SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10
General Form For Registration of Securities
Pursuant to Section 12(b) or (g) of
the Securities Exchange Act of 1934
USA VIDEO INTERACTIVE CORP.
(Exact name of registrant as specified in its charter)
Wyoming 95-43707-25
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
70 Essex Street,
Mystic, Connecticut 06355
(Address, including postal code, of registrant's principal executive offices)
Registrant's telephone number, including area code: 1 (800) 625-2200
Securities to be registered under Section 12(b) of the Exchange Act: None
Securities to be registered under Section 12(g) of the Exchange Act:
Common Shares
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USA VIDEO INTERACTIVE CORP.
FORM 10
TABLE OF CONTENTS
PART I Page
----
Item 1. Business........................................................... 3
Item 2. Financial Information.............................................. 19
Item 3. Properties......................................................... 21
Item 4. Security Ownership of Certain Beneficial Owners and Management..... 22
Item 5. Directors and Executive Officers................................... 23
Item 6. Executive Compensation............................................. 25
Item 7. Certain Relationships and Related Transactions..................... 27
Item 8. Legal Proceedings.................................................. 28
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters........................................ 30
Item 10. Recent Sales of Unregistered Securities............................ 31
Item 11. Description of Registrant's Securities to be Registered............ 32
Item 12. Indemnification of Directors and Officers.......................... 33
Item 13. Financial Statements and Supplementary Data........................ 33
Item 14. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................... 33
Item 15. Financial Statements and Exhibits.................................. 34
ITEM 1. Business
Description of Business
Introduction
------------
USA Video Interactive Corp.'s (The "Company") technology offers businesses
and individuals the capability of using high-quality full-motion video or still
images on the Web to educate, sell, train, inform and entertain. The Company
designs and supplies Store and Forward Video-on-Demand/TM/ ("VoD") and Wavelet
services, which include the following features: Wavelet compression of video
content for full-motion viewing on the Internet; content server and video
editing suite sales and installation; content hosting and video editing services
on a project basis; content production for full-motion Internet advertising; and
customized solutions to Internet and intranet video requirements. Simply
defined, VoD is an electronic video distribution method capable of delivering
user-selected video information on a user-specified schedule; that is, a video
that can be requested at any time and is available at the discretion of the end-
user. VoD encompasses the entire service category that enables an information
consumer to select the type of information, as well as the time, place and
frequency of reception.
The Company's high quality, full-motion video (existing content or live
streaming video) turns a personal computer into a television with fully user-
interactive capabilities, or turns televisions, via set-top boxes, into fully
user-interactive entertainment and education modules. The technology provides
video via existing twisted-pair telephone systems, set-top boxes or cable modems
with copper or fiber-optic cable, wireless, satellite, Ethernet and ATM
networks. Digitized content includes movies, sports, music and entertainment,
educational resources, corporate training seminars, and other libraries and
archives. The technology gives users the unique flexibility of standard, VCR-
like controls of play, fast-forward, reverse and pause, and the convenience of a
standard Internet-browser format for access. The technology can accommodate
10,000 or more streams (simultaneous users) accessing a single source with
unlimited content, with each user having full and independent control of the
viewing function.
The Company also has a division to create and supply content, and a
division to digitize existing single videos or entire video libraries, so they
can be placed on computer servers or CD-ROMs for access over Internet or
intranet systems. The Company digitizes videos using any compression technique
desired by the customer: MPEG-1, MPEG-2, MPEG-4 or the Company's Interactive
Wavelet Technology.
Evolution of the Company
------------------------
. April 18, 1986, the Company was incorporated as First Commercial
Financial Group Inc. in the Province of Alberta, Canada.
. September 1, 1989, the Company changed its name to Micron Metals
Canada Corp. and forward split its common shares on a two for one
basis.
. November 1991, the Company acquired 100% of the outstanding shares of
USA Video Inc., which was incorporated in Texas in 1990, pursuant to a
purchase agreement dated November 21, 1991 and amended March 6, 1992,
July 28, 1992 and September 15, 1992.
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. December 24, 1991, the Company incorporated a wholly-owned subsidiary,
USA Video Corp., in the State of Nevada.
. April 6, 1992, the Company changed its name to USA Video Corporation.
. May 4, 1993, USA Video Corp. changed its name to USA Video
(California) Corporation.
. July 28, 1993, USA Video Inc. changed its name to USA Video
Corporation.
. January 3, 1995, the Company changed its name to USA Video Interactive
Corp.
. February 16, 1995 the Company continued its corporate jurisdiction
from the Province of Alberta to the State of Wyoming.
. February 23, 1995, the Company consolidated its common shares on a
one for five basis.
. In July, 1998, the Company created the USA Video Interactive
Programming division.
. In June 14, 1999, the Company incorporated another wholly-owned
subsidiary, Merging Rivers Media Corporation, Inc., in the State of
Wyoming.
During 1999, the Company formed several new operational divisions of the
company:
. A Media Services division to create and/or digitize video content for
Internet advertisers, advertising agencies, theater studios, and
others.
. An Engineering Services division to handle sales and service of its
servers, switches and telecommunications equipment.
. A West Coast subsidiary, Merging Rivers Media, an Internet-television
advertising agency, to focus on entertainment-related activities.
. A Programming Division, for the express purpose of negotiating and
finalizing contracts related to content services.
The Company is a public company in the development stage listed on the
Canadian Venture Exchange under the trading symbol "US" and the NASD OTC
Bulletin Board under the trading symbol "USVO".
The Company's executive offices are located at 70 Essex Street, Mystic,
Connecticut 06355, telephone: (800) 625-2200 and its corporate offices are
located at #507, 837 West Hastings Street, Vancouver, B.C., V6C 3N6 , telephone:
(604) 685-1017, (800) 321-8564, Fax: (604) 685-5777.
The Company's Technology
------------------------
The Company has designed and patented a technology known as "Store and
Forward Vision" ("SFV") for the delivery of video programs and interactive
services to remote locations such as schools, libraries and businesses. The SFV
system is the critical technology behind the Company's VoD systems and services.
Simply defined, VoD is an electronic video distribution method capable of
delivering user-selected video information on a user-specified schedule.
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Video Systems. The Company's VoD technology can be implemented in a VoD
system, which is an enhanced data server with peripheral components that make
use of a distributed multi-processing architecture to provide access to and
retrieval of large quantities of digital data.
The system design is based on a unique architecture that is flexible and
scaleable, and that addresses the needs of high-volume markets (e.g., cable,
telephone companies). The system also can be scaled to medium and low capacity
markets in a cost-effective manner because it can be configured using a broad
range of commercial, off-the-shelf (COTS) hardware components.
System Components. The VoD system has five primary components that
together provide the VoD service. These components can be co-located or
separated by a local or wide-area distribution network.
Video Library or "Content" - The original video source material. The Video
Library contains the collection of video material in its original format,
which is normally a high quality Beta-SP or D1 format.
Encoder - Where analog video is digitized, encoded, and compressed for
storage in a digital medium. The Encoder converts the original video to a
computer-based digital format while preserving the initial quality,
compresses the digitized video using one of several industry standard
compression algorithms, and delivers compressed video to the archive, which
is maintained on CD-ROM, DVD or any digital medium. Archived files are
sized to attain delivery data rates from 0.015 to 6.0 megabits per second.
Video Server - The device that stores video in a digital format for
retrieval on demand; also performs several management functions. The Video
Server accesses archived video data and is responsible for receiving and
servicing user requests for programming. The Company establishes a
connection between its server and the client's computer to provide access
to its VoD programs. The Video Server also can track viewership and manage
billing information if these services are required. The Video Server is
designed in a highly modular fashion, allowing support for additional users
to be added as system usage increases.
Distribution Network - The connectivity for distribution of video data and
client interaction; i.e. Internet, intranet, Ethernet, fiber, telephone
line or cable. The Distribution Network is the infrastructure by which
video is transmitted and accessed by users. Digitized video content can be
streamed over the Internet (via existing twisted-pair telephone systems or
cable modems with copper or fiber-optic cable). Video also can be streamed
via wireless, intranet, satellite, cable-TV, set-top box, Ethernet, and ATM
networks.
Video Client - The Web Browser software and host system or other viewing
device that is run to request and view digitized video. The Video Client
is the user's workstation and can be any device (TV, PC, workstation) where
digitized video can be decoded and processed for viewing.
System Architecture. The architecture is optimized for the delivery of
video data and is able to support from one to tens of thousands of simultaneous
subscribers. The video server design is based on scaleable processing elements
interconnected by independent load-sharing data paths that facilitate inter-
processor communication and provide access to multiple storage devices and user
access ports.
Every processing element is connected to every other processing element via
an independent
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inter-processor bus. In a fully connected network of processing nodes, each node
can reach a storage device or user access port either directly or indirectly
through a connecting node.
The server is designed in an open manner, using standard Unix-based or
Windows NT-based workstations, FiberChannel, SCSI-II I/O bus, and Fast Ethernet
technology with COTS equipment. This approach allows continual evolution of the
hardware by automatically accommodating the incorporation of any mix of current
and future digital storage, processing and transmission technologies and is
intended to result in economical solutions with full capability and high
performance. The system design is intended to permit each major hardware
component to be individually upgraded as its respective price/performance ratio
is improved by evolving industry standards or technical advances .
The Company's VoD system has several attributes that it believes provide
benefits unique in the industry:
Flexibility - Configuration design tailored to unique client requirements
and budgets.
Scaleability - Paths to system expansion for those who want to start small
and grow later.
Modularity - No single point of failure for improved reliability and
maintenance.
Affordability - COTS hardware and a software-based architecture, offering
cost-effective alternatives to total hardware solutions.
Non-Obsolescence - Upgrades and updates through software rather than
through costly hardware equipment upgrades.
Wavelet Compression. Although the Company's system is not constrained to a
particular compression technique, advanced Wavelet compression technology is an
integral part of the solution for the marketing of the Company's product.
Wavelet compression allows high-speed, high-quality streaming video to be
provided via the Internet using existing telephone lines and standard TV-cable.
It also allows the Company to optimize the use of fiber-optic cable, which is
being installed worldwide. The Company's Wavelet compression can be used cost-
effectively for broadcast video and still images and outperform any existing
compression technology.
During compression, video files are made smaller by reducing the amount of
data required to represent an image. "Lossless" compression provides total
restoration of the original image, but cannot reduce file size by more than
about one-third. On the contrary, "lossy" compression cannot restore the total
original image, but can yield compression ratios of on the order of 7,000-to-1
for streaming video content, truly improving the efficiency of bandwidth use.
The challenge is to achieve such a high degree of compression while
retaining a high-fidelity video image. Successful lossy compression
(compression which retains the maximum fidelity of the video image) discards
information that contributes little to the original image and then smoothes the
remaining information to restore homogeneity. Unlike compression using the
Discrete Cosine Transform (e.g., MPEG1 and MPEG2), which segments the original
image and can create a visually unpleasant blockiness or jitteriness, Wavelet
processing is applied across the entire image, allowing higher compression
ratios without blockiness.
The art of Wavelet compression is in apportioning the discarded data so
that the eye-brain
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combination does not notice the impact of the data loss, so the decompressed
video image is barely distinguishable from the original image even at fairly
high compression ratios. Because of this superior approach, an increasing number
of companies are exploring use of Wavelet; by virtue of its early development
and incorporation of Wavelet, the Company believes it has a timing advantage in
the market. For these principal reasons, the Company's technology focus is
integrating Wavelet coders-decoders (codecs) into its VoD solution.
The Company believes that the Wavelet technology is superior to Digital
Cosine Transform compression (subdivides the image into small square segments
and treats each segment as an individual image during the compression process)
because it allows for high levels of compression while retaining higher
resolution than methods used by competitors, which allows significantly more
material to be stored on a server or CD-ROM at a lower cost. Wavelet-encoded
video has none of the blocky, jittery images inherent in MPEG videos. Because
the Company's Wavelet technology produces a video that is much closer to the
original quality than MPEG-based video, compressed to a fraction of the original
file size, it requires much less bandwidth for transmission.
The Company's Wavelet compression technology gives users a greater degree
of compression when compared to competitive solutions. In tests performed with
existing and commercially available compression methods, the Company's Wavelet
compression outperformed the competitors by a factor of at least 3:1.
While initially the Company's Wavelet compression has been used to encode
and store video content for the education markets, the Company is applying its
Wavelet technology to the Internet. The Company also is working on a number of
revenue generating opportunities for Wavelet compression in applications focused
on the installed base of dial-up modem users; for example, video conferencing
and video security monitoring.
Research & Development
----------------------
Prior to 1999, the Company conducted seven years of research and
development of its compression VoD technology. In 1999, the Company's focus
shifted to promoting and marketing its products and services, with research and
development directed primarily at supporting sales. The costs of research and
development have been absorbed by the Company and will not be borne by its
customers. The Company has begun to build a sales force and is pursuing
alliances and contracts necessary to generate interest in the technology and
sell its products and services within targeted industries.
The Company spent the following amounts in the past three years on research
and development:
-----------------------------------------------
1997 1998 1999
-----------------------------------------------
$2,668 $24,000 $90,966 *
-----------------------------------------------
\\ *Subject to year-end audit adjustment.\\
The Patents
-----------
The Company controls multiple patents in the critical path to exploiting
VoD technology and developing VoD systems. Ownership of these patents brings
value to the Company but the patents are not critical to the current development
of business. The Company applied for an exclusive U.S. patent for its SFV VoD
technology on
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February 1, 1990. The Company was granted U.S. Patent # 5,130,792 on July 14,
1992. The market for VoD technology has since expanded and the Company is
investigating the applicability of its patent to the multiple VoD deployments
now under way using any kind of switched connection, such as telephone lines, in
video transmission to educational institutions, corporations, government
entities, and home end-users.
In 1999, the U.S. Patent Office declined a request to reinstate this
patent, which had expired because of an administrative oversight that led to
late payment of fees in 1995. The Company has further investigated reasons for
this administrative oversight and determined that additional factors beyond its
control were present; the Company has appealed the denial of the patent
reinstatement and has reason to believe the matter will be resolved in favor of
the Company.
In 1999, the Company received approval of its SFV system patent
applications in five European countries: England, France, Germany, Italy and
Spain. The technological characteristics of the European Patents are based on
the U.S. Patent, covering systems for transmitting video programs to remote
locations over a switched telephone network, but provide more comprehensive
protection. The Company believes that these patents extend to any video on the
Internet, regardless of its geographic origin, that can be received in any of
these five countries. Identical patents are pending in Canada and Japan. The
Company is in the process of arranging to enforce its patents.
The Company's VoD Patent has been extensively searched by the Company's
patent attorneys as to the technical prior art. It is believed that the claims
of the Company's VoD patent are broad and may be of significant value in the VoD
market.
The scope of the market for licensing of the Company's VoD patent will be
determined by how expansive the market for VoD products becomes and how many
major industry players develop profitable VoD markets. The Company intends to
vigorously defend its existing VoD Patents from infringement and continue to
apply for additional patents in the global market place.
Evolution of the Industry
-------------------------
Until recently, VoD was marketed as a service that was to be provided by
cable operators to the average consumer's home television using set-top boxes
and digital video systems. It was touted as offering scaleable video service to
between ten thousand and one million households, which households would
presumably be willing and desirous to pay for such convenient at-home service.
Ultimately, there were many problems including unrealistic throughputs and
bandwidth requirements, slow digital upgrades to cable systems, insufficient
set-top box manufacturing, and different interfacing requirements. Consumers
were not willing to pay for these amenities until they saw some real value and
the technology deployment costs were too high to allow a reasonable business
model. Disillusionment was rampant among even the ardent supporters because the
promises of TV-based VoD were not being met and there were insufficient library
choices of 20 to 30 titles, not allowing for sufficient testing of consumer
demand.
Today, with the explosion of the Internet, access to information among
multiple users is taken for granted. However, to date, distribution of video has
been bottlenecked due to its requirement for broadband services. Now, with more
and more bandwidth being installed, the potential for market acceptance of video
distribution is coming closer to being a reality. A single short video clip can
still provide more information and visual appeal than pages and pages of HTML
text. The cost of bandwidth has been decreasing over the past few years, and
prices are expected to decrease even more dramatically over the next two years,
which will bring increased use of
8
high bandwidth applications to the general market as related transmission costs
are reduced. In addition, the cost of cable modems, ADSL modems, ATM to the
desktop, and ISDN modems will bring these services more in line with customer
expectations and open up opportunities in the marketplace.
According to Nathan G. Muller of Strategic Information Resources, VoD buy
rates are more than 12 times stronger than the pay-per-view industry average buy
rate. As reported by The 1996 Pay-Per-View Report, published by Paul Kagan
Associates, Inc., VoD has the potential to challenge video tape rental as the
top revenue generator in the home video industry, which Kagan estimates at $417
billion overall.
According to Veronis, Suhler & Associates, communications industry
analysts, total U.S. spending on media will reach $663.3 billion by 2003. The
7.5% combined annual growth rate will make communications the second fastest-
growing industry (behind telecommunications) among the top 12 U.S. industries.
As for growing end-user markets, in 1998, households spent $6.1 billion
accessing the Internet, up 33.7% over 1997, and an additional $8.5 billion
purchasing products over the Internet, more than seven times the 1997 total.
Business-to-business electronic commerce was nearly five times higher than
consumer purchases in 1998, totaling an estimated $40 billion.
Revenues of publicly reporting subscription video services (SVS) companies
rose 17.7% to $34.4 billion in 1997, the third consecutive year of double-digit
growth. SVS operators accounted for $27.9 billion of the total, while cable and
pay-per-view networks accounted for $6.4 billion. Total SVS spending, including
advertising, subscriber and pay-per-view, is forecasted to rise to $66.4 billion
in 2002 from $38.5 billion in 1997, an 11.6% compound annual growth rate.
The Company is participating in these markets by working with a number of
broadcast companies to move content onto the Internet through a variety of
means.
Competitive Conditions
----------------------
The Company competes in the VoD, streaming video, video services and
Internet services markets involving transmission of data by wired and wireless
methods including satellite, radio and other signals, telephone wires, cable,
etc.
Where once the market was relatively limited, video via the Internet has
become the "hot application" for the present and near future. Many large
companies (Microsoft, IBM, and others) which had been relatively small players
in the field are now entering in a very significant way. There currently are
several hundred competitors offering identical or nearly identical products and
services. The Company believes it has an advantage, however, in that it
integrates the latest form of compression (Wavelet, which is quickly becoming a
standard in competition with the long-established MPEG). The Company utilizes
patented video technology to produce what it believes to be the highest quality
digital video available on the Internet to regular modem users (28.8k and 56k).
The Company believes its video is superior to that of competitors' at the high-
bandwidth (200k) level as well, providing significant advantages in storage and
overall cost requirements.
The products offered by the Company include turnkey VoD systems and
services, development and hosting of content, services related to streaming
video; VoD, Internet transmission of data; satellite transmission of data; other
wired and wireless transmission of data; compression and decompression of data,
particularly high quality digital video. The Company focuses on the sectors of
education,
9
entertainment, training, and corporate and industrial services.
The Company believes there are a handful of dominant players in the
Internet video field including Real Networks, Microsoft (via its Windows Media
Player), Broadcast.com, Intervu, and several others. Because of the extreme
interest in the field, many mergers are underway and major players change fairly
regularly. The Company believes that the fluid nature of the industry allows
newcomers to thrive and emerge in leadership positions if they have technically
superior, cost effective, properly marketed products and services.
Competition is by direct competition in the marketplace, through
affiliations with other companies with dominant positions in their fields, and
through pure dint of high-profile, capital-intensive marketing and advertising
campaigns.
General Development of the Business
Development Plan
----------------
An integral part of the Company's strategy is to develop as a market leader
to take advantage of the demand for VoD and streaming video products and
services and the many applications they serve. The Company's business
development approach includes the following key elements with the goal of
focusing on specific markets while creating a broad market awareness of its
unique technology:
. Complete building the sales and marketing teams and equip them with
the tools and information they need to be successful;
. Expand current sales contracts and other income-generating licensing
agreements;
. Identify and penetrate niche markets and increase Internet
applications;
. Continue developing a significant content library that includes
educational, entertainment, and other content with the objective of
providing turnkey packages;
. Use the technology itself, as well as more traditional advertising and
marketing, to create an industry-wide awareness of the Company's
unique and patented VoD technology;
. Based on a solid licensing program, identify potential patent
infringements and aggressively enforce technology ownership rights;
. Pursue grants and other non-traditional sources of revenue as well as
service contracts;
. Establish strategic and synergistic alliances and partnerships for:
* Multiplying marketing efforts,
* Developing and exploiting complementary technology,
* Performing specific project work,
* Seeking opportunities for licensing of patent and content
rights;
. Continue with research and development in order to maintain leading-
edge VoD technology; and
. Develop feedback mechanisms to drive market-driven product
development.
Currently, maximum emphasis is being placed on raising public, industry and
market awareness of the capabilities of the Company's technology. The major
industry markets targeted are education,
10
entertainment (including movies, music and music videos, and sports), training
and e-commerce.
Education includes colleges, universities, and elementary and high schools
where video can be delivered to classrooms or offices and viewed on desktop
computers or television. With instant digital access to enormous libraries,
instructors will be able to create specialized video programs and students will
be able to access material at their convenience. The current inefficient method
of copying, mailing and logging videotapes will be eliminated.
Entertainment includes residential access to movies, sports and other
entertainment resources at the user's convenience, eliminating the time
restrictions and limited choices of cable television and pay-per-view
television. Additionally, people will have instant access to regional
information services such as weather, traffic conditions, sightseeing
destinations, and similar choices.
Training includes corporate and motivational training procedures and other
instructions needed by workers in any profession from medical and surgical, to
architecture and design and factory and construction workers.
E-Commerce will be greatly enhanced by true, high quality VoD technology as
research has shown that interactive video is far more effective than static
banners or other advertising currently deployed on the Internet. The targeted
markets are vast and include books, music, videos, travel and hospitality,
clothing, and many others.
The transmission vehicles targeted for the VoD technology are the Internet,
intranet systems, cable television, wireless, and satellite. Although optimally
designed for fiber optic cable, which is currently being installed worldwide and
which provides almost unlimited bandwidth for video and data transmission, the
VoD technology provides fast, high quality, full screen, full motion video and
audio using even existing twisted pair technology and a common home modem.
The Company has fully operational pilot systems the education, home
entertainment and corporate training markets. Additional deployments, sales and
contracts are being aggressively pursued in the airport security, sports,
college, public education, home entertainment and advertising markets.
Marketing Plan
--------------
The Company's focus is to expand market awareness of its VoD technology.
The Company believes its unique and proprietary architecture and applications
provide distinct advantages to users. In this light, the near-term corporate
vision is to deploy media server solutions targeted to corporate, campus, cable,
and telephone company VoD applications. The Company believes that with a set of
strategic partners, which are discussed below, it is uniquely positioned to
provide complete solutions.
The Company believes the initial appeal of its VoD system will be its
ability to deliver to its customers all the technological advantages that
provide access on-demand to their specialized content, be it educational video
resources, corporate records and training resources, government archive
retrieval and legislative activities, or other content.
The VoD technology will allow users to access digital video information
whenever desired, eliminating the need for videocassettes and other analog
formats. Budget constraints in the public sector
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and downsizing in the corporate sector provide opportunities for the Company to
introduce its cost-effective VoD solutions to a multi-billion dollar customer
base in North America's schools, corporations, and government entities.
The Company and its strategic allies are positioning for this mission by
deploying technologies in arenas where it will be utilized immediately such as
with students, educators, corporate leaders, and government workers who require
continuous access to specialized video content. Through deployments to these
customer bases, the Company will expose the users to the various specialized
configurations available through the VoD technology which hopefully will lead
the users to fully utilize emerging Internet video capabilities in their fields.
The Company is using a number of market models to gain market entry with
sales of video servers, content and services. One successful model is to
partner with education content providers and to convert the videos from VHS tape
directly to Wavelet encoded digital media. This gives the Company the ability
to sell complete turnkey solutions with educational content, and should generate
a distinct stream of licensing revenue.
VoD can be extrapolated to cover a variety of "on-demand" information
applications. Within each of these application areas, revenues can be generated
from several sources, including services, systems, licenses, and advertising.
Specifically, the Company plans to recognize revenue through sales of video and
encoding servers, hardware, software and services, and contracted systems
integration, design and support services.
The Company has learned from its initial sales opportunities that its best
success is going to be providing video services. Although the "early adopters"
are buying the video servers and placing them on their own networks, most
companies in discussions with the Company want the Company to host the video
server and sell this as a service. This drastically reduces the costs to
companies interested in VoD, as companies do not have to train employees on new
hardware and software, no major capital expenditure is required, and no new
management or maintenance of multiple networks is required. The Company
provides all these services for a fee. The service to the customer is complete
and turnkey. This type of service is of interest to both current and potential
customers.
Compared with short-term revenue from the one-time sale of video server
services or hosting solutions, longer-term revenue is greater because it
provides the Company a recurring revenue stream
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with profit margins on all components of the services, including:
. Hosting of video server;
. Content management and encoding; and
. Network setup and maintenance costs, primarily Internet.
The cost of the services are amortized into the service charge to the customer,
with a profit margin for the Company. The cost of these services will be
standardized so that sales and channel representatives can quote these services
on the spot. A pricing matrix is currently being developed for this purpose and
the matrix will include the following pricing:
. Compression method and MPEG 1, MPEG 2, MPEG 4 and Wavelet;
. Encoding services by length of content, size and frames per second;
. Amount of available concurrent users (streams), or broadcast method;
. Length of time content is available on network;
. Security of content; and
. Whether content is to be delivered or archived on any media.
The Company has completed agreements with UUNET in order
to sell turnkey video on demand solutions and services.
The Company's sales cycle is substantially reduced when selling video
services, as clients typically do not need budget approvals or to budget for
future purchasing periods due to the fact that no major capital outlay is
required to purchase the service.
The pricing matrix was completed in the fourth quarter of fiscal 1999.
The Company will focus its marketing of total system solutions on the
target markets it believes will not only benefit greatly from the VoD
technology, but which are likely to be the most receptive to these solutions due
to increasing budget allocations for technology, notably the:
. Educational setting;
. Corporate sector; and
. Government agencies.
These entities base their purchasing choices on the stability of the
service provider, the total cost of ownership, the technology, and the service
provider's ability to provide complete turn-key solutions, or specific
components of the solution. The Company believes it has competitive advantages
in all these areas and has the further advantage of a flexible set of support
options.
For the corporate and government markets, the Company will continue to use
a direct sales approach until a suitable distribution channel for these markets
is established. The Company plans to set up a General Services Administration
("GSA") listing once there is a steady amount of government orders. GSA listings
simplify the purchasing process for government users by pre-qualifying the
products, cost and services.
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Strategic Alliances
-------------------
During the first nine months of 1999, the Company expanded its management
team, obtained European patents, added Wavelet compression technologies to
standard MPEG offerings, founded Merging Rivers Media Corporation, a full-
service ad subsidiary on the West Coast focusing on entertainment-related
applications, and began generating sales and revenues.
The Company is in active negotiations with a number of companies to
establish partnerships and other alliances of mutual benefit. These alliances
are updated regularly on the Company's website. The Company believes that the
following alliances will play a central role in its ability to succeed in the
marketplace:
VIANET: The Company has a strategic alliance with Vianet Technologies,
which is a research company that has developed a wavelet technology utilized by
the Company. As part of this agreement, the Company will develop a Unix-
compliant Wavelet codec, allowing for expansion of the market to include Unix-
based operating systems such as those used by Sun Microsystems.
UUNET: The Company has signed an agreement to co-locate its servers in the
UUNET data center in Vienna, Virginia, and to collaborate in providing an
overall package of Internet services as part of the Company's turnkey solution.
EXODUS COMMUNICATIONS: The Company has a similar agreement with Exodus
Communications for bandwidth and other services as well as access to Exodus
Communications marketing organization and services. Exodus Communications hosts
some 40 percent of the US corporate websites.
Plan of Operation Over the Next Twelve Months
---------------------------------------------
The Company has cash and other liquid assets with which to fund its
business plan. However, it also will be necessary for the Company to sell
additional common stock in order for it to put its business plan into operation.
Specifically, the Company must raise the funds necessary to launch its products
and services and continue research and development. If it can raise the funds to
do so, the Company anticipates cash expenditures of between $2.5 million and $4
million. There can be no guarantee that the Company will be able to raise funds
on acceptable terms, or at all. If the Company succeeds in raising additional
funds through the sale of common stock, the ownership interest of holders of
existing shares of the Company's common stock will be diluted. The principal
aspects of its business plan for the next 12 months include the following:
Organizational Expenses: The Company has incurred and will continue to
incur organizational expenses, including legal and accounting fees, in
connection with corporate matters, and raising the capital necessary to carry
out its business plan.
Marketing and Sales Expenses: In order to market and sell its services and
products, the Company will incur expenses for salaries, for marketing and sales
personnel, for renting and furnishing office space, for acquiring computers and
software, and for telephone lines, Internet access, travel, and advertising. The
Company will also incur expenses to expand its corporate website in order to
support its marketing, sales, and customer support activities. These expenses
will include the cost of fees for consulting services and for purchasing
additional server hardware.
Product Support Expense: The Company will incur expenses to hire personnel
to provide technical support for customers who purchase its VoD product.
14
Administrative Expense: The Company will also incur expenses for hiring
personnel and acquiring equipment for processing sales orders, and for routine
administrative support of its operations.
Product Development/Acquisition: The Company will incur expenses
principally for fees paid to third parties for development of its products, or
for the acquisition of the rights to other products.
Research & Development: The Company has carried out some preliminary
investigation into the development of an advanced Wavelet algorithm to adapt
the existing Wavelet algorithm to other operating platforms such as Unix.
Additional staff has been identified to commence development and integration of
these algorithms into initial Wavelet properties. The program commenced during
the first quarter of 2000.
Employees: The Company currently has a total of 25 employees, consisting
of 13 full-time employees. The Company anticipates that the number of employees
will grow to 33 over the next year, including 3 in the sales division, 2 in the
engineering division, 2 in the operations division, and 1 administrative person.
Outlook: Issues and Uncertainties
----------------------------------
Business Risks
This Form 10 contains forward-looking statements. The words, "anticipate",
"believe", expect", "plan", "intend", "estimate", "project", "could", "may",
"foresee", and similar expressions are intended to identify forward-looking
statements. The following discussion and analysis should be read in conjunction
with the Company's Financial Statements and Notes thereto and other financial
information included elsewhere in this Form 10. This Form 10 contains, in
addition to historical information, forward-looking statements that involve
risks and uncertainties. The Company's actual result could differ materially
from the results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere in this Form 10.
The Company operates in a highly competitive business, which has a number
of inherent risks. These may be summarized as follows:
1. Limited Operating History: Because the Company has been in its
development stage until recently, it is difficult to evaluate its business and
prospects. The Company's revenue and income potential is not proven and its
business model is still emerging. An investor in the Company's common stock must
consider the risks and difficulties frequently encountered by early stage
companies in new and rapidly evolving markets. There can be no assurance that
the Company's products and services will achieve commercial success and, if they
do not, the price of the Company's common stock will decline.
2. Lack of Recent Profitable Operations: The Company has not achieved
profitability. The Company expects to incur net losses for the foreseeable
future and may never become profitable. The Company's net losses for the years
ended December 31, 1998 and December 31, 1997 were $981,598 and $678,156,
respectively. Through the nine months ended September 30, 1999, the Company's
net losses were $971,547. The Company's limited operating history makes it
difficult to forecast its future operating results. The Company expects to
continue to increase its marketing and sales, product development and general
and administrative expenses. As a result it will need to generate significant
additional revenue and/or raise additional funds to achieve profitability. If
the Company does achieve profitability, it cannot be certain that it sustain or
increase it.
3. Competition: The Company's services compete against those of other
established companies, some of which have greater financial, marketing and other
resources than those of the Company. These competitors may be able to institute
and sustain price wars, or imitate features of the Company's services, resulting
in a reduction of Company's share of the market. In addition, there are no
significant barriers to new competitors entering the market place.
4. Need for a Broad Customer Base: The Company will need to build and
sustain a large customer base. Failure to do so may result in continued losses.
5. Reliance on New Products and Services: The Company's business and
financial plans focus on products and services which are relatively new. There
can be no assurance that existing sales levels, which are still quite small, can
be maintained or that increased sales levels can be achieved. Internal cash
generated by operations may not permit the level of research and development
spending required to maintain the stream of new service improvements that may
become necessary and outside financing may not be available. The Company is
using certain relatively new software products and the developers of this
software are, in some cases, still working to improve certain essential features
of the software including a feature to allow the transfer of data to be done on
a secure and confidential basis.
6. Obsolescence: The Company is at risk if it does not continue to
upgrade and improve its services. Typically, the high technology industry is
characterized by a consistent flow of new and improved products and services
which render existing products and services obsolete. The Company's sales may
decline if it is unable to adapt its products to changes in technology. The
Company may incur significant expenses in developing new products and may not be
successful in either developing such products or timely introducing them to the
market. The Company will have to improve its methods for measuring the
performance and commercial success of its different products to better respond
to
15
customer demands for information on product effectiveness and to better
determine which products and services can be developed most profitably.
7. Marketplace: The marketplace for the Company's services is relatively
new and will be undergoing rapid and constant change. As a result, it is
difficult to predict the continued demand for the Company's services. The
Company's success is dependent on its ability to adjust to change and meet new
demands. It is also dependent on continued use and expansion of the Internet
and intranets. The Internet infrastructure may not be able to support the
demands placed on it by continued growth. The growth in volume of Internet
traffic may create instabilities in its structure such as shortages in Internet
addresses and overworked search engines. Such instabilities may have an adverse
affect on the Company's operations and business if they are not addressed. The
Internet could also lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
activity, security, reliability, cost, ease of use, accessibility, and quality
of service.
8. Management: The Company is dependent on a relatively small number of
key employees to implement its business plan, the loss of any of whom may affect
its ability to provide the required quality service and technical support to
achieve and maintain a competitive market position. The Company does not have
an employment agreement with any of the key employees, and, as a result, there
is no assurance that they will continue to manage the Company's affairs in the
future. The Company has not obtained any key man insurance with respect to such
employees.
9. Marketing Plan: The Company's internal marketing plan is based on a
number of assumptions which may or may not prove valid. Marketing expenditures
are to be funded partly from the proceeds of private placements, exercise of
stock options and warrants and cash flow from operations. Poor market
acceptance of the Company's services or other unanticipated events may result in
lower revenues than anticipated, making the planned expenditures on marketing
and promotion unachievable.
10. Personnel and Resources: Limitations on the Company's personnel and
resources may affect the ability of the Company to provide the required quality
service and technical support to achieve and maintain a competitive market
position.
11. Third Parties: The Company utilizes the services of third party
contractors to provide certain technical services, telecommunications hardware,
computers, software and communication lines. Therefore, the performance of the
Company will be affected by the quality of the goods and services provided by,
and the reputations of, such third parties. In addition, there can be no
assurance that the Company will successfully maintain relationships and
affiliations with third parties on terms satisfactory to the Company. An
unanticipated termination of a relationship with any third party could adversely
affect the Company's results of operations even if the Company were able to
establish a relationship with an alternative third party.
12. Insurance Risks: The Company has not acquired liability insurance
with respect to the provision of services by the Company.
13. Government Regulation of the Internet Possible: The laws and
regulations applicable to the Internet and the Company's products and services
are evolving and unclear and could damage the business. There are currently few
laws or regulations directly applicable to access to the Internet. Due to the
increasing popularity and use of the Internet, it is possible that laws and
regulations may be adopted, covering issues such as user privacy, defamation,
pricing, taxation, content regulation, quality of products and services, and
intellectual property ownership and infringement. Such legislation could
dampen the growth in use of the Internet, decrease the acceptance of the
Internet as a communications and commercial medium, or require the Company to
incur significant expenses in complying with any new regulations. Increased
regulation or the imposition of access fees could substantially increase the
costs of communication on the Internet, potentially decreasing the demand for
the Company's services. A number of proposals have been made at the federal,
state and local level that would impose additional taxes on the sale of goods
and services through the Internet. Such proposals, if adopted, could
substantially impair the growth of electronic commerce and could adversely
affect the Company. Any new legislation or regulation in the United States or
aboard or the application of existing laws and regulations to the Internet could
damage the Company's business and cause the price of its common stock to
decline.
16
14. Requirement of New Capital: The Company will need to continually
expand and upgrade its infrastructure and systems and ensure high levels of
service, speedy operation, and reliability. As a growing business, the Company
typically needs more capital than it has available to it or can expect to
generate through the sale of its services. In its short history, the Company
has had to raise, by way of debt and equity financing, considerable funds to
meet its needs. There is no guarantee that the Company will be able to continue
to raise the funds needed for the Company's business. Failure to raise the
necessary funds in a timely fashion will limit the Company's growth.
15. Year 2000 Issues: The Company's products did not require any
significant modifications for the Year 2000. However, the Company may face Year
2000 issues as it seeks to coordinate with other entities with which it
interacts electronically, including suppliers, customers and distribution
partners. If the Company discovers that certain of its services need
modification, or certain of its hardware and software is not year 2000
compliant, it will attempt to make modifications to its services and systems on
a timely basis. The Company does not believe that the cost of these
modifications will materially affect its operating results. However, it cannot
provide assurance that it will be able to modify these products, services and
systems in a timely, cost-effective and successful manner, and the failure to do
so could have a material adverse effect on the Company's business and operating
results.
16. Protection of Intellectual Property, Trade Secrets and Know-How: The
Company regards its intellectual property as critical to its success and,
therefore, it employs various methods, including trademarks, patents, copyrights
and confidentiality agreements with employees, consultants and marketing
partners, to protect its intellectual property and trade secrets. There can be
no assurance, however, that the Company will be able to maintain the
confidentiality of any of its proprietary technology, know-how or trade secrets,
or that others will not independently develop substantially equivalent
technology. The failure or inability to protect these rights could have a
material adverse effect on the Company's results of operations. Furthermore, the
Company cannot assure that its business activities will not infringe upon the
proprietary rights of others, or that other parties will not assert infringement
claims against the Company. Should it occur, such claims and any resultant
litigation could subject the Company to significant liability for damages and
could result in invalidation of its proprietary rights. Even if not meritorious,
these potential claims could be time-consuming and expensive to defend or
prosecute, and could result in the diversion of management time and attention
away from the Company's business.
17. General Factors: The Company's areas of business may be affected from
time to time by such matters as changes in general economic conditions, changes
in laws and regulations, taxes, tax laws, prices and costs, and other factors of
a general nature which may have an adverse effect on the Company's business.
Risks Related to the Company's Securities
1. Issuance of Additional Shares: A substantial portion of the
250,000,000 authorized common shares of the Company are unissued. The Board of
Directors has the power to issue such shares without shareholder approval. None
of the 250,000,000 authorized preferred shares of the Company have been issued.
The preferred shares may be issued in series from time to time with such
designation, rights, preferences and limitations as the Board of Directors may
determine by resolution and without shareholder approval. There are outstanding
warrants and options whose holders may acquire additional common shares. The
Company fully intends to issue additional common shares or preferred shares if
necessary in order to acquire products, properties, capital, businesses or for
any other corporate purposes. Any additional issuances by the Company from its
authorized but unissued shares would have the effect of further diluting the
percentage interest of existing shareholders.
2. Cumulative Voting and Preemptive Rights: There are no pre-emptive
rights in connection with the Company's common shares. Cumulative voting in the
election of directors is not permitted. Accordingly, the holders of a majority
of the common shares, present in person or by proxy, will be able to elect all
of the Company's Board of Directors.
17
3. Concentration of Ownership: The Executive Officers and Directors own
or exercise full or partial control over more than 20% of the Company's
outstanding shares. As a result, other investors in the Company's common shares
may not have as much influence on corporate decision making.
4. Preferred Stock Change in Control: Preferred Stock may be issued in
series from time to time with such designation, rights, preferences and
limitations as the Board of Directors may determine by resolution. The Board of
Directors could use an issuance of Preferred Stock with dilutive or voting
preferences to delay, defer or prevent a change in control of the Company. In
addition, the concentration of control over the Company's common stock in the
Directors and Executive Officers could prevent any change in control of the
Company not acceptable to the existing Directors and Executive Officers.
5. Estimates and Financial Statements: Some of the information in this
Form 10 consists of and relies upon evaluations and estimates made by management
and other professionals. Even though management believes in good faith that
such estimates are reasonable, based upon market studies and data provided by
sources knowledgeable in the field, there can be no assurance that such
estimates will ultimately be found to be accurate or even based upon accurate
evaluations. Any management errors in evaluations or estimates could have a
significant negative effect upon the Company's profitability or even its
viability.
6. No Foreseeable Dividends: The Company has not paid dividends on its
common shares and does not anticipate paying dividends on its common shares in
the foreseeable future.
7. Possible Volatility of Securities Prices: The market for the
Company's stock is highly volatile and will likely continue to behave in this
manner in the future. Additionally, market prices for securities of many
smaller companies have experienced wide fluctuations not necessarily related to
the operating performance of the companies themselves. The stock markets may
continue to experience volatility that may inflate or deflate the market price
of the Company's common stock.
8. Requirements of SEC With Regard to Low-Priced "Penny Stock"
Securities: The Company's securities are subject to Rule 15g-9 under the 1934
Act, which imposes additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and
"accredited investors" (generally, an individual with a net worth in excess of
$1,000,000 or an annual income exceeding $200,000, or $300,000 together with his
or her spouse). For transactions covered by this rule, a broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, the
rule may adversely affect the ability of broker-dealers to sell the Company's
securities and may adversely affect the ability of shareholders to sell their
shares in the secondary market.
9. Limited Liability of Executive Officers and Directors: The Company's
by-laws contain provisions that limit the liability of directors for monetary
damages and provide for indemnification of officers and directors under certain
circumstances. These provisions may discourage shareholders from bringing a
lawsuit against the directors for breaches of fiduciary duty and may also reduce
the likelihood of derivative litigation against directors and officers even
though such action, if successful, might otherwise have benefited the
shareholders. In addition, a shareholder's investment in the Company may be
adversely affected to the extent that costs of settlement and damage awards
against the officers or directors are paid by the Company pursuant to the
indemnification provisions of the articles of incorporation and by-laws. The
impact on a shareholder's investment in terms of the cost of the defending a
lawsuit may deter a shareholder from bringing suit against one of the Company's
officers or directors.
Financial Information About Industry Segments
The information in the financial statements provided with this registration
statement are incorporated by reference as though set forth here.
18
ITEM 2. Financial Information
Selected Financial Data
The following selected financial data reflects the fact that the Company is
emerging from its development stage and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition", "Plan of
Operations Over the Next Twelve Months" and the financial statements appearing
elsewhere in this registration statement.
- --------------------------------------------------------------------------------------------------------
Item Sept. 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Revenue $ 10,000 $ 0 $ 0 $ 0 $ 0
- --------------------------------------------------------------------------------------------------------
Income / Loss ($ 983,768) ($ 981,598) ($ 678,156) ($ 658,983) ($ 3,168,518)
- --------------------------------------------------------------------------------------------------------
Income / Loss
per share ($ 0.014) ($ 0.02) ($ 0.02) ($ 0.03) ($ 0.22)
- --------------------------------------------------------------------------------------------------------
Total assets $1,444,597 $ 435,232 $ 418,354 $ 470,553 $ 303,260
- --------------------------------------------------------------------------------------------------------
Long-term
obligations $ 0 $ 0 $ 0 $ 0 $ 0
- --------------------------------------------------------------------------------------------------------
Cash dividends
per share $ 0 $ 0 $ 0 $ 0 $ 0
- --------------------------------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
This Form 10 contains forward-looking statements. The words, "anticipate",
"believe", expect", "plan", "intend", "estimate", "project", "could", "may",
"foresee", and similar expressions are intended to identify forward-looking
statements. The following discussion and analysis should be read in conjunction
with the Company's Financial Statements and Notes thereto and other financial
information included elsewhere in this Form 10. This Form 10 contains, in
addition to historical information, forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from the results discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include those discussed below, as
well as those discussed elsewhere in this Form 10.
Revenue
The Company has not earned any significant revenue during the last two
fiscal years. Revenue-generating contracts have been signed in the first
quarter 2000.
19
The Company provides a number of revenue generating services to the
interactive video industry, including:
. Content encoding services to all MPEG and Wavelet formats on any
media;
. Deployment of media services and related equipment;
. Requirements analysis and application development for media server
applications, installation and deployment of complete digital video
management solutions including network infrastructure;
. Customization of user friendly browser-based video management tools
for off-the-shelf media servers;
. Content Services -- negotiating and finalizing agreements pertaining
to the production, distribution, and exhibition of VoD (Programming
Division); and
. Post-sale technical support options and packages.
The Company has an encoding suite at its facilities in Mystic, Connecticut,
for encoding content.
The Company's systems integration team provides engineering and
installation services to customers who are implementing interactive video
solutions. Services can be provided for an end-to-end solution for the customer
or a specific area within a project.
20
General and Administrative Expenses
General administrative expenses remained constant during the fiscal years
1998 and 1997. Both of these years resulted in a 30% decrease in expenses from
1996. Management fees were reduced significantly in 1998 and 1997 as the former
President, Gordon Lee, resigned his position as President and his contract was
settled and discontinued. Product marketing costs rose significantly during 1998
as the Company commenced a marketing program for its technology.
Liquidity and Capital Resources
The Company has historically satisfied its capital needs primarily by
issuing equity securities. Its operating activities used $698,224 and $651,072
for the years ended December 31, 1998 and 1997, respectively. During the nine
months ended September 30, 1999, the Company's operating activities used
$996,016. To fund its operations, the Company generated $977,630 and $937,126 in
1998 and 1997, respectively, through sales of its common stock. During the nine
months ended September 30, 1999, the Company generated $2,025,492 through sales
of its common stock. The operation, development and expansion of the Company's
business will likely require additional capital infusions for the foreseeable
future. The Company plans to manage its payables balances and satisfy its
operating and capital needs partially from cash generated by operating
activities and partially through sales of equity securities.
Exposure to Market Risk
-----------------------
The Company believes its exposure to overall foreign currency risk is
immaterial. The Company does not manage or maintain market risk sensitive
instruments for trading or other purposes and is, therefore, not subject to
multiple foreign exchange rate exposures.
The Company reports its operations in US dollars and its currency exposure,
although considered by the Company as immaterial, is primarily between the US
and Canadian dollars. Exposure to the currencies of other countries is also
immaterial as international transactions are settled in US dollars. Any future
financing undertaken by the Company will be denominated in US dollars. As the
Company increases its marketing efforts, the related expenses are basically in
US dollars except for the marketing efforts in Canada. If these advertisements
are coordinated through a US agency, then the expenses are in US dollars. The
Company is not exposed to the effects of interest rate fluctuations as it does
not carry any long-term debt.
ITEM 3. Properties
The Company's headquarters and executive offices are located at 70 Essex
Street, Unit 1C, Mystic, Connecticut 06355 and the telephone number is (800)
625-2200. The Company leases this space on an annual basis from Wharf Building
Associates at a monthly rent fee of $1,509.00.
The Company also has additional office space at 100 Essex Street, Unit 1A,
Mystic, Connecticut 06355. The Company leases this space on an annual basis
from Mystic Shipyard, LLC at a monthly rent fee of $1,700.00.
21
The Company also has corporate offices located at Suite 507, 837 West
Hastings Street, Vancouver, British Columbia, V6C 3N6 and the telephone number
is (604) 685-1017. The Company leases this space on a month-to-month basis from
Graystone Property Management Ltd. at a monthly rent fee of U.S. $1,780.00. The
Company paid a security deposit of U.S. $20,500.00 upon leasing the property.
The Company believes that its present facilities will be suitable for the
operation of its business for the foreseeable future. The facilities are
adequately insured against perils commonly covered by business insurance
policies. These locations could be replaced without significant disruption to
the Company.
ITEM 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of January 31, 2000, the outstanding
common shares of the Company owned of record or beneficially by each Executive
Officer and Director and by each person who owned of record, or was known by the
Company to own beneficially, more than 5% of the Company's common shares, and
the shareholdings of all Executive Officers and Directors as a group.
- ---------------------------------------------------------------------------------------------------------
Name Shares Owned Percentage of
Shares Owned
- ---------------------------------------------------------------------------------------------------------
Edwin Molina (1) 5,085,400 6.59%
President, Chief Executive Officer and member of the
Board of Directors
- ---------------------------------------------------------------------------------------------------------
Anton J. Drescher (2) 5,334,385 7.03%
Chief Financial Officer, Secretary and member of the
Board of Directors
- ---------------------------------------------------------------------------------------------------------
Ronald L. Patton (3) 1,002,000 1.35%
Chief Technical Officer
- ---------------------------------------------------------------------------------------------------------
Anthony J. Castagno (4) 1,513,000 2.02%
Chief Operating Officer
- ---------------------------------------------------------------------------------------------------------
Gerhard J. Drescher (5) 271,598 0.37%
Director
- ---------------------------------------------------------------------------------------------------------
Norman Bonin (6) 50,000 0.07%
Director
- ---------------------------------------------------------------------------------------------------------
ALL EXECUTIVE OFFICERS & DIRECTORS AS A 15,710,383 21.14%
GROUP (7 Persons) (7)
- ---------------------------------------------------------------------------------------------------------
Except as noted below, all shares are held of record and each record
shareholder has sole voting and investment power.
1) Includes 1,200,000 options and 1,685,000 warrants that are currently
exercisable. Mr. Molina's address is the same as the Company's executive
offices in Mystic, Connecticut.
2) Includes 1,000,000 options and 520,000 warrants that are currently
exercisable. Mr. Drescher's address is the same as the Company's corporate
office in Vancouver, British Columbia.
3) Includes 50,000 warrants. Mr. Patton's address is the same as the Company's
executive offices in Mystic, Connecticut.
4) Includes 470,000 warrants. Mr. Castagno's address is the same as the
Company's executive offices in Mystic, Connecticut.
5) Includes 50,000 options and 221,598 warrants that are currently
exercisable. Mr Drescher's address is the same as the Company's corporate
office in Vancouver, British Columbia.
6) Includes 50,000 options that are currently exercisable. Mr Bonin's address
is the same as the Company's corporate office in Vancouver, British
Columbia.
7) Includes 2,450,000 options and 3,275,000 warrants that are currently
exercisable.
There are no arrangements known to the Company the operation of which may
result in a change of control of the Company.
22
ITEM 5. Directors and Executive Officers
The following table sets forth the name, age and position of each director and
executive officer of the Company:
- -------------------------------------------------------------------------------------------------------
NAME AGE POSITION PERIOD SERVED
- -------------------------------------------------------------------------------------------------------
Edwin Molina 44 Director, Chief Executive Officer and President since 1998
- -------------------------------------------------------------------------------------------------------
Anton J. Drescher 43 Director, Chief Financial Officer and Secretary since 1994
- -------------------------------------------------------------------------------------------------------
Gerhard J. Drescher 39 Director since 1992
- -------------------------------------------------------------------------------------------------------
Norman J. Bonin 47 Director since 1998
- -------------------------------------------------------------------------------------------------------
Anthony J. Castagno 50 Chief Operating Officer since 1998
- -------------------------------------------------------------------------------------------------------
Ronald L. Patton 45 Chief Technical Officer since 1999
- -------------------------------------------------------------------------------------------------------
Daniel L. Sciro 34 Vice-President, Sales since 1998
- -------------------------------------------------------------------------------------------------------
Gerhard Drescher, Anton Drescher, Edwin Molina and Norman Bonin were
elected directors of the Company in June 1999. Each director will serve until
the next annual meeting of shareholders and their respective successors are
elected and qualified. All officers currently devote part-time to the operation
of the Company.
Executive Officers, Directors and Other Significant Employees of the Company:
Edwin Molina - President, Chief Executive Officer and Director
- --------------------------------------------------------------
Mr. Molina served as a Senior Administrator with the Company from June 1992 to
June 30, 1998, when he was appointed as President, Principal Executive Officer
and a member of the Board of Directors. Prior to joining the Company he was a
Senior Administrator with Adnet USA LLC, a private California company, from May
1996 to June 1998. Mr. Molina was also a Senior Administrator with Future Link
Systems Inc., a Vancouver Stock Exchange listed company, from January 1988 to
June 1992. Mr. Molina works a minimum of 60 hours per week on Company
activities. His duties include overseeing all activities of the Company
including providing strategic direction, managing and directing personnel and
budgets, overseeing the activities of other corporate officers and staff, and
directly overseeing all investor-related activities of the Company.
Anton J. Drescher - Chief Financial Officer, Secretary and Director
- -------------------------------------------------------------------
Mr. Drescher has been Chief Financial Officer of the Company since December
1994. He has been a Certified Management Accountant since 1981. He has been a
director and Secretary/Treasurer of Future Link Systems Inc. since 1997;
Director and Secretary/Treasurer of Interlink Systems Inc., a public company
listed on The Canadian Dealing Network, since 1996; President of Westpoint
Management Consultants Limited, a private British Columbia company, since 1979;
President of Harbour Pacific Capital Corp., a private British Columbia company,
since 1998. Gerhard Drescher and Anton Drescher are brothers. Mr. Drescher works
a minimum of 60 hours per week on Company activities. His duties include
overseeing all financial activities of the company including direct oversight of
budgets, accounts receivable and accounts payable, interactions with regulatory
authorities in the United States and Canada, and consultation on strategic
direction.
Gerhard J. Drescher - Director
- ------------------------------
Mr. Drescher has been a director of the Company since February 1992. Mr.
Drescher is the President and sole shareholder of Python Technologies Ltd., of
Vancouver, British Columbia, an electronics consulting firm, since 1989. He has
been a director of Future Link Systems Inc. since 1994.
23
Norman J. Bonin - Director
- --------------------------
Mr. Bonin has been a director of the Company since June 1998. Mr. Bonin is
President and a director of Direct Disposal Corp., a private British Columbia
company, since 1993. He has been a director of Future Link Systems Inc. since
1998.
Anthony J. Castagno - Chief Operating Officer
- ---------------------------------------------
Mr. Castagno has been with the Company since December 1998. Mr. Castagno
provides business development, investment and marketing strategy. He also is
President of The Rowe Group, an independent consulting firm specializing in
start-up and rapidly growing high-tech companies. Mr. Castagno has more than 20
years business, corporate public relations and marketing experience, teaches
Mass Media and Communications at the University of Connecticut, and has authored
numerous articles and reference materials. Mr. Castagno works a minimum of 60
hours per week on Company activities. His duties include providing strategic
direction and overseeing all marketing, sales, public relations and media
relations, initiating and negotiating contracts, overseeing technological
fulfillment of contracts, and overseeing day-to-day operations of the Company.
Ronald L. Patton - Chief Technical Officer
- ------------------------------------------
Mr. Patton has been with the Company since January 1999. Mr. Patton formerly
served for 20 years as Vice President of Integrated Performance Decisions at
Analysis & Technology and Senior Vice President of Research and Development at
Sonalysts, Inc. He worked with a team from Paramount Pictures to create special
audio effects for "Hunt for Red October," which received an Academy Award for
sound effects. Mr. Patton works a minimum of 60 hours per week on Company
activities. His duties include directing and overseeing all technology
activities of the Company, including developing and modifying products and
services to support sales and marketing; developing new products and services to
introduce to market, and directing a team of technology professionals.
Daniel J. Sciro - Vice-President, Sales
- ---------------------------------------
Mr. Sciro has been with the Company since June 1998. Mr. Sciro previously
served as President of two telecommunication companies based in New York. He
developed and deployed global telecommunication technologies for clients
including the U.S. government, supplying ship-to-shore communication technology
during the Gulf War. Mr. Sciro works a minimum of 60 hours per week on Company
activities. His duties include developing and implementing sales and sales
strategies, establishing new clients and designing systems to meet the
requirements of clients, negotiating contracts, and directing a teams of sales
professionals.
24
ITEM 6. Executive Compensation
Compensation of "Named Executive Officers"
The following table sets forth compensation awarded to, earned by or paid
to Named Executives for the designated fiscal years. Other than set forth below,
no employee of the Company earned salary and bonus of $100,000 or more in fiscal
year 1999.
Summary Compensation Table
Long Term Compensation
----------------------------------------------
Annual Compensation Awards Payouts
- ------------------------------------------------------------------------------------------------------------
Name Other Securities
and Annual Restricted Underlying
Principal Compen- Stock Options/ LTIP All Other
Position Year Salary ($) Bonus ($) sation ($) Award(s) ($) SARs (#) Payouts ($) Compensation ($)
- ---------------------------------------------------------------------------------------------------------------------------
Molina, 1999 $120,000 $200,665 1,200,000
Edwin (1)
(CEO)
1998 $ 60,500 $ 3,172 1,300,000
(2) (1)
1997 250,000
- ---------------------------------------------------------------------------------------------------------------------------
Drescher, 1999 $120,000 $146,060 1,000,000
Anton (3)
(CFO)
1998 $ 77,270 $ 34,429 1,000,000
(4)
1997 $ 65,517 $ 27,782 500,000
(5)
- ---------------------------------------------------------------------------------------------------------------------------
Patton, 1999 $120,000 $ 49,580 500,000
Ronald (6)
(CTO)
- ---------------------------------------------------------------------------------------------------------------------------
Castagno, 1999 $120,000 $194,300 250,000
Anthony (7)
(COO)
- ---------------------------------------------------------------------------------------------------------------------------
(1) 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.
(2) 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.
(3) 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.
(4) On January 28, 1998, Mr. Drescher exercised 500,000 stock options at an
exercise price of $0.067 per option, resulting in compensation of
$10,050.00. In 1998, Mr. Drescher received interest on loans to the
Company in the amount of $24,379.00.
(5) On June 20, 1997, Mr. Drescher exercised 500,000 stock options at an
exercise price of $0.072 per option, resulting in a realized value of
($1,800.00). In 1997, Mr. Drescher received interest on loans to the
Company in the amount of $29,582.00.
(6) 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.
(7) On July 6, 1999, Mr. Castagno exercised 250,000 stock options at an
exercise price of $0.067 per option, resulting in compensation of
$194,300.00.
25
The following table sets forth certain information concerning grants of
stock options pursuant to stock option plans to the Named Executive Officer
during the year ended December 31, 1999.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- -----------------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
- -----------------------------------------------------------------------------------------------------------------------
% of Total
Options /
Number of SARs Market
Securities Granted to Price
Underlying Employees on
Options/SARs in Fiscal Exercise Date of Expira-
Granted Year (1) Price Grant tion
($/Sh) ($/Sh) Date 0% ($) 5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------------------
Molina, 1,200,000 23.53% $ 1.00 $ 1.04 7/16/01 $48,000 $110,400 $172,800
Edwin
- -----------------------------------------------------------------------------------------------------------------------
Drescher, 1,000,000 23.53% $ 1.00 $ 1.04 7/16/01 $40,000 $ 92,000 $144,000
Anton
- -----------------------------------------------------------------------------------------------------------------------
Patton, 500,000 11.76% $0.067 $0.065 1/31/01 $ 625 $ 2,250
Ronald
- -----------------------------------------------------------------------------------------------------------------------
Castagno, 250,000 5.88% $0.067 $0.060 1/12/01 N/A N/A
Anthony
- -----------------------------------------------------------------------------------------------------------------------
(1) A total of 4,250,000 stock options were granted to employees in 1999.
The following table sets forth certain information concerning exercises of
stock options pursuant to stock option plans by the Named Executive Officer
during the year ended December 31, 1999 and stock options held at year end.
Aggregated Option / SAR Exercises in Last Fiscal Year
and FY-End Option / SAR Values
- --------------------------------------------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options / SARs Options / SARs
at FY-End (#) at FY-End ($)
Shares Acquired Exercisable / Exercisable /
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable(1)
- --------------------------------------------------------------------------------------------------------------------
Molina, Edwin 800,000 $200,665 1,200,000 / 0 N/A (2) / $0
- --------------------------------------------------------------------------------------------------------------------
Drescher, Anton 1,000,000 $146,060 1,000,000 / 0 N/A (3) / $0
- --------------------------------------------------------------------------------------------------------------------
Patton, Ronald 100,000 $ 49,580 400,000 / 0 $ 365,200 / $0
- --------------------------------------------------------------------------------------------------------------------
Castagno, Anthony 250,000 $194,300 0 / 0 $ 0 / $0
- --------------------------------------------------------------------------------------------------------------------
(1) On December 31, 1999, the average of the high and low price of the stock
trading on the OTC BB was $0.98.
(2) Mr. Molina's 1,200,000 options, with an exercise price of $1.00, were not
in-the-money based on the December 31, 1999 closing price of $0.98 per share for
the Company's common stock.
(3) Mr. Drescher's 1,000,000 options, with an exercise price of $1.00, were not
in-the-money based on the December 31, 1999 closing price of $0.98 per share for
the Company's common stock.
26
Compensation of Directors
Directors receive no compensation for their service as such, although they
do receive reimbursement for consulting services provided to the Company. In
addition to Mr. Molina, Mr. Anton Drescher, Mr. Gerhard Drescher and Mr. Bonin
each were granted options to purchase an aggregate of 2,300,000 common shares of
the Company, due in part to their service as directors. All of the options are
fully vested, have an exercise price of $1.00 per share and must be exercised by
July 16, 2001. The Company has no obligation or policy to grant stock options to
directors.
Employment Contracts
The Company does not have an employment contract with Mr. Molina and it has
no obligation to provide compensation to him in the event of his resignation,
retirement or termination, or a change in control.
The Company may in the future create retirement, pension, profit sharing,
insurance and medical reimbursement plans covering its Executive Officers and
Directors. At the present time, no such plans exist. No advances have been made
or are contemplated by the Company to any of its Officers or Directors.
ITEM 7. Certain Relationships and Related Transactions
Transactions with Management and Others
---------------------------------------
No director, executive officer or nominee for election as a director of the
Company, and no owner of five percent or more of the Company's outstanding
shares or any member of their immediate family has entered into or proposed any
transaction in which the amount involved exceeds $60,000.
Certain Business Relationships
------------------------------
No directors or nominee for director is or has been during the Company's
last fiscal year an executive officer or beneficial owner of more than 10% of
any other entity that has engaged in a transaction with the Company in excess of
5% of either company's revenues or assets.
Indebtedness of Management
--------------------------
There are no persons who are directors, executive officers of the Company,
nominees for election as a director, immediate family members of the foregoing,
corporations or organizations (wherein the foregoing are executive officers or
partners, or 10% of the shares of which are directly or beneficially owned by
the foregoing), trusts or estates (wherein the foregoing have a substantial
beneficial interest or as to which the foregoing serve as a trustee or in a
similar capacity) are indebted to the Company in an amount in excess of $60,000.
27
ITEM 8. Legal Proceedings
The following are pending legal proceedings in which the Company is a
party:
1. USA Video Interactive Corp. v. Wegener Communications, Inc.
-----------------------------------------------------------
This case was commenced by the Company against Wegener Communications,
Inc., a Georgia corporation, on January 7, 2000 in the U.S. District Court for
the District of Connecticut.
The facts of the case follow. In early February, 1999, the defendant agreed
to pay the Company five percent of the value of any orders from customers
referred to it by the Company. In reliance on this agreement, the Company
expended efforts to find the defendant compatible clients and introduced the
defendant to Autotote Communications. The defendant secured a contract with
Autotote Communications worth $4 million. The defendant failed to pay the
Company the agreed upon commission of five percent and this suit was ultimately
commenced to seek relief in the form of compensatory damages, punitive damages,
and attorney fees.
2. USA Video Interactive Corp. and Merging Rivers Media Corp. v. Rafael
--------------------------------------------------------------------
O. Quezada
- ----------
This case was commenced by the Company and its subsidiary, Merging Rivers
Media Corp., against Rafael O. Quezada, former president of Merging Rivers, on
January 10, 2000 in the U.S. District Court for the District of Connecticut.
The facts of the case follow. In mid-April, 1999, the Company entered into
a Confidentiality and Non-Disclosure Agreement with the defendant, prohibiting
him from disclosing and using the Company confidential information without prior
written consent of the Company. The Agreement also provided that the Company
would retain all publication and ownership rights to all intellectual property.
In mid-June, 1999, the Company and Merging Rivers entered into a Consulting
Agreement with the defendant which provided that the defendant was to represent
Merging Rivers and the Company to clients and prospective clients for purposes
of selling video and other multimedia advertising. At the end of July, 1999,
the Company provided a laptop computer to the defendant containing proprietary
information.
The defendant later registered domain names and trademarks in his own name,
charging the expenses to the Company. While a consultant to the Company and
president of Merging Rivers, the defendant sought employment with a competitor
to work on an identical project for which he was doing work for the Company.
Following termination of his consulting agreement with the Company and his
employment with Merging Rivers, the defendant interfered with a business
relationship between the Company and one of its customers.
The plaintiffs are seeking full compensatory and consequential damages, an
award of treble damages, and other equitable relief.
28
3. SABA Energy Ltd. v. USA Video Interactive Corp.
-----------------------------------------------
This case was commenced by SABA Energy Ltd. against the Company on October
23, 1996 in the Court of Queen's Bench of Alberta Judicial Centre of Calgary.
This case involves a failed assignment of a Petroleum and Natural Gas
Lease. The plaintiff and the Company entered into an agreement to transfer the
rights to the Lease. The Company registered the assignment of the Lease but
failed to register the well licenses with Alberta Energy. The agreement provides
that the Company indemnify the plaintiff for any liability, loss, claim or
damages arising out of any act, omission, matter or thing done by the defendant.
In May, 1995, the Company failed to pay rent for the Lease and failed to take
responsibility for abandoning the wells.
On April 14, 1997, a Default Judgment was awarded to SABA Energy in the
amount of Cdn $78,265.53 including interest and taxable costs. Settlement
negotiations are underway to reach agreement on the amount to ultimately be paid
by the Company.
4. DCC Building #4 Limited Partnership v. USA Video Corporation
------------------------------------------------------------
This case was commenced by DCC Building #4 Limited Partnership against USA
Video Corporation, a subsidiary of the Company, on September 7, 1995 in the
District Court of Dallas County, Texas. A default judgment was entered by the
court on November 10, 1995.
There is a contingent liability in the amount of $505,169 ($25,399 included
in accounts payable December 31, 1998) in respect to the default judgment
entered against USA Video Corporation. This suit was in regard to a lease of
premises by USA Video Corporation in Dallas, Texas. USA Video Corporation
vacated the premises in Dallas, Texas during the year ended December 31, 1995
and a claim was made to the company for the total amount payable under the terms
of the lease through the term of the lease, ending in 2002. Management of the
Company is of the opinion that the amount payable under the terms of this
judgment is not determinable at this time as the damages may be substantially
mitigated by the landlords renting the property to another party. Settlement
talks are underway. Any settlement resulting from the resolution of this
contingency will be accounted for during the year of the settlement.
To the knowledge of the Company's Executive Officers and Directors, the
Company is not a party to any other legal proceeding or litigation and none of
its property is the subject of a pending legal proceeding. Further, the Officers
and Directors know of no other threatened or contemplated legal proceedings or
litigation.
29
ITEM 9. Market Price of and Dividends on the Company's Common Equity and
Related Stockholder Matters
There is a limited public market for the common shares of the Company which
currently trades on the Canadian Venture Exchange under the symbol "US" where it
has been traded since February 23, 1995 and on the NASD OTC Bulletin Board under
the symbol "USVO" where it has been traded since February 22, 1995. The
following quotations reflect inter-dealer prices, without retail mark-up, mark-
down or commission and may not represent actual transactions:
Canadian Venture Exchange
(Symbol "US")
Quarter High * Low *
------- ---- ---
(Cdn $) (Cdn $)
First Quarter 1998 .245 .105
Second Quarter 1998 .18 .075
Third Quarter 1998 .18 .07
Fourth Quarter 1998 .115 .06
First Quarter 1999 .80 .07
Second Quarter 1999 1.83 .25
Third Quarter 1999 1.69 1.02
Fourth Quarter 1999 1.65 .90
* The prices are high and low sale prices. This information was provided by
Bloomberg Professional.
OTC Bulletin Board
(Symbol "USVO")
Quarter High * Low *
------- ---- ---
($US) ($US)
First Quarter 1998 0.13 0.08
Second Quarter 1998 0.01 0.03
Third Quarter 1998 0.12 0.04
Fourth Quarter 1998 .063 0.035
First Quarter 1999 0.75 0.045
Second Quarter 1999 1.95 0.16
Third Quarter 1999 1.17 0.66
Fourth Quarter 1999 1.39 0.62
* The prices are high and low bid prices. This information was provided by
NASDAQ, Trading & Marketing Services.
As of January 31, 2000, there were 74,322,089 common shares outstanding,
held by 1,118 shareholders of record and by various broker/dealers on behalf of
an indeterminate number of street
30
name shareholders.
To date the Company has not paid any dividends on its common shares and
does not expect to declare or pay any dividends on such common shares in the
foreseeable future. Payment of any dividends will depend upon future earnings,
if any, the financial condition of the Company, and other factors as deemed
relevant by the Company's Board of Directors.
ITEM 10. Recent Sales of Unregistered Securities
Set forth below is information regarding the issuance and sales of
securities of the Company without registration for the past three (3) years. No
such sales involved the use of an underwriter and no commissions were paid in
connection with the sale of any securities.
a) In January, 2000, the Company concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
US $1.10 per share by January 26, 2002. On completion of the offering, a total
of 250,000 units were issued at US $4.00 per unit for total proceeds of US
$1,000,000.00. The offer and sale of the units were exempt from registration
under Rule 506 of Regulation D and under Section 4(2) of the Securities Act of
1933. The Company limited the manner of the offering and there were no non-
accredited investors. If the foregoing exemptions are not available, the Company
believes that US $200,000.00 of these sales were also exempt under Regulation S
under the Securities Act of 1933, as amended, due to the foreign nationality of
the relevant purchasers.
b) In July 1999, the Company concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
US $1.10 per share by July 15, 2001. On completion of the offering, a total of
750,000 units were issued at US $1.00 per unit for total proceeds of US
$750,000.00. The offer and sale of the units were exempt from registration under
Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2),
respectively, of the Securities Act of 1933. The Company limited the manner of
the offering and the number of non-accredited investors to five (5) investors.
If the foregoing exemptions are not available, the Company believes that US
$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.
c) In May 1999, the Company concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
Cdn $0.73 per share by May 19, 2001. On completion of the offering, a total of
500,000 units were issued at Cdn $0.58 per unit for total proceeds of Cdn
$290,000.00. The offer and sale of the units were exempt from registration under
Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2),
respectively, of the Securities Act of 1933. The Company limited the manner of
the offering and the number of non-accredited investors to four (4) investors.
If the foregoing exemptions are not available, the Company believes that Cdn
$56,550.00 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 March 1999, the Company concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
Cdn $0.19 per share by March 23, 2001. On completion of the offering, a total of
1,000,000 units were issued at Cdn $0.17 per unit for total proceeds of Cdn
$170,000.00. The offer and sale of the units were exempt from registration under
Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2),
respectively, of the Securities Act of 1933. The Company limited the manner of
the offering and the number of non-accredited investors to two (2) investors. If
the foregoing exemptions are not available, the Company believes that $59,500.00
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.
e) In January 1999, the Company concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
Cdn $0.10 per share by March 23, 2001. On completion of the offering, a total of
2,000,000 units were issued at Cdn $0.10 per unit for total proceeds of Cdn
$200,000.00. The offer and sale of the units were exempt from registration under
Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2),
respectively, of the Securities Act of 1933. The Company limited the manner of
the offering and the number of non-accredited investors to two (2) investors. If
the foregoing exemptions are not available, the Company believes that $72,500.00
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.
f) During the nine months ended September 30, 1999, the Company issued
4,981,000 shares pursuant to options exercised at between US$0.067 and US$1.00
per share for total proceeds of US$410,705. The sale of the shares was exempt
from registration under Rule 701 under the Securities Act of 1933. The sales
were made on exercise of grants under the Company's written share option plan, a
copy of which the Company has provided to its participants.
31
g) In September 1998, the Company concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
Cdn $0.10 per share by September 30, 2000. On completion of the offering, a
total of 6,000,000 units were issued at Cdn $0.10 per unit for total proceeds
of Cdn $600,000.00. The offer and sale of the units were exempt from
registration under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and
4(2), respectively, of the Securities Act of 1933. The Company limited the
manner of the offering and the number of non-accredited investors to four (4)
investors. If the foregoing exemptions are not available, the Company believes
that $260,000.00 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.
h) During the year ended December 31, 1998, the Company issued 3,450,000
shares pursuant to options exercised at US$0.067 per share for total proceeds of
US$232,558.00. The sale of the shares was exempt from registration under Rule
701 under the Securities Act of 1933. The sales were made on exercise of grants
under the Company's written share option plan, a copy of which the Company has
provided to its participants.
i) In October 1997, the Company concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
Cdn $0.10 per share by October 3, 1999. On completion of the offering, a total
of 1,250,000 units were issued at Cdn $0.10 per unit for total proceeds of Cdn
$125,000.000. The offer and sale of the units were exempt from registration
under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2),
respectively, of the Securities Act of 1933. The Company limited the manner of
the offering and there were no non-accredited investors. If the foregoing
exemptions are not available, the Company believes that $20,000.00 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.
j) In June 1997, the Company concluded an offering of units. Each unit
consisted of one warrant to acquire an additional share at Cdn $0.10 per share
by June 27,1999. On completion of the offering, a total of 2,500,000 units were
issued at Cdn $0.10 per unit for total proceeds of Cdn $250,000.00. The offer
and sale of the units were exempt from registration under Rule 504 and Rule 506
of Regulation D under Sections 3(b) and 4(2), respectively, of the Securities
Act of 1933. The Company limited the manner of the offering and there were no
non-accredited investors. If the foregoing exemptions are not available, the
Company believes that $150,000.00 of these sales were also exempt under
Regulation S under the Securities Act of 1933, as amended, due to the foreign
nationality of the relevant purchasers.
k) During the year ended December 31, 1997, the Company issued 650,000 shares
pursuant to options exercised at US$0.072 per share for total proceeds of
US$46,952.00. The sale of the shares was exempt from registration under Rule 701
under the Securities Act of 1933. The sales were made on exercise of grants
under the Company's written share option plan, a copy of which the Company has
provided to its participants.
ITEM 11. Description of Securities to Be Registered
The following description of the Company's capital stock does not purport
to be complete and is subject to and qualified in its entirety by the Company's
articles of incorporation and bylaws, which are included as exhibits to the
registration statement and by the applicable provisions of Wyoming law.
The authorized capital stock of the Company consists of 250,000,000 common
shares without nominal or par value and 250,000,000 preferred shares without
nominal or par value.
Common Stock
------------
Dividends: The holders of common shares are entitled to dividends, out of
funds legally available therefore, when and as declared by the Board of
Directors. The Board of Directors have never declared a dividend and do not
anticipate declaring a dividend in the future.
Voting Rights: Each outstanding common share entitles the holder thereof to
one vote per share on all matters. Cumulative voting is not provided for in
connection with the election of the Board of Directors, which means that the
holders of more than 50% of such outstanding shares, voting for the election of
directors, can elect all of the directors to be elected, if they so choose, and,
in such event, the holders of the remaining shares will not be able to elect any
of the Company's directors.
Preemption Rights: The holders of the common shares have no preemptive or
subscription rights.
Each outstanding share of common stock entitles the holder thereof to one
vote per share on all matters and cumulative voting is not provided for in
connection with the election of the Board of Directors. This means that the
holders of more than 50% of such outstanding shares, voting for the election of
directors, can elect all of the directors to be elected, if they so choose, and,
in such event, the holders of the remaining shares will be able to elect any of
the Company's directors.
Preferred Stock
---------------
The Board of Directors will determine, in whole or in part, the
preferences, limitations and relative rights, within the limits set forth by the
laws of the state of incorporation, or any successor statute, of any class of
its preferred shares before the issuance of any shares of that class or one or
more series within that class before the issuance of any shares of that series.
The Board of Directors could use an issuance of preferred stock with dilutive or
voting preferences to delay, defer or prevent a change in control of the
Company.
Stock Options
-------------
A total of 6,718,000 stock options, convertible on a one for one basis,
were outstanding as at February 17, 2000:
Exercise Price
No. of Options Date of Grant Expiry Date Per Option
- -------------- ------------- ----------- ----------
80,000 October 20, 1998 October 20, 2000 $0.067
875,000 January 31, 1999 January 31, 2000 $0.067
500,000 March 9, 1999 March 9, 2001 $0.095
2,944,000 July 16, 1999 July 16, 2001 $ 1.00
669,000 November 25, 1999 November 25, 2001 $ 1.00
750,000 (1) December 22, 1999 December 22, 2001 $ 1.00
900,000 (1) February 17, 2000 February 17, 2002 $ 5.00
(1) These options are subject to Regulatory Acceptance.
For further information on the Company's stock options, please see the
Company's Share Option Plan attached as an exhibit to the registration
statement.
Warrants
--------
A total of 5,675,000 warrants, convertible on a one for one basis, were
outstanding as a January 31, 2000:
No. of Warrants Expiry Date Exercise Price
- --------------- ----------- --------------
2,275,000 September 30, 2000 $0.067
925,000 January 31, 2001 $0.067
975,000 March 23, 2001 $0.129
500,000 May 19, 2001 $0.495
750,000 July 15, 2001 $ 1.10
250,000 (1) January 26, 2002 $ 4.00
(1) These warrants are subject to Regulatory Acceptance.
The Board of Directors may determine and from time to time vary the
conditions upon which share warrants are issued. The bearer of a share warrant
shall be entitled to attend and vote at general meetings. A share warrant may be
surrendered and the name of the holder of the shares may be entered in the
register. The bearer of a share warrant is considered a shareholder of the
Company. The holder of the share warrant is subject to the conditions in force
with respect to share warrants whether made before or after the issue of the
warrant.
32
ITEM 12. Indemnification of Directors and Officers
Subject to the applicable corporate law, the Company's bylaws limit the
liability of directors and officers for any loss, damage or expense to the
Company in their capacity as directors and officers and provide for the
indemnification of directors and officers. The effect of these provisions is
potentially to indemnify the Company's directors and officers from all costs and
expenses of liability incurred by them in connection with any action, suit or
proceeding in which they are involved by reason of their affiliation with the
Company.
These provisions in the bylaws do not eliminate a director's or officer's
duty of care, and in appropriate circumstances equitable remedies such as an
injunction or other forms of non-monetary relief would remain available. Each
director and officer will continue to be subject to liability for breach of the
his or her duty of loyalty to the Company, for acts or omissions not in good
faith or involving intentional misconduct or knowing violations of law, for acts
or omissions that the director or officer believes to be contrary to the best
interests of the Company or the Company's stockholders, for any transaction from
which the director or officer derived an improper personal benefit, for improper
transactions between the director or officer and the Company and for improper
loans to stockholders and loans to directors or officers. This provision also
does not affect a director's or officer's responsibilities under any other laws,
such as the federal securities laws or state or federal environmental laws.
There is no pending litigation or proceeding involving the Company's
directors or officers as to which indemnification is being sought, nor is the
Company aware of any pending or threatened litigation that may result in claims
for indemnification by any director or officer.
ITEM 13. Financial Statements and Supplementary Data
The information in the financial statements provided with this registration
statement are incorporated by reference as though set forth here.
ITEM 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No changes in and disagreements with accountants are reportable pursuant to
this item.
33
ITEM 15(a). Financial Statements
Index to Consolidated Financial Statements
Report of Independent Auditors.............................................................................. F-1
Balance Sheets as of September 30, 1999 (Unaudited), December 31, 1998, and December 31, 1997............... F-2
Income Statements for the nine months ended September 30, 1999 and 1998 (Unaudited) and the years
ended December 31, 1998 and 1997............................................................................ F-4
Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 (Unaudited) and the years
ended December 31, 1998 and 1997............................................................................ F-7
Statement of Stockholders Equity for the years ended December 31, 1986 to December 31, 1998 and
January 1, 1992 to December 31, 1998........................................................................ F-11
Notes to Financial Statements (Unaudited as to periods after December 31, 1998)............................. F-17
ITEM 15(b). Exhibits
Exhibit No. Description
- -------------- ------------------------------------------------------------
3.1 Articles of Continuance (Wyoming) filed February 16, 1995
3.2 Articles of Amendment (Alberta) filed January 3, 1995
3.3 Articles of Amendment (Alberta) filed June 28, 1993
3.4 Articles of Amendment (Alberta) filed April 6, 1992
3.5 Articles of Amendment (Alberta) filed September 1, 1989
3.6 Articles of Incorporation (Alberta) filed April 18, 1986
3.7 Bylaws
4.1 Specimen Share Certificate for Common Shares
4.2 Form of Warrants
4.3 Share Option Plan
4.4 Form of Share Option Agreement (Directors)
4.5 Form of Share Option Agreement (Consultant/Employee)
10.1 Letter Agreement dated February 7, 2000 between VIANET and
registrant
10.2* Client Referral Agreement dated May 3, 1999 between UUNET
Technologies, Inc. and registrant
10.3* Co-Location Services Agreement dated June 3, 1999 between UUNET
Technologies, Inc. and registrant
10.4* Alliance Partner Agreement dated November 11, 1999 between Exodus
Communications, Inc. and registrant
21 List of Subsidiaries
27 Financial Data Schedule
* To be filed by amendment.
34
F-1
USA Video Interactive Corp.
Consolidated Financial Statements
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
AUDITORS' REPORT
To the Stockholders,
USA Video Interactive Corp.
We have audited the consolidated balance sheets of USA Video Interactive Corp.
as at December 31, 1998 and 1997 and the consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 1998 and for the period from inception of the
development stage, January 1, 1992 to December 31, 1998. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 1998
and 1997 and the results of its operations and cash flows for each of the years
in the three year period ended December 31, 1998 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.
Vancouver, Canada "AMISANO HANSON"
April 21, 1999, except as to Note 14, which is as Chartered Accountants
of May 3, 1999
Comments by Auditors for U.S. Readers on Canada - U.S. Reporting Conflict
- -------------------------------------------------------------------------
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there is
substantial doubt about a company's ability to continue as a going concern. The
accompanying consolidated financial statements have been prepared on the basis
of accounting principles applicable to a going concern which assumes the
realization of assets and discharge of liabilities in the normal course of
business. As discussed in Note 1 to the accompanying financial statements and
in respect of the company's substantial losses from operations, substantial
doubt about the company's ability to continue as a going concern exists. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Our report to the shareholders dated April 21, 1999 is expressed in accordance
with Canadian reporting standards which do not permit a reference to such
uncertainty in the auditors' report when the uncertainty is adequately disclosed
in the consolidated financial statements.
Vancouver, Canada "AMISANO HANSON"
April 21, 1999, except as to Note 14, which is as Chartered Accountants
of May 3, 1999
F-2
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED BALANCE SHEET
as at September 30, 1999
(Unaudited)
(Prepared by Management)
(Stated in US Dollars)
--------------------
ASSETS
------
1999 1998
--------------------- ---------------------
Current
Cash and term deposit $ 737,235 $ 76,005
Marketable securities 155,065 164,333
Accounts receivable 23,209 30,789
Prepaid expenses 53,310 2,418
--------------------- ---------------------
968,819 273,545
Advance on investment 25,000 49,300
Capital assets 410,052 226,396
(Net of accumulated amortization 1999 - $81,249)
Deferred development costs --- 363,364
Patents 40,726 36,159
--------------------- ---------------------
$ 1,444,597 $ 948,764
===================== =====================
LIABILITIES
-----------
Current
Accounts payable $ 563,695 $ 432,187
Due to related parties 60,353 146,271
--------------------- ---------------------
624,048 578,458
--------------------- ---------------------
STOCKHOLDERS' EQUITY
--------------------
Common stock 20,748,458 18,128,407
Shares Subscribe --- 394,400
Deficit (19,927,909) (18,152,501)
--------------------- ---------------------
820,549 370,306
--------------------- ---------------------
$ 1,444,597 $ 948,764
===================== =====================
APPROVED BY THE DIRECTORS:
"Anton J. Drescher" "Edwin Molina"
________________________, Director ______________________, Director
F-3
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Stated in US Dollars)
--------------------
ASSETS
------
1998 1997
-------------------- --------------------
Current
Cash $ 2,618 $ 23,751
Marketable securities - Note 3 73,920 160,940
Accounts receivable - Note 8 21,049 16,211
Prepaid expenses - Note 5 70,862 -
-------------------- -------------------
168,449 200,902
Advance on investment - Note 5 - 52,481
Capital assets - Note 6 236,961 138,400
Patents - Note 7 29,822 26,571
-------------------- -------------------
$ 435,232 $ 418,354
==================== ===================
LIABILITIES
-----------
Current
Accounts payable - Note 8 $ 494,600 $ 467,319
Due to related parties - Note 8 174,028 180,463
-------------------- -------------------
668,628 647,782
-------------------- -------------------
STOCKHOLDERS' DEFICIENCY
------------------------
Common stock - Note 9 18,722,966 17,631,628
Common stock subscribed - Notes 8 and 9 - 113,708
Deficit accumulated during the development stages (18,956,362) (17,974,764)
-------------------- -------------------
(233,396) (229,428)
-------------------- -------------------
$ 435,232 $ 418,354
==================== ===================
Nature and Continuance of Operations - Note 1
Commitments - Notes 5, 9, 13 and 14
Subsequent Events - Note 14
Contingent Liability - Note 16
APPROVED BY THE DIRECTORS:
"Anton J. Drescher" "Edwin Molina"
__________________________, Director ___________________, Director
F-4
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
for the nine months ended September 30, 1999
(Unaudited) (Prepared by Management)
(Stated in US Dollars)
--------------------
1999 1998
--------------------- ---------------------
Revenue $ 10,000 $ ---
Interest earned 2,248 ---
-------------------- --------------------
12,248 ---
-------------------- --------------------
Expenses
Amortization of capital assets 43,568 6,941
Amortization of patents 787 ---
Advertising 6,811 ---
Consulting fees 98,952 49,141
Filing fees 13,498 3,655
Insurance 3,305 ---
Interest expense 5,053 11,594
LA Music Awards 43,206 ---
License fees 17,345 ---
Management fees 22,500 15,000
Office 133,207 29,486
Printing 59,411 2,620
Product marketing costs 244,903 ---
Professional fees 54,088 35,569
Public relations 17,580 ---
Rent 35,895 17,184
Research and development costs 47,470 ---
Telephone and utilities 48,825 5,954
Transfer agent fee 7,621 5,015
Travel and promotion 41,746 6,529
Webb site costs 50,245 5,164
-------------------- --------------------
996,016 193,852
-------------------- --------------------
Loss for the year (983,768) (193,852)
Other
Foreign exchange gain 12,221 105,769
Gain on sale of capital assets --- 188
Loss on sale of marketable securities --- (697)
Severance pay --- (89,145)
-------------------- --------------------
Net (loss) for the period (971,547) (177,737)
Deficit, beginning of the period (18,956,362) (17,974,764)
-------------------- --------------------
Deficit, end of the period $ (19,927,909) $ (18,152,501)
==================== ====================
F-5
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1998, 1997 and 1996
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1998
(Stated in US Dollars)
--------------------
January 1, 1992
(Date of Incep-
tion of Develop-
ment Stage) to
Years ended December 31, December 31,
1998 1997 1996 1998
---- ---- ---- ----
Expenses
Amortization of capital assets $ 38,473 $ 4,605 $ 5,509 $ 129,555
Amortization of goodwill - - - 228,023
Amortization of patents 2,508 2,170 1,841 12,836
Automobile expenses 5,127 - - 51,974
Consulting fees - Note 8 84,611 108,197 218,873 1,805,779
Delivery costs - - - 56,042
Equipment rental - - - 95,136
Filing fees 8,326 6,581 11,923 74,099
Insurance 928 - - 52,732
Interest and bank charges - Note 8 24,665 46,164 67,798 530,373
Interest on convertible debentures
- Note 8 - - 64,868 160,641
Management fees - Note 8 27,000 174,025 359,947 1,916,845
Product marketing costs - Note 8 209,553 85,865 - 366,405
Office and general - Note 8 32,919 27,764 103,581 738,439
Office assistance - Note 8 40,881 14,328 - 55,209
Printing 21,786 - - 162,413
Professional fees - Note 8 48,611 65,147 73,510 690,726
Public relations 13,050 39,494 - 359,400
Rent - Note 8 33,214 17,278 19,922 446,346
Repairs and maintenance 2,638 - - 20,817
Research and development costs
- Note 8 24,000 2,668 - 3,638,920
Salaries and benefits - Note 8 - - - 1,798,755
Telephone and utilities 35,511 25,460 17,125 484,216
Transfer agent fees 5,960 7,216 5,171 45,551
Travel and entertainment 26,072 6,038 14,244 704,017
Web site costs 12,391 18,072 - 30,463
---------- ---------- ---------- -------------
Loss before other items ( 698,224) ( 651,072) ( 964,312) ( 14,655,712)
---------- ---------- ---------- -------------
F-6
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1998, 1997 and 1996
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1998
(Stated in US Dollars)
--------------------
January 1, 1992
(Date of Incep-
tion of Develop-
ment Stage) to
Years ended December 31, December 31,
1998 1997 1996 1998
---- ---- ---- ----
Other items
Interest income - - - 5,020
Foreign exchange gain 70,328 5,074 5,987 251,659
Gain (loss) on sale of marketable
securities - Note 8 ( 688) 64,213 375,236 428,878
Gain on disposal of capital assets
- Note 8 77 - - 67,122
Gain on settlement of accounts
payable - - 69,691 197,228
Gain on write-off of accounts
payable - 26,760 41,742 68,502
Severance pay - Note 8 ( 90,000) - - ( 90,000)
Oil well closure costs - ( 3,092) ( 57,397) ( 79,702)
Write-down of marketable securities
- Note 8 ( 118,807) ( 86,680) ( 129,840) ( 1,007,897)
Write-down of advances - Note 8 ( 130,631) - - ( 137,958)
Write-down of capital assets ( 13,653) ( 33,359) - ( 791,124)
Write-off of resource properties - - - ( 717,789)
Write-off of goodwill - - - ( 640,639)
----------- ----------- ----------- -----------
( 283,374) ( 27,084) 305,419 ( 2,446,700)
----------- ----------- ----------- -----------
Net loss $( 981,598) $( 678,156) $( 658,893) $(17,102,412)
=========== =========== =========== ===========
Net loss per share $( 0.02) $( 0.02) $( 0.03)
=========== =========== ===========
Weighted average shares outstanding 50,457,546 37,878,380 24,608,793
=========== =========== ===========
F-7
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1999
(Unaudited)
(Prepared by Management)
(Stated in US Dollars)
--------------------
1999 1998
---- ----
Cash provided by (used in):
Operations
Net (loss) $ (971,547) $ (177,737)
Gain on sale of capital asset --- (188)
Loss on sale of marketable securities --- 697
Items not involving cash:
Amortization 44,355 6,941
Accounts receivable (2,160) (14,578)
Prepaid expense 17,552 (2,418)
Accounts payable 69,095 (35,132)
Due to related parties (113,675) (34,192)
----------- ----------
(956,380) (256,607)
----------- ----------
Financing
Issue of common stock for cash 2,025,492 496,779
Common stock subscribe --- 280,692
Sale proceeds of capital assets 683
Sale proceeds of marketable securities --- 19,796
----------- ----------
2,025,492 797,950
----------- ----------
Investing
Deferred exploration expenditures --- (363,364)
Marketable securities (81,145) (23,886)
Advance on investment (25,000) 3,181
Patents (11,691) (10,991)
Capital assets (216,659) (94,029)
----------- ----------
(334,495) (489,089)
----------- ----------
Net increase in cash 734,617 52,254
Cash, beginning of the period 2,618 23,751
----------- ----------
Cash, end of the period $ 737,235 $ 76,005
=========== ==========
F-8
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1998
(Stated in US Dollars)
--------------------
January 1, 1992
(Date of Incep-
tion of Develop
ment Stage) to
Years ended December 31, December 31,
------------------------
1998 1997 1996 1998
---- ---- ---- ----
Cash flow from operating activities:
Net loss $ ( 981,598) $ ( 678,156) $ ( 658,893) $ ( 17,102,412)
Adjustments to reconcile net loss to net cash used in operations:
Amortization of capital assets 38,473 4,605 5,509 129,555
Amortization of goodwill - - - 228,023
Amortization of patents 2,508 2,170 1,841 12,836
Foreign exchange ( 38,773) ( 5,074) ( 5,987) ( 87,735)
Loss (gain) on sale of marketable securities 688 ( 64,213) ( 375,236) ( 428,878)
Gain on disposal of capital assets ( 77) - - ( 67,122)
Gain on settlement of accounts payable - - ( 69,691) ( 197,228)
Gain on write-off of accounts payable - ( 26,760) ( 41,742) ( 68,502)
Write-down of marketable securities 128,312 86,680 129,840 1,032,518
Write-down of advances 130,631 - - 137,958
Write-down of capital assets 13,653 33,359 - 791,124
Write-off of resource properties - - - 717,789
Write-off of goodwill - - - 640,639
Accounts receivable 3,077 204,951 ( 202,645) ( 1,427)
Prepaid expenses ( 30,084) 1,087 4,300 ( 63,091)
Accounts payable 35,798 ( 202,100) 94,426 1,137,655
Due to related parties 1,252 ( 82,309) 229,852 ( 86,759)
----------- ----------- ----------- ------------
Net cash used in operating activities ( 696,140) ( 725,760) ( 888,426) ( 13,275,057)
----------- ----------- ----------- ------------
F-9
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1998
(Stated in US Dollars)
--------------------
January 1, 1992
(Date of Incep-
tion of Develop
ment Stage) to
Year ended December 31, December 31,
-----------------------
1998 1997 1996 1998
---- ---- ---- ----
Cash flow provided by (used in) investing activities:
Proceeds on sale of marketable securities $ 26,045 $ 123,415 $ 589,991 $ 1,304,328
Purchase of marketable securities ( 58,520) ( 139,948) ( 342,253) 1,957,267)
Advances ( 113,779 ( 52,481) - ( 137,958)
Investment - - - 246,571
Goodwill - - - ( 868,662)
Proceeds on sale of capital assets 674 - - 279,528
Purchases of capital assets ( 151,284) ( 127,632) ( 33,148) ( 1,370,046)
Patent fees ( 5,759) ( 5,599) ( 817) ( 42,658)
Resource properties - - - 19,213
------------ ------------- ------------- -------------
Net cash provided by (used in) investing activities ( 302,623) ( 202,245) 213,773 ( 2,526,951)
------------ ------------- ------------- -------------
Cash flow provided by (used in) financing activities:
Cash in trust - - 75,236 -
Note payable - ( 114,857) ( 1,022) -
Convertible debenture - - ( 10,880) 1,558,438
Common shares issued for cash 977,630 938,275 518,417 15,192,649
Common share subscriptions - 113,708 106,827 -
Reserved earnout shares acquired and cancelled - - - ( 947,200)
------------ ------------- ------------- -------------
Net cash provided by financing activities 977,630 937,126 688,578 15,803,887
------------ ------------- ------------- -------------
Net increase (decrease) in cash ( 21,133) 9,121 13,925 1,879
Cash, beginning of the period 23,751 14,630 705 739
------------ ------------- ------------- -------------
Cash, end of the period $ 2,618 $ 23,751 $ 14,630 $ 2,618
============ ============= ============= =============
Supplementary Information - Note 10
F-11
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
for the years ended December 31, 1986 to December 31, 1998
and January 1,1992 (Date of Inception of Development Stage) to
December 31, 1998 (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
Issued for settlement of debt 1989 20,000 0.422 8,445 8,445
Issued for loan repayment 1989 200,000 0.422 84,445 84,445
Exercise of share purchase options 1990 304,500 0.429 130,490 130,490
Issued for private placement 1990 795,500 0.370 294,086 294,086
Issued on conversion of debenture 1990 1,000,000 0.129 128,536 128,536
Exercise of share purchase options 1991 425,000 0.044 18,546 18,546
Exercise of share purchase warrants 1991 300,000 0.175 52,365 52,365
Net loss from inception to
December 31, 1991 ( 906,750) ( 906,750)
Share subscriptions at
December 31, 1991 6,923 6,923
---------- --------- ------ --------- ---------
Balance December 31, 1991 9,501,560 1,237,861 6,923 ( 906,750) ( 338,034)
F-12
Consolidated Financial Statements
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
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, 1998
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1998
(Stated in US Dollars)
--------------------
Deficit
Accumulated
During the
Number Common Stock Common Share Development
of Shares Price Amount Subscriptions Stages Total
---------- ----- ------ ------------- ------ -----
Issued for cash:
Private placement 3,000,000 $0.141 $ 422,081 $ 422,081
Private placement 1,625,669 0.629 1,022,518 1,022,518
Share purchase options 450,000 0.041 18,621 $ ( 6,923) 11,698
Share purchase options 371,000 0.414 153,521 153,521
Share purchase warrants 700,000 0.166 115,865 115,865
Share purchase warrants 283,250 0.414 117,210 117,210
Convertible debenture warrants 8,297,320 0.041 343,347 343,347
Issued for conversion of debenture 8,297,320 0.031 257,511 257,511
Issued for settlement of debt 1,031,332 0.093 96,023 96,023
Issued for settlement of debt 134,800 0.414 55,781 55,781
Net loss for year (2,721,567) (2,721,567)
Share subscriptions at
December 31, 1992 154,181 154,181
---------- ----------- ------------ ---------- -----------
Balance December 31, 1992 33,692,251 3,840,339 154,181 (3,628,317) 366,203
F-13
Consolidated Financial Statements
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
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, 1998
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1998
(Stated in US Dollars)
--------------------
Deficit
Accumulated
During the
Number Common Stock Common Share Development
of Shares Price Amount Subscriptions Stages Total
---------- ----- ------ ------------- ------ -----
Issued for cash:
Private placement 500,000 $0.395 $ 197,705 $ 197,705
Private placement 1,000,000 0.465 465,188 465,188
Private placement 2,328,615 0.636 1,480,436 $ ( 154,181) 1,326,255
Issue costs ( 18,938) ( 18,938)
Private placement 50,000 1.287 64,351 64,351
Share purchase options 2,521,320 0.388 977,407 977,407
Share purchase options 150,000 0.465 69,778 69,778
Share purchase warrants 50,000 0.644 32,175 32,175
Convertible debenture warrants 1,146,485 0.039 44,444 44,444
Issued for conversion of debenture 666,666 0.029 19,383 19,383
Issued for conversion of debenture 781,250 0.821 641,098 641,098
Issued in payment of debenture
interest 479,819 0.029 13,950
Issued for settlement of debt 473,273 0.594 281,321 281,321
Net loss for year ( 3,526,607) (3,526,607)
Share subscriptions at
December 31, 1993 485,900 485,900
---------- ----------- ------------- ------------ -----------
Balance December 31, 1993 43,839,679 8,108,637 485,900 ( 7,154,924) 1,439,613
Consolidated Financial Statements F-14
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
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, 1998
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1998
(Stated in US Dollars)
--------------------
Deficit
Accumulated
During the
Number Common Stock Common Share Development
of Shares Price Amount Subscriptions Stages Total
-------------- ------------ ----------- -------------- --------------- -------------
Balance December 31, 1993 43,839,679 $ 8,108,637 $ 485,900 $ (7,154,924) $ 1,439,613
Issued for cash:
Private placement 3,000,000 $0.732 2,196,354 (485,900) 1,710,454
Private placement 22,261,000 0.183 4,074,420 4,074,420
Share purchase options 52,180 0.366 19,101 19,101
Share purchase options 87,900 0.439 38,612 38,612
Share purchase warrants 100,000 0.549 54,909 54,909
Share purchase warrants 300,000 0.498 149,352 149,352
Issued for conversion of debenture 78,125 0.813 63,552 63,552
Reserved earnout shares acquired
and cancelled (947,200) (947,200)
Net loss for year (5,367,073) (5,367,073)
------------- ----------- ----------- -------------- ------------
Balance December 31, 1994 69,718,884 14,704,937 (13,469,197) 1,235,740
Issued for settlement of debt 150,000 0.255 38,249 38,249
Issued for settlement of debt 10,720 0.182 1,952 1,952
Share consolidation - 1 share for
5 shares (55,903,643)
Issued for cash:
Private placement 510,000 0.219 111,467 111,467
Issued for settlement of debt 7,574 0.546 4,138 4,138
F-15
Consolidated Financial Statements
December 31, 1998 and 1997
(State in U.S. dollars)
---------------------
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, 1998
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1998
(Stated in US Dollars)
--------------------
Deficit
Accumulated
During the
Number Common Stock Common Share Development
of Shares Price Amount Subscriptions Stages Total
--------- ----- ------ ------------- ------------ -----
Net loss for year $( 3,168,518) $( 3,168,518)
Share subscriptions
at December 31, 1995 $ 394,791 394,791
----------- ----------- ---------- ------------- ------------
Balance December 31, 1995 14,493,535 $14,860,743 394,791 ( 16,637,715) ( 1,382,181)
Issued for cash:
Private placement 9,950,000 $0.088 875,623 ( 394,791) 480,832
Share purchase options 205,000 0.183 37,585 37,585
Issued for settlement of debt 9,233,553 0.088 812,575 812,575
Net loss for year ( 658,893) ( 658,893)
Share subscriptions at
December 31, 1996 106,827 106,827
----------- ----------- ---------- ------------- ------------
Balance December 31, 1996 33,882,088 16,586,526 106,827 ( 17,296,608) ( 603,255)
Issued for cash:
Private placement 4,000,000 0.072 288,933 ( 106,827) 182,106
Private placement 1,250,000 0.235 293,448 293,448
Share purchase warrants 749,000 0.079 59,513 59,513
Share purchase warrants 3,000,000 0.108 325,051 325,051
Share purchase warrants 270,000 0.116 31,205 31,205
Share purchase options 650,000 0.072 46,952 46,952
F-16
Consolidated Financial Statements
December 31, 1998 and 1997
(State in U.S. dollars)
---------------------
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, 1998
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1998
(Stated in US Dollars)
--------------------
Deficit
Accumulated
During the
Number Common Stock Common Share Development
of Shares Price Amount Subscriptions Stages Total
--------- ------------ ------ ------------- ----------- -----
Net loss for year $ ( 678,156) $ 678,156)
Share subscriptions at
December 31, 1997 $ 113,708 113,708
----------- ----------- ----------- ------------ -----------
Balance December 31, 1997 43,801,088 $17,631,628 113,708 ( 17,974,764) ( 229,428)
Issued for cash:
Private placement 6,000,000 $0.067 404,449 404,449
Share purchase warrants 2,000,000 0.101 202,224 ( 75,835) 126,389
Share purchase warrants 550,000 0.074 40,782 40,782
Share purchase warrants 300,000 0.108 32,356 32,356
Share purchase warrants 2,655,000 0.067 178,969 178,969
Share purchase options 3,450,000 0.067 232,558 ( 37,873) 194,685
Net loss for year ( 981,598) ( 981,598)
----------- ----------- ----------- ------------- -----------
Balanced December 31, 1998 58,756,088 $18,722,966 $ - $ 18,956,362) $ 233,396)
=========== =========== =========== ============= ===========
F-17
USA VIDEO INTERACTIVE GROUP
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
(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 Alberta Stock Exchange and NASD Bulletin Board and
is developing and testing a video-on-demand technology.
These financial statements have been prepared on a going concern
basis. The company has a working capital deficiency of $500,179 as at
December 31, 1998 and has accumulated a deficit of $18,956,362 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.
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.
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.
F-18
USA Video Interactive Corp.
Consolidated Financial Statements
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
Note 2 Summary of Significant Accounting Principles - (cont'd)
--------------------------------------------
Development Stage Company
-------------------------
The company is a development stage company as defined in Statement of
Financial Accounting Standards No. 7.
Principles of Consolidation
---------------------------
These consolidated financial statements include the accounts of USA
Video Interactive Corp. and its wholly owned subsidiaries, USA Video
(California) Corporation and USA Video Corporation, both inactive
companies. The company accounts for its investment in these
subsidiaries by using the purchase method of accounting. All
significant inter-company transactions and balances have been
eliminated on consolidation.
The consolidated financial statements also include the accounts of
Adnet USA LLC, a 50% owned inactive joint venture. Investments in
joint ventures are accounted for using the proportionate consolidation
method, whereby the company's proportionate share of revenues,
expenses, assets and liabilities are included in the accounts. All
inter-company balances and transactions have been eliminated on
consolidation.
Capital Assets and Amortization
-------------------------------
Capital assets are recorded at historical cost. Amortization is
calculated at the following rates:
Office equipment - 7 years on a graduated straight line basis
Computer and Testing equipment - 7 years on a graduated straight line basis
Video server prototypes - 7 years on a graduated straight line basis
The specific rates used on a 7 year graduated straight line basis are:
Year 1 14.29%
Year 2 24.49%
Year 3 17.49%
Year 4 12.49%
Year 5 8.93%
Year 6 8.92%
Year 7 8.93%
Year 8 4.46%
Capital assets not put into use during the year are not amortized.
Patent
------
The company owns the patent for the Store and Forward Video System.
The patent is being amortized on a straight line basis over 17 years.
Research and Development Costs
------------------------------
Research and development costs are expensed as incurred.
F-19
USA Video Interactive Corp.
Consolidated Financial Statements
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
Note 2 Summary of Significant Accounting Principles - (cont'd)
--------------------------------------------
Foreign Currency Translation
----------------------------
Foreign currency transactions are translated into U.S. dollars by the
use of the exchange rate in effect at the date of the transaction. The
company has operations in Canada and these accounts are translated
using the temporal method. Under this method, monetary items are
translated at the year-end exchange rate. Non-monetary items are
translated at the historical exchange rate, unless such items are
carried at market, in which case they are translated at the year-end
exchange rate. Revenue and expense items are translated at the average
exchange rate during the year.
Income Taxes
------------
The company uses the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes".
Loss per Share
---------------
Loss per share computations are based on the weighted average number
of shares outstanding during the year.
Fair Market Value of Financial Instruments
------------------------------------------
The carrying value of cash, marketable securities, accounts
receivable, accounts payable and due to related parties approximate
fair value because of the short maturity of those instruments.
Note 3 Marketable Securities - Note 8
------------------------------
1998
Fair 1998 1997
Market Value Cost Cost
------------ ---- ----
Future Media Technologies Corp.
(1997: 750,000 common shares) $ - $ 107,672
Write-down to market value - (86,680)
--------- -------- ---------
$ - - 20,992
--------- -------- ---------
Glassmaster Industries Inc.
2,850,000 common shares
(1997: 2,000,000 common shares) 192,727 139,948
Write-down to market value (118,807) -
--------- ---------
73,920 139,948
--------- --------- ---------
$ 73,920 $ 73,920 160,940
========= ========= =========
F-20
USA Video Interactive Corp.
Consolidated Financial Statement
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
Note 3 Marketable Securities - Note 8 - (cont'd)
---------------------
The company also holds share purchase warrants that entitle it to
purchase one common share in the following company for each warrant
held:
Number of Exercise Expiry
Warrants Price Date
-------- ----- ----
Glassmaster Industries Inc. 1,150,000 CDN$ 0.115 November 1, 1999
Future Media Technologies Corp. and Glassmaster Industries Inc. are
related to the company by virtue of common directors.
F-21
USA Video Interactive Corp.
Consolidated Financial Statements
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
Note 4 Adnet USA LLC Joint Venture - Notes 6 and 8
---------------------------
The company owns a 50% interest in a joint venture which has
incorporated a California limited liability company, Adnet USA LLC.
The purpose of the joint venture company was to provide internet
advertising and web page facilities to corporate customers. The
company's joint venture partner is a related company by virtue of
common directors The company has included in its accounts the
following amounts in respect of the joint venture:
1998 1997
---- ----
Capital assets (net) $ - $13,653
Current liabilities $ - $ 7,962
Joint venture expenses consist of the following:
January 1, 1992
(Date of Incep-
tion of
Develop-
ment Stage) to
December 31,
1998 1997 1996 1998
---- ---- ---- ----
Amortization of capital assets $ - $ 3,243 $ 2,417 $ 5,660
Market consulting 2,500 17,502 22,500 42,502
Office administration - 3,412 750 4,162
Professional fees - - 862 862
Public relations and advertising - 8,376 2,745 11,121
Rent - 2,976 4,856 7,832
Telephone 1,189 16,434 13,642 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 $47,772 $174,144
======= ======== ======= ========
Company's share of joint venture loss $16,434 $109,938 $47,772 $174,144
======= ======== ======= ========
The company and its joint venture partner have agreed to abandon the
joint venture and consequently Adnet USA LLC is inactive.
Note 5 Advance on Investment
---------------------
The company had entered into negotiations to purchase a 50% interest
in a company for CDN$2,500,000 payable in stages. As at December 31,
1997, the company had advanced CDN$75,000 toward the CDN$2,500,000 of
which CDN$50,000 was refundable if the agreement is not proceeded with
and the balance of CDN$25,000 was non-refundable. As at December 31,
1998 the company has decided not to proceed with the investment,
consequently the non-
F-22
USA Video Interactive Corp.
Consolidated Financial Statements
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
refundable portion of CDN$25,000, ($16,852), has been written-off. The
balance of CDN$50,000, ($32,423), is included in prepaid expenses and is
to be applied under the terms of the license agreement (Note 13).
Note 6 Capital Assets - Note 4
--------------
Accumulated Net Carrying Value
Cost Amortization 1998 1997
---- ------------ ---- ----
Office equipment $ 73,698 $10,669 $ 63,029 $ 2,107
Computer and Testing Equipment 30,737 4,485 26,252
Video Server Prototype 170,916 23,236 147,680 124,493
-------- ------- -------- --------
275,351 38,390 236,961 126,600
Adnet USA LLC Joint Venture
Computer and testing equipment - - - 11,800
-------- ------- -------- --------
$275,351 $39,390 $236,961 $138,400
======== ======= ======== ========
Note 7 Patents
-------
1998 1997
---- ----
Cost $ 42,658 $ 36,899
Accumulated amortization (12,836) (10,328)
---------- ----------
$ 29,822 $ 26,571
========== ==========
F-23
USA Video Interactive Corp.
Consolidated Financial Statements
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
Note 8 Related Party Transactions - Notes 3, 4, 9 and 14
--------------------------
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,
1998 1997 1996 1998
---- ---- ---- ----
Consulting fees $ 84,611 $ 63,982 $ 122,182 $1,062,044
Interest and bank charges 24,379 44,342 58,612 318,059
Interest on convertible debentures - - 51,075 133,144
Management fees 27,000 174,025 359,947 1,916,845
Product marketing costs 82,000 - - 82,000
Office and general - - 74,330 236,989
Office assistance 21,739 14,328 - 36,067
Professional fees 5,270 5,508 32,032 98,272
Rent - - - 12,950
Research and development costs 24,000 - - 443,198
Salaries and benefits - - - 219,177
Loss (gain) on sale of marketable
securities 688 (64,213) (375,236) (428,878)
Gain on disposal of capital assets - - - (48,133)
Severance pay 90,000 - - 90,000
Write-down of marketable securities 118,807 86,680 129,840 1,007,897
Write-down of advances 113,779 - - 121,106
-------- --------- ---------- ----------
$592,273 $ 324,652 $ 452,782 $5,300,737
======== ========= ========== ==========
Included in accounts receivable at December 31, 1998 is $12,590 (1997:
$7,986) due from companies related by virtue of having directors in
common.
Included in accounts payable at December 31, 1998 is $19,372 (1997:
$15,669) in fees due to directors and companies controlled by directors
of the company.
Due to related parties at December 31, 1998 includes $130,961 (1997:
$180,463) due to directors 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. Due to related parties at
December 31, 1998 also includes $43,067 due to a director and officer of
the company with respect to advances to the company that are non-
interest bearing, unsecured and are payable on demand.
Share subscriptions of $113,708 outstanding at December 31, 1997
consisted of subscriptions from directors of the company.
F-24
USA Video Interactive Corp.
Consolidated Financial Statements
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
Note 9 Capital Stock - Notes 8 and 14
-------------
Authorized:
250,000,000 common shares without nominal or par value
250,000,000 preferred shares without nominal or par value
Commitments:
Share Purchase Options
The following common share purchase options were outstanding at December
31, 1998 entitling the holders thereof the right to purchase one common
share for each option held:
Exercise Price
Number of Options Per Share Expiry Date
----------------- --------- -----------
Directors 1,900,000 CDN$ 0.10 July 14, 2000
Employees 1,010,000 CDN$ 0.10 July 14, 2000
100,000 CDN$ 0.10 Oct. 20, 2000
Consultants 225,000 CDN$ 0.10 June 26, 1999
250,000 CDN$ 0.10 July 10, 2000
600,000 CDN$ 0.10 July 14, 2000
250,000 CDN$ 0.10 Oct. 20, 2000
---------
4,335,000
=========
Share Purchase Warrants
The following share purchase warrants were outstanding entitling the
holders thereof the right to acquire one common share for each warrant
held at December 31, 1998:
Number of Exercise Price
Warrants Per Share Expiry Date
-------- --------- -----------
845,000 CDN$ 0.10 July 15, 1999
1,250,000 CDN$ 0.43 October 3, 1999
5,000,000 CDN$ 0.10 September 30, 2000
---------
7,095,000
=========
Other Reserved Earn-out Shares
At December 31, 1998, the company has 3,328,000 reserved shares
outstanding that may be issued on the basis of one share for each
CDN$4.80 of cash flow generated by the company's subsidiary, USA Video
Corporation. Any reserved shares not issued by September 22, 1999, will
not be issued.
F-25
USA Video Interactive Corp.
Consolidated Financial Statements
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
Note 9 Capital Stock - Notes 8 and 14 - (cont'd)
-------------
Commitments:
Common Stock Subscribed
At December 31, 1997, the company had received share subscriptions
totalling $113,708. During the year ended December 31, 1998, these
subscriptions were utilized for the issuance of 750,000 common shares
pursuant to the exercise of share purchase warrants and 500,000 common
shares pursuant to the exercise of share purchase options.
Note 10 Supplementary Cash Flow Information
-----------------------------------
The company has issued common shares for non-cash consideration as
follows:
January 1, 1992
(Date of Incep-
tion of Develop-
ment Stage) to
Type of December 31,
Issuance 1998 1997 1996 1998
-------- ---- ---- ---- ----
In settlement of debt $ - $ - $812,575 $1,290,039
For payment of interest - - - 13,950
Conversion of debenture - - - 981,544
---------- ---------- -------- ----------
$ - $ - $812,575 $2,285,533
========== ========== ======== ==========
Note 11 Deferred Tax Assets
-------------------
The Financial Accounting Standards Board issued Statement Number 109 in
Accounting for Income Taxes ("FAS 109") which is effective for fiscal
years beginning after December 15, 1992. FAS 109 requires the use of
the asset and liability method of accounting of income taxes. Under the
assets and liability method of FAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to temporary differences between the financial statements carrying
amounts of existing assets and liabilities and loss carryforwards and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled.
F-26
USA Video Interactive Corp.
Consolidated Financial Statements
December 31, 1998 and 1997
(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 $ 13,000,000
Capital asset amortization 55,000
------------
$ 13,055,000
============
Gross deferred tax assets $ 6,527,500
Valuation allowance for deferred tax asset (6,527,500)
------------
$ -
============
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, 1998, the company has
net operating loss carryforwards, which expire commencing in 2005
totalling approximately $13,000,000, the benefit of which has not been
recorded in the financial statements.
Note 13 Commitments
-----------
i) The company has entered into an operating lease for office
equipment which requires monthly payments of CDN$397, expiring
February 2002. Minimum lease payments under the terms of the lease
are as follows:
CDN
1999 $ 4,764
2000 4,764
2001 4,764
2002 793
-------
$15,085
=======
F-27
USA Video Interactive Corp.
Consolidated Financial Statements
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
Note 13 Commitments - (cont'd)
-----------
ii) The company has entered into an agreement dated April 14, 1998 and
amended March 24, 1999 whereby the company has the exclusive right
to sell a certain software application system until October 14,
1999. In consideration of this right the company has agreed to
order a minimum of $150,000 of systems during the period of the
agreement. If the minimum order amount is not met the company is
required to pay a penalty of 30% of the unordered amount. At
December 31, 1998 the unordered amount was $125,625. The advance
of CDN$50,000 ($32,423) included in prepaid expenses at December
31, 1998 is to be applied against the outstanding penalty, if any,
at October 14, 1999.
Note 14 Subsequent Events - Note 13
-----------------
i) Subsequent to December 31, 1998, the company issued the following
common shares:
Number Exercise Price Nature of Cash
of Shares Per Share Transaction Proceeds
--------- --------- ----------- --------
2,800,000 CDN$0.10 Share purchase options CDN$280,000
935,000 CDN$0.10 Share purchase warrants CDN$93,500
2,000,000 CDN$0.10 Private Placement CDN$200,000
--------- -----------
5,735,000 CDN$573,500
========= ===========
The private placement included 2,000,000 share purchase warrants
which entitle the holders thereof the right to purchase 2,000,000
common share at CDN$0.10 per share. The warrants expire January
31, 2001.
ii) Subsequent to December 31, 1998, the company granted
directors, employees and a consultant share purchase options which
entitle the holders thereof the right to purchase up to 2,900,000
common shares of the company as follows:
Number Exercise Price
of Shares Per Share
--------- ---------
1,800,000 CDN$0.10
1,100,000 CDN$0.14
---------
2,900,000
=========
F-28
USA Video Interactive Corp.
Consolidated Financial Statements
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
The above-noted options expire in two years from the date the
options were granted. The options at CDN$0.14 are subject to
regulatory approval.
ii) On February 15, 1999, the company cancelled 250,000 share
purchase options outstanding at December 31, 1998 to purchase
250,000 common shares at CDN$0.10 per share.
iii) Subsequent to December 31, 1998, the company entered into
a private placement agreement to sell 1,000,000 units at CDN$0.17
per unit. Each unit consists of 1 common share and 1 share
purchase warrant to purchase 1 common share at $0.19 per share,
exercisable for 2 years from the receipt of the private placement
funds.
Note 15 New Accounting Standard
-----------------------
In March, 1995, Statement of Financial Accounting Standards No. 12
("SFAS-121") "Accounting for Impairment of long-lived assets and for
long-lived assets to be disposed of" was issued. Certain long-lived
assets held by the company must be reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Accordingly, the impairment loss is
recognized in the period it is determined. The company has adopted
these standards and there was no material effect on its financial
position or results of operations of the company from its adoption.
Note 16 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, 1998). 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 damages may be
substantially mitigated by the landlords renting the property to
another party. Any settlement resulting from the resolution of this
contingency will be accounted for during the year of the settlement.
Note 17 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. The effects of the Year
2000 Issue may be experienced before, on, or after January 1, 2000 and
if not addressed, the impact on operations and financial reporting may
range from minor errors to significant system failure which could
affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspects of the Year 2000 Issue
affecting the entity, including those related to the efforts of
customers, suppliers or other third parties, will be fully resolved.
Note 18 Comparative Figures
-------------------
F-29
USA Video Interactive Corp.
Consolidated Financial Statements
December 31, 1998 and 1997
(Stated in U.S. dollars)
- ------------------------
Certain figures for the comparative year ended December 31, 1997 have
been restated to conform with the current year's presentation.
F-30
USA VIDEO INTERACTIVE CORP.
for the nine months ended September 30, 1999
(Unaudited)
(Prepared by Management)
(Stated in US Dollars)
---------------------
Note 1 Development Costs
Research & Development $ 47,470
Note 2 Common shares Issued during the period
(a) 4,741,000 common shares were issued pursuant to the exercise
of stock options for net proceeds of $360,169
(b) 2,745,000 common shares were issued pursuant to the exercise
of share purchase warrants for net proceeds of $468,411
(c) 4,250,000 common shares were issued pursuant to private
placement agreement for net proceeds $1,196,912
Note 3 (a) Outstanding as at this period end
Authorized Issued Issued
Class Par Value Number Number Amount
Common NPV 250,000,000 70,517,088 $20,748,458
Preferred --- 250,000,000 --- ---
(b) Share Purchase Options
The following common share purchase options were outstanding at
September 30, 1999 entitling the holders thereof the right to
purchase one common share for each option held:
Number of Options Exercise Price
Per Share Expiry Date
Employees 100,000 CDN$ 0.10 Jan. 20, 2001
1,425,000 CDN$ 0.10 Jan. 31, 2001
550,000 CDN$ 0.14 Mar. 9, 2001
500,000 CDN$ 0.86 May 15, 2001
2,924,000 US$ 1.00 July 16, 2001
Consultants 50,000 CDN$ 0.10 July 14, 2000
95,000 CDN$ 0.10 Oct. 20, 2000
100,000 US$ 1.00 July 16, 2001
---------
5,744,000
=========
F-31
USA VIDEO INTERACTIVE CORP.
for the nine months ended September 30, 1999
(Unaudited -Prepared by Management)
(Stated in US Dollars)
---------------------
Page 2
(c) Share Purchase Warrants
The following share purchase warrants were outstanding entitling
the holders thereof the right to acquire one common share for each
warrant held at September 30, 1999:
Number of Exercise Price
Warrants Per Share Expiry Date
4,400,000 CDN$ 0.10 September 30, 2000
1,800,000 CDN$ 0.10 January 31, 2001
975,000 CDN$ 0.19 March 23, 2001
500,000 CDN$ 0.73 May 19, 2001
750,000 US$ 1.10 July 15, 2001
---------
8,425,000
=========
(d) Other Reserved Earn-out Shares
Effective September 23, 1999 the reservation for 3,328,000 shares
had expired, these shares were to be issued on the basis of one
share for each CDN$4.80 of cash flow generated by the company's
subsidiary, USA Video Corporation. Any reserved shares not issued
by September 22, 1999 will not be issued.
Note 4 Related party Transactions
As at September 30, 1999, the aggregate compensation paid or was
payable to the Company's (including its two subsidiaries) executive
officers and directors, including salaries, management and consulting
fees, interest, commissions and benefits was $171,000.
Included in Due to related parties is the following: 1999
----
Due to directors/officers $ 60,353
========
Note 5 List of Directors as at September 30, 1999
Gerhard Drescher, Anton, J. Drescher, Edwin Molina and Norman Bonin
Note 6 Contingent Liabilities
There is a contingent liability in respect to a default judgement
entered against the Company's subsidiary in the State of Texas with
respect to the lease of premises in Dallas, Texas in the amount of
$505,169 US ($25,399 US included in accounts payable at December 31,
1995). The subsidiary vacated its premises in Dallas, Texas during the
year ended December 31, 1995 and was sued for the total amount payable
under the terms of the lease through the term of the lease, ended in
2002. Management of the Company is of the opinion that the amounts
payable under the terms of this judgement is not determinable at this
time as the damages may be substantially mitigated by the landlord
renting the property to another party. Any settlement resulting from
the resolution of this contingency will be accounted for as a prior
record adjustment or as a charge to income of the period in which the
costs would relate to.
Note 7 Basis of preparation: These unaudited interim financial statements have
been prepared by management and reflect all adjustments which are, in
the opinion of management, necessary to a fair statement of the results
for the interim periods presented.
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: February 22, 2000
By: /s/ Edwin Molina
------------------------------------
Edwin Molina, President
Chief Executive Officer and Director
35
Item 15(b). Exhibits
Exhibit No. Description
- ---------------- ---------------------------------------------------------------
3.1 Articles of Continuance (Wyoming) filed February 16, 1995
3.2 Articles of Amendment (Alberta) filed January 3, 1995
3.3 Articles of Amendment (Alberta) filed June 28, 1993
3.4 Articles of Amendment (Alberta) filed April 6, 1992
3.5 Articles of Amendment (Alberta) filed September 1, 1989
3.6 Articles of Incorporation (Alberta) filed April 18, 1986
3.7 Bylaws
4.1 Specimen Share Certificate for Common Shares
4.2 Form of Warrants
4.3 Share Option Plan
4.4 Form of Share Option Agreement (Directors)
4.5 Form of Share Option Agreement (Consultant/Employee)
10.1 Letter Agreement dated February 7, 2000 between VIANET and
registrant
10.2* Client Referral Agreement dated May 3, 1999 between UUNET
Technologies, Inc. and registrant
10.3* Co-Location Services Agreement dated June 3, 1999 between UUNET
Technologies, Inc. and registrant
10.4* Alliance Partner Agreement dated November 11, 1999 between Exodus
Communications, Inc. and registrant
21 List of Subsidiaries
27 Financial Data Schedule
* To be filed by amendment.