related parties 102,465 128,312 86,680 1,134,983 Loss on equity assessment investment - 16,434 109,938 174,144 Write-down of advances - related parties 14,375 113,779 - 135,481 - other 7,000 16,852 - 23,492 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 - related parties 12,590 (4,604) 204,951 3,482 - other (9,202) 7,681 - (1,521) Prepaid expenses 28,065 (30,084) 1,087 (35,026) Accounts payable - related parties (7,780) 3,703 - (4,077) - other 80,368 32,095 202,100 1,214,320
SEE ACCOMPANYING NOTES Cont'd. -65- 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 ment Stage) to December 31, Years ended December 31, ------------------------- 1999 1998 1997 1999 ----- ---- --- ---- Due to related parties 14,838 (15,182) (192,247) (246,065) ------------ ---------- ---------- ------------ Net cash used in operating activities (1,337,478) (696,140) (725,760) (14,612,895) ------------ ---------- ---------- ------------ Cash flow provided by (used in) investing activities: Proceeds on sale of marketable securities - related parties 4,867 26,045 123,415 1,309,195 Purchase of marketable securities - related parties (88,700) (58,520) (139,948) (2,045,967) Advances - related parties (14,375) (113,779) (52,481) (151,973) - other (7,000) - - (7,000) Investment - - - 246,571 Goodwill - - - (868,662) Proceeds on sale of capital assets - related parties - - - 48,133 - other - 674 - 231,395 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 - related parties - - - 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 ------------ ---------- ---------- ------------
SEE ACCOMPANYING NOTES Continued -66- 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 ment Stage) to Year ended December 31, December 31, ----------------------- 1999 1998 1997 1999 ---- ---- ---- ---- 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 -67- 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 is a designer of high-tech internet streaming video and video-on-demand systems, services and solutions. These consolidated 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. The company historically satisfies its capital needs primarily by issuing equity securities. 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. -68- 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. All significant inter-company transactions and balances have been eliminated on consolidation. Investment in Joint Venture --------------------------- The company accounts for its investment in corporate joint ventures by the equity method of accounting where it is not able to exercise control over the operations. Cash Equivalents ---------------- The company considers all highly liquid debt instruments capable of redemption within three months or less to be cash equivalents. Marketable Securities --------------------- All marketable securities held by the company are considered to be trading securities, bought and held principally for the purpose of selling them in the near term. Trading securities are included at fair value and both realized and unrealized gains and losses are included in earnings. -69- 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) -------------------------------------------- Allowance for Doubtful Accounts ------------------------------- Allowance for doubtful accounts are determined based on management's review of specific accounts receivable or advances receivable based on the likelihood of collection. If collection is unlikely, then the company will record a write-down of the receivable. 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. Cost of computer software obtained for internal use is capitalized with computer and testing equipment. Website development costs are expensed as incurred. Amortization of capital assets acquired in prior years was previously 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 recognize amortization over a shorter period in order to reflect the rapid pace of technological change. This change has been applied retroactively to capital asset acquisitions of prior years, and is treated as a change in accounting principle due to the change in method of amortization for previously recorded assets. Patents ------- The company owns patents and has patents pending for the Store and Forward Video System. The patents and patents pending are recorded at cost and are being amortized on a straight-line basis over 17 years. In the event that patents pending are not granted, the company expenses the remaining net carrying value in the year the grant application is denied. Research and Development Costs ------------------------------ Research and development costs are expensed as incurred. Foreign Currency Translation ---------------------------- Foreign currency transactions are translated into U.S. dollars, the functional and reporting currency, by the use of the exchange rate in effect at the date of the transaction, in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation". At each balance sheet date, recorded balances that are denominated in a currency other than US dollars are adjusted to reflect the current exchange rate. 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". -70- 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 2 Summary of Significant Accounting Principles - (cont'd) -------------------------------------------- Basic Loss per Share -------------------- The company reports basic loss per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Basic loss per share is computed using the weighted average number of shares outstanding during the years. Diluted loss per share has not been provided as it would be antidilutive. Fair Market Value of Financial Instruments ------------------------------------------ The carrying values 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. Revenue Recognition ------------------- Revenue from hardware product sales and software sales is recognized when it is earned, upon receipt of a non-cancellable contract, the product has been shipped and collectibility is reasonably assured. Revenue recognized from these sales are net of applicable provisions for refunds, discounts and allowances. Engineering services sales are recognized upon the service having been provided, on an accrual basis. Revenue from multiple element contracts (hardware, software and engineering) is allocated to the various elements based on fair value. Revenue from these contracts is deferred until the earlier of when objective evidence of fair value does exist or all elements of the contract have been delivered. Discounts will be applied to each element on a proportionate basis. No portion of the revenue will be recognized if the portion of the revenue allocable to delivered elements is subject to forfeiture, refund or other concession if any of the undelivered elements are not delivered. Impairment of Long-lived Assets ------------------------------- The company reports the impairment of long-lived assets and certain identifiable intangibles in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- lived Assets and for Long-lived Assets to be Disposed Of". Certain long-lived assets and identifiable intangibles held by the company are reviewed for impairment whenever assets or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Accordingly, an impairment loss is recognized in the period it is determined. Write-off of Accounts Payable ----------------------------- Accounts payable are reviewed by management at each year end to determine whether any payable set-up in a previous period are unlikely to be paid based on a disagreement by management as to the amount of product or services provided, if any, and whether such payables have become legally unenforceable and to better reflect the company's demands for cash flow in the future. Those payables that meet these criteria are written-off. Stock-based Compensation ------------------------ The company has elected to account for stock-based compensation following APBO No. 25, "Accounting for Stock Issued to Employees", and to provide the disclosures required under SFAS No. 123, "Accounting for Stock Based Compensation" (Note 9). -71- 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 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 corporate 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 ================ ============ =========== ============
-72- 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 4 Adnet USA LLC Joint Venture - Note 8 --------------------------- The company and its joint venture partner have agreed to abandon the joint venture and consequently Adnet USA LLC inactive. The remaining investment in Adnet is recorded at $Nil, as the company recorded its equity share of the losses to date, totalling $174,144, the amount of the investment in and advances to the joint venture 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 $52,481 (CDN$75,000) toward the purchase price of which CDN$50,000 was refundable if the agreement was 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 $16,852, (CDN$25,000) was written-off. The balance of $33,937, (CDN$50,000) 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, 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 $33,937, (CDN$50,000) 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. -73- 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 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 and has not recorded a charge to income for this contingent loss at December 31, 1999. The amount of the contingent loss of the net carrying amount of the US patent is $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 expense 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 35,788 688 (64,213) (393,090) 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 ---------- ---------- --------- ----------- $ 726,373 $ 592,273 $ 324,652 $ 6,027,110 ========== ========== ========= ===========
-74- 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 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: Stock-Based Compensation Effective January 2, 1990, the company established the Share Option Plan. Under the terms of this plan, officers, directors and employees may be granted options to purchase common shares of the company at the closing price of the company's common stock on the date of the grant, with no option being granted below $0.067 (CDN$0.10) per share. For the purposes of the share option plan, consultants are considered to be employees, as they are either officers of the company or act in the capacity of an employee. Consequently, stock-based compensation transactions with these individuals are calculated on the same basis as employees. The options may be granted with varying terms until expiry, with a maximum term of 5 years. There are no specific vesting requirements under the plan. The aggregate number of securities reserved for issuance under the terms of the plan may not exceed 10% of the outstanding listed securities of the company (on a non-diluted basis) and the aggregate number of securities reserved for issuance to any one party may not exceed 5% of the outstanding listed securities of the company (on a non-diluted basis). -75- 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 9 Capital Stock - Note 13 - (cont'd) ------------- Presented below is a summary of the stock option plan activity for the years shown:
Number of Weighted Average Stock Options Exercise Price ------------- -------------- Balance, December 31, 1996 880,000 $0.17 Cancelled (880,000) $0.17 Granted 3,425,000 $0.07 Exercised (650,000) $0.07 --------- ----- Balance, December 31, 1997 2,775,000 $0.07 Granted 5,010,000 $0.07 Exercised (3,450,000) $0.07 Balance, December 31, 1998 --------- ----- 4,335,000 $0.07 Cancelled (500,000) $0.07 Granted 7,375,000 $0.64 Exercised (4,881,000) $0.08 --------- ----- Balance, December 31, 1999 6,329,000 $0.81 ========= =====
The number of stock options outstanding is equal to the number exercisable as there are no vesting provisions. The company grants stock options at exercise prices equal to the fair market value of the company's stock at the date of the grant. Pursuant to APBO No. 25, no compensation expense is recognized in this circumstance. Under SFAS No. 123, if the company elects to follow APBO No. 25, it is required to present pro-forma information as to the effect on income and earnings per share as if the company had accounted for its employee stock options under the fair value method of that statement. Had compensation cost been determined based on the fair value at the grant dates for those options issued to directors, employees, and consultants, the company's net loss and loss per share would have been increased to the pro-forma amounts indicated below:
1999 1998 1997 ---- ---- ---- Loss As reported $1,684,468 $ 981,598 $678,156 Pro-forma $5,420,133 $1,193,652 $816,184 Loss per share As reported $ 0.03 $ 0.02 $ 0.02 Pro-forma $ 0.08 $ 0.02 $ 0.02
Pro-forma diluted loss per share has not been presented because assuming the conversion of stock options would have an anti-dilutive effect. -76- 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 9 Capital Stock - Note 13 - (cont'd) ------------- The weighted average fair value at date of grant of the options granted were as follows:
1999 1998 1997 ---- ---- ---- Weighted average fair value $ 0.51 $ 0.05 $ 0.04 Total options granted 7,375,000 5,010,000 3,425,000 Total fair value of all options granted $3,735,665 $ 212,054 $ 138,028
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:
1999 1998 1997 ---- ---- ---- Expected dividend yield 0.0% 0.0% 0.0% Expected volatility 250% 195% 155% Risk-free interest rate 5.46% 5.36% 6.45% Expected term in years 1 1 1
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 $ 1.00 July 16, 2001 Employees 1,275,000 $ 0.067 (CDN $0.10) January 31, 2001 144,000 $ 1.00 July 16, 2001 225,000 $ 1.00 November 25, 2001 200,000 $ 1.00 December 22, 2001 Consultants 95,000 $ 0.067 (CDN $0.10) October 20, 2000 550,000 $ 0.097 (CDN $0.14) March 9, 2001 540,000 $ 1.00 July 16, 2001 450,000 $ 1.00 November 25, 2001 550,000 $ 1.00 December 22, 2001 --------- 6,329,000 =========
-77- USA Video Interactive Corp. (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 1999 and 1998 - Page 11 (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 $ 0.067 (CDN $0.10) September 30, 2000 925,000 $ 0.067 (CDN $0.10) January 31, 2001 975,000 $ 0.131 (CDN $0.19) March 23, 2001 500,000 $ 0.503 (CDN $0.73) May 19, 2001 750,000 $ 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 -------- ---- ---- ---- ---- For settlement of debt $ - $ - $ - $1,290,039 For payment of interest - - - 13,950 Conversion of debentures - - - 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. -78- USA Video Interactive Corp. (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 1999 and 1998 - Page 12 (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 $0.069 Share purchase options $ 28,635 825,000 $0.069 Share purchase warrants 56,925 50,000 $0.097 Share purchase options 4,850 50,000 $1.000 Share purchase options 50,000 --------- -------- 1,340,000 $140,410 ========= ========
-79- USA Video Interactive Corp. (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 1999 and 1998 - Page 13 (Stated in U.S. dollars) - ------------------------ Note 13 Subsequent Events - (cont'd) ----------------- 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. The total proceeds of US$4.00 per unit will be applied to the common shares only. 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. iv) On March 3, 2000, the company reached a settlement with a creditor of the company and paid $52,657 to this creditor. This amount was included in accounts payable at December 31, 1999. Note 14 New Accounting Standards ------------------------ 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. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". Adopting this Bulletin does not have a significant impact on the company's financial position, 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. The range of possible loss is NIL to $505,169. -80- USA Video Interactive Corp. (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 1999 and 1998 - Page 14 (Stated in U.S. dollars) - ------------------------ 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. Note 17 Valuation and Qualifying Accounts --------------------------------- Balance of write-down of advances receivable at December 31, 1997 $ - Additional write-downs 130,631 Collection - --------- Balance of write-down of advances receivable at December 31, 1998 130,631 Additional write-downs 152,006 Collections (130,631) --------- Balance of write-down of advances receivable at December 31, 1999 $ 21,375 =========
Note 18 Comparative Figures ------------------- Certain of the comparative figures have been restated to conform to the current year's presentation. -81- 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. ITEM 15(a). Financial Statements Index to Consolidated Financial Statements Report of Independent Auditors.............................................................................. 52 Balance Sheets as of December 31, 1999 and December 31, 1998................................................ 53 Income Statements for the years ended December 31, 1999, 1998 and 1997...................................... 54 Statement of Stockholders Equity for the years ended December 31, 1986 to December 31, 1999 and January 1, 1992 to December 31, 1999........................................................................ 58 Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997............................... 65 Notes to Financial Statements............................................................................... 68
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 10.5 Employment Agreement dated April 27, 2000 between William Meyer and registrant. 21 * List of Subsidiaries 27 Financial Data Schedule
* Filed previously with the Securities and Exchange Commission. ** Non-public information has been filed with the Securities and Exchange Commission. -82- 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: May 19, 2000 By: /s/ Edwin Molina ------------------------------------ Edwin Molina, President Chief Executive Officer and Director -83- 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 10.5 Employment Agreement dated April 27, 2000 between William Meyer and registrant 21* List of Subsidiaries 27 Financial Data Schedule
* Filed previously with the Securities and Exchange Commission ** Non-public information has been filed with the Securities and Exchange Commission. EX-10.5 2 EMPLOYMENT AGREEMENT DATED APRIL 27, 2000 EXHIBIT 10.5 EMPLOYMENT AGREEMENT AGREEMENT made as of April 27, 2000, by and between USA Video Interactive Corp., a corporation incorporated under the laws of the state of Wyoming, with its executive offices in Mystic, Connecticut and its corporate offices in Vancouver, British Columbia (the "Company"), and William Meyer, residing at the address set forth at the end of this Agreement (the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive desire to set forth the terms and conditions of the Executive's employment by the Company; NOW, THEREFORE, the parties hereto agree as follows: 1. Term of Employment. The Executive's employment under this Agreement shall be for a term commencing on April 27, 2000, and terminating two years therefrom, subject to earlier termination as provided in section 5 hereof (the "Term of Employment"). Each year of the Term of Employment is referred to herein as a "Contract Year." 2. Employment. 2.1 During the Term of Employment, the Company shall employ the Executive as Chief Operating Officer and the Executive shall serve in such position, perform such services and have such authority, functions, duties, powers and responsibilities as ordinarily are associated with such title. The Executive shall report to the President of the Company. The Executive shall faithfully and diligently serve the Company and shall devote all of his business time, attention, skill and efforts thereto; provided, that the Executive may manage his passive 1 investments and be involved in charitable interests so long as they do not interfere or conflict with the performance of the Executive's duties hereunder. The Executive shall be based in Mystic, Connecticut. 3. Compensation and Other Remuneration. 3.1 Base Salary. The Company shall pay to the executive during the Term of Employment base salary with a starting annual rate of $120,000.00 annually. Base salary will be paid in accordance with the customary payroll practices of the Company and shall be subject to required payroll deductions and withholdings. 3.2 Bonus. The Executive shall be eligible to receive a bonus in respect of each Contract Year in such amount, if any, as may be determined by the Company's board of directors. 3.3 Vacation. The Executive shall be entitled to up to three weeks of vacation during each Contract Year, scheduled in advance with the Company to avoid excessive disruption of the Company's operations. 3.4 Stock Options. 3.4.1 Pursuant to one or more stock option agreements (hereafter referred to as the "Stock Option Agreement") dated the date hereof, the Company shall grant to Executive stock options, under and pursuant to the Company's 1990 Stock Option Plan, to purchase two hundred fifty thousand (250,000) shares of the Company's common stock ("Common Stock"), subject to a four month hold as of the date of approval, with the purchase price to be the greater of either (1) the market price on the date of announcement less 10% or (2) a ten day average trading price beginning on the date of announcement less 10%. Twenty-five percent (25%) of these options will vest immediately upon grant, thirty-seven percent (37%) at 2 the end of the first Contract Year and the remaining shares shall vest on the last business day before the end of the second Contract Year; provided Executive is employed on such dates, except as otherwise provided in the last sentence hereof, and subject to any approvals required by the CDNX, if any, which approvals shall be obtained by the Company with dispatch. The Stock Option Agreement will further provide that if the Executive dies during the Term of Employment or if the Company terminates this Agreement due to his disability (as described below) or without "Cause" (as defined below), or the Executive terminates this Agreement for "Good Reason" (as defined below), all unvested options shall immediately become exercisable. 3.4.2 All vested options will be exercisable for a period of five (5) years from the date of grant. Any options which are not exercised within ninety (90) days of the termination of employment (other than due to death or disability) or twelve (12) months in the event of termination due to disability automatically shall be cancelled. 4. Benefits; Reimbursement of Business Expenses. 4.1 Benefits. The Executive shall participate in all benefit plans of the Company generally available to its employees and/or to any senior executive of the Company, whether now existing or hereafter established (collectively, the "Benefit Plans"). The Company expressly agrees that such benefit will at all times include health insurance such as the Executive currently enjoys. The extent of Executive's participation in the Benefit Plans shall be at the same level as the most senior executives of the Company. Additionally, unless otherwise provided by the Company, the Executive shall be entitled to reimbursement for payment of insurance premiums for life insurance and disability insurance in an amount not to exceed $575.00 monthly, payment due by the Company upon presentation of receipts. 3 4.2 Reimbursement of Business Expenses. Business expenses incurred by the Executive in accordance with the Company's policies will be reimbursed upon the presentation of receipts. Business-related air travel shall be such class as is determined by Executive in his reasonable discretion. 4.3 Moving Expenses. The Company will pay or reimburse the Executive for the expenses of commuting between Florida and Connecticut weekly for a period of three months, and to reimburse the Executive for moving expenses, in an amount not to exceed Ten Thousand Dollars ($10,000.00). 4.4 Insurance. During any period that the Executive is rendering any services hereunder, the Company agrees to cause Executive to be named as an insured under a director and officer liability insurance policy which the Company shall obtain within 30 days from the date hereof. 5. Termination. 5.1 Termination for Cause. 5.1.1 The Company may terminate this Agreement and all of the Company's obligations hereunder, other than its obligations set forth below in this section 5.1, for "Cause". "Cause" shall mean that the Executive (i) is convicted of a felony, or any misdemeanor involving fraud or theft, (ii) engages in dishonest behavior which materially adversely affects the Company, (iii) commits a willful and intentional act having the effect of materially injuring the reputation or business of the Company, including, without limitation, habitual use of illegal drugs or alcohol, or (iv) materially breaches this Agreement and, after having been given written notice thereof by the Company, fails to correct such breach within ten (10) days after receipt of such notice. 4 5.1.2 In the event of termination by the Company for Cause, the Company shall have no further obligations to the Executive other than to pay (i) base salary accrued through the effective date of termination; and (ii) all other benefits and amounts which may be then due the Executive under the general provisions then in effect of any Benefit Plan ((i) and (ii) collectively, the "Termination Entitlements"). 5.2 Termination Due to Death. This Agreement shall terminate upon the Executive's death, and in such event the Company shall have no further obligations hereunder, other than to pay to the Executive's estate the Termination Entitlements. 5.3 Termination Due to Disability. If, during the Term of Employment, the Executive shall become physically or mentally disabled, whether totally or partially, so that he is unable to perform the material functions of this position for periods aggregating one hundred thirty-five (135) days in any twelve (12) month period, the Company shall be entitled to terminate this Agreement upon written notice to the Executive given at any time thereafter during which the Executive is still so disabled. Upon such termination, the Term of Employment shall end, and the Company shall have no further oblations hereunder other than to pay the Executive the Termination Entitlements. 5.4 Termination for Good Reason. "Good Reason" shall mean any of the following: (i) a material breach by the Company of this Agreement, (ii) a material diminution of Executive's authority, duties or responsibilities with the Company, or (iii) the assignment to Executive of duties materially inconsistent with Executive's position with the Company, unless otherwise approved by the Executive. If there exists an event or condition that constitutes Good Reason, and such event or condition is not cured within ten (10) days following Executive's giving the Company notice thereof, Executive at any time thereafter shall have the right to 5 terminate this Agreement by giving the Company written notice of such termination, and upon his doing so, the provisions of sections 3.4.1, 3.4.2, and 5.5 and all other relevant provisions hereof shall apply. 5.5 Termination Without Cause or for Good Reason. If the Company terminates this Agreement without Cause (as defined in section 5.1 hereof), or if the Executive terminates this Agreement for Good Reason (as defined in section 5.4 hereof), in addition to the Termination entitlements, the Executive shall be entitled to receive all base salary due for the balance of the Term of Employment in a lump sum within thirty (30) days of the date of termination. 5.6 Stock Option Vesting. The impact of the termination of this Agreement on the stock options referred to in section 3 hereto, shall be as described in section 3 and in the Stock Option Agreements under which such options shall be issued. 6. Protection of Confidential Information. The Executive acknowledges that employment by the Company will bring the Executive into close contact with the confidential affairs of the Company and its affiliates. In recognition of the foregoing, the Executive covenants and agrees that the Executive will keep secret all confidential matters of the Company and its affiliates, including, without limitation, the terms and provisions of this Agreement, and will not use for his own benefit or intentionally disclose such matters to anyone outside of the Company, either during or after the Term of Employment, except with the Company's consent, provided that (i) the Executive shall have no such obligation to the extent such matters are or become publicly known other than as a result of the Executive's breach of his obligations hereunder, (ii) the Executive may disclose such matters to the extent required by applicable laws 6 or governmental regulations or judicial or regulatory process, and (iii) the Executive may disclose the terms of this Agreement to his attorney(s), accountant(s) and/or financial advisor(s). 7. Ownership of Work Product. Except for previously held work product of the Executive and specifically the work product currently subject to a Confidentiality Agreement between the parties relating to blended media (television, telephone, fax, internet, and wireless devices) e-commence business models, methods, procedures, and system design for business to consumer or business to business sales, over which Executive maintains exclusive ownership, the Executive acknowledges that in the course of employment hereunder, he may conceive of, discover, or create inventions or new contributions relating to the subject matter of his employment (all of the foregoing being collectively referred to herein as "Work Product"). The Executive acknowledges that, unless the Company otherwise agrees in writing, all of such Work Product shall be owned by and belong exclusively to the Company. The Executive shall further, unless the Company otherwise agrees in writing, (i) promptly disclose any such Work Product to the Company; (ii) assign to the Company, upon request, the entire rights to such Work Product to the extent not otherwise owned at law by the Company; and (iii) do all things and sign all papers reasonably necessary to carry out the foregoing. 8. Representations. Both Executive and Company represent and warrant that each is not a party to any agreement or understandings which would prevent the fulfillment by such party of the terms of this Agreement or which would be violated by entering into this Agreement and performing such party's obligations hereunder. 9. Notices. All notices, requests, consents and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or three days after being mailed first-class, postage prepaid, by registered 7 or certified mail, to the address of the recipient given herein (or such other address of which notice is given or, in the case of notice to the Executive, to the most recent address set forth on the records of the Company). 10. Indemnification. The Company shall indemnify Executive against any and all judgments, fines, amounts paid in settlement and reasonable expenses, including attorney's fees, incurred in connection with any action or proceeding, whether civil, criminal, judicial, legislative, administrative or investigative, or in connection with an appeal therein, by reason of the fact that Executive is or was a director, officer, employee, representative or agent of the Company; provided, however, that no such indemnification shall be made to Executive if an adverse judgment or other final adjudication establishes that the acts of Executive were committed in bad faith or were the result of active and deliberate dishonesty or gross negligence and, in either case, were material to the cause of action so adjudicated. Without limiting the foregoing, Executive shall also be entitled to indemnification by the Company against any liability or damage, including attorney's fees and liabilities under federal and state securities laws, arising form any act or omission by Executive provided such act or omission was reasonably believed to be within the scope of Executive's authority or was taken upon advise of the accountants or legal counsel for the Company. The indemnification of Executive provided by this section 10 shall continue after Executive has ceased to be a director, officer, employee, representative or agent of the Company and all inure to the benefit of Executive's heirs, executors, administrators and legal representatives. 11. General. 11.1 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of Connecticut. 8 11.2 Captions. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 11.3 Entire Agreement; No Other Representations. The parties expressly acknowledge, represent and agree that this Agreement is fully integrated and contains and constitutes the complete and entire agreement and understanding of the parties with respect to the subject matters hereof and supersedes any and all agreements, understandings and discussions, whether written or oral, between the parties with respect to the subject matters hereof, other than the Proprietary Rights and Information Agreement being entered into simultaneously herewith. The parties further acknowledge, represent, and agree that neither has made any representations, promises or statements to induce the other party to enter into this Agreement, and each party specifically disclaims reliance, and represents that there has been no reliance, on any such representations, promises or statements. 11.4 Assignability. This Agreement and the parties' rights and obligations hereunder may not be assigned by either party. 11.5 Amendments; Waivers. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and covenants hereof may be waived, only by written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provisions hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 9 11.6 Construction. No presumption will be made or inference drawn because the attorneys for one of the parties drafted this Agreement or because of its drafting history. 12. This Agreement is subject to regulatory acceptance, if any, including by the Canadian Venture Exchange. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. USA VIDEO INTERACTIVE CORP. By: /s/ Edwin Molina ------------------------------------- Its: President -------------------------------- /s/ William Meyer ----------------------------------------- William Meyer Address: 2420 Santa Cruz Avenue Clearwater, Florida 33764 10 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SELECTED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR YEAR DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 DEC-31-1999 DEC-31-1998 417,666 2,618 20,700 73,920 17,661 21,049 0 0 0 0 499,868 168,449 0 0 174,650 39,390 995,351 435,232 686,029 668,268 0 0 0 0 0 0 20,950,152 18,722,966 (20,690,830) (18,956,362) 309,322 (233,396) 20,500 0 20,500 0 19,199 0 0 0 1,645,414 956,933 0 0 12,965 24,665 (1,657,078) (981,598) 0 0 (1,657,078) (981,598) 0 0 0 0 (27,390) 0 (1,684,468) (981,598) (0.03) (0.02) 0 0
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