UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
For the Fiscal Year ended December 31, 1999
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
Of the Securities Exchange Act of 1934
EDUVERSE.COM
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(Name of Small Business Issuer in its charter)
Nevada 88-0277072
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1135 Terminal Way
Suite 209
Reno, Nevada 89502-2168
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (775) 332-3325
Securities to be registered under Section 12(b) of the Act:
None Not Applicable
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Title of each class to be so registered Name of each exchange on which
each class is to be registered
Securities to be registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
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(Title of Class)
Not Applicable
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(Title of Class)
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TABLE OF CONTENTS
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Page
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NOTE REGARDING FORWARD LOOKING STATEMENTS.........................................................................1
ITEM 1 DESCRIPTION OF BUSINESS.............................................................................1
ITEM 2 DESCRIPTION OF PROPERTY.............................................................................7
ITEM 3 LEGAL PROCEEDINGS...................................................................................7
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................7
PART II ....................................................................................................7
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................................7
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............11
ITEM 7 FINANCIAL STATEMENTS...............................................................................16
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............16
PART III ...................................................................................................17
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE WITH SECTION 16
(A) OF THE EXCHANGE ACT............................................................................17
ITEM 10 EXECUTIVE COMPENSATION.............................................................................18
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....................................21
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................21
ITEM 13 EXHIBITS AND REPORTS ON FORM 8K....................................................................22
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Note Regarding Forward Looking Statements
Except for statements of historical fact, certain information contained
herein constitutes "forward-looking statements," including without limitation
statements containing the words "believes," "anticipates," "intends," "expects"
and words of similar import, as well as all projections of future results. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results or achievements of the Company
to be materially different from any future results or achievements of the
Company expressed or implied by such forward-looking statements. Such factors
include, but are not limited to the following: the Company's limited operating
history, competition, management of growth and integration, risks of
technological change, the Company's dependence on key personnel, marketing
relationships and the other risks and uncertainties described under "Description
of Business - Risk Factors" in this Form 10-KSB. Certain of the forward looking
statements contained in this annual report are identified with cross-references
to this section and/or to specific risks identified under "Description of
Business - Risk Factors."
ITEM 1 DESCRIPTION OF BUSINESS
Overview
The Company develops and markets software programs under several product
names to assist non-English speaking students in learning spoken English. The
Company has begun the process of withdrawing from the traditional "boxed"
software sales sold through retail stores. The Company's primary focus is
partnering with governments to build the largest Internet audience by combining
education, the Internet and corporate advertising.
eduverse.com makes available its English as a Second Language (ESL)
training course free to students, paid for by corporate advertising.
eduverse.com's ESL course is delivered over school or university Intranets, or
through the Internet and on CD ROMs. Corporate advertising is embedded in the
course software.
The eduverse.com business model provides users with free and easy access to
quality online education, while reducing to zero the cost to educational
institutions of providing educational content. Thus eduverse.com is able to
attract valuable users at a fraction of the industry average cost. Further, it
offers corporate sponsors an effective and, for the first time, measurable way
to advertise their products and services to a highly targeted audience.
There are 3 important distinguishing features of eduverse.com's business
model: its products, distribution channels and its revenue source.
The Company's common stock currently trades on the NASD
Over-The-Counter-Market Bulletin Board ("OTCBB") under the symbol "EDUV." The
Company's registered office is located at Suite 209, 1135 Terminal Way, Reno,
Nevada, U.S.A. 89502-2168 and its phone number at that address is (775)
332-3325. EDUVERSE DOT COM (Canada) INC.'s principal executive offices are
located at 2nd Floor, 1235 West Pender Street, Vancouver, British Columbia,
Canada V6E 2V1 and its phone number at that address is (604) 623-4864.
Industry Background
The market for educational software is growing rapidly. It is often
described in two market segments: consumers and educational institutions. In
2000, the Company plans to compete in both of these segments. The factors
driving the growth in the market include increasing penetration of personal
computers in homes, expanding distribution channels for educational software,
growth in consumer and educational publications featuring educational software
and increased awareness of the potential of multimedia as an effective
educational tool.
The distribution channels for consumer educational software products have
expanded significantly in recent years. Traditionally these products were sold
through specialty software stores. Today, these products are increasingly sold
through these and other distribution channels, including the Internet, computer
superstores, consumer electronic stores, mass merchants, office supply, discount
warehouse stores and bookstores. While the
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number of distribution outlets has increased, competition for retail shelf space
and customer awareness has also increased due to growth in the numbers of
products and publishers competing for that shelf space and awareness. The
Company believes that, with proliferation of software titles and the
corresponding decrease in the availability of retail shelf space, it becomes
increasingly important to find alternative methods of offering educational
software products to the public such as via the Internet or in educational
settings.
The market for educational software in educational institutions is also
expanding and changing rapidly. School sales of educational software are being
driven by growth in penetration of computers into schools, upgrades of the
installed base to new multimedia computers, increases in the number of teachers
trained to incorporate technology-based products into their curriculum and
changes in governmental funding authorizations to encourage the use of
technology-based instructional materials. In addition, educational institutions
are increasingly requiring students to use particular software applications as
part of their coursework requirements. However, with school resources being
stretched, available funding for educational software is limited. The Company
believes that its business model of providing free high quality educational
software paid for by advertisers is the model for education in the future.
The demand for English training is significant. According to a major study
conducted by the British Council about the future of English, there are over 1
billion people currently studying the language worldwide. As English is the
language of global commerce, communications, the Internet and diplomacy, the
worldwide demand to learn to read, write and speak English is growing at an
ever-increasing pace.
eduverse.com
The Company develops and markets software programs under several product
names to assist non-English speaking students in learning spoken English. The
Company's primary focus is to partner with governments to combine education, the
Internet and corporate advertising. During 1999, the Company began the process
of exiting the traditional method of selling software through retail channels.
As a result, quarterly revenues have been declining. This will continue until
the third quarter of 2000 when advertising revenues are expected to begin.
The Company's core software products feature phonetic-based English
language tutorial systems, which use multimedia presentations to help
non-English speaking students learn English language pronunciation. An
Internet-enabled version of its software called ENGLISH PRO Web Edition, is
available for free from the Company's web vortal (vertical portal) at
http://www.freeENGLISH.com, as is a network-enabled version of its software
called ENGLISH PRO Network Edition, which is designed to be installed on private
computer networks. Revenues during 1999 were derived from three sources, the
sale of CD-ROM software packages, distribution royalty fees and other income
derived from the sale of two web site names. For the year ended December 31,
1999, 57% of the Company's software sales were derived from one customer. The
Company anticipates generating most of its revenues from its ENGLISH PRO Web
Edition and ENGLISH PRO Network Edition products by charging fees for
advertising that is placed within the ENGLISH PRO Web Edition and ENGLISH PRO
Network Edition software. To date, the Company has not generated any revenues
from the ENGLISH PRO Web Edition and ENGLISH PRO Network Edition products.
Revenues from the Web and Network editions are expected in the third quarter of
2000. All of the Company's products operate only on Windows computers.
The Company still distributes ENGLISH PRO 6.2 in retail computer stores and
bookstores. However, the Company intends to withdraw from this sector by the end
of 2000. The Company distributes ENGLISH PRO Web Edition through its
freeENGLISH.com Internet Web site and through Internet Service Providers
("ISPs") and Web portals. Currently, the Company has an agreement with the
Ministry of University Affairs in Thailand to offer its software products to
university students in Thailand via the University Network in Thailand (UniNet),
a proprietary computer network operated by the Ministry. It also has a similar
agreement with SJK (C) Smart School Project in Malaysia. The Company began
implementation of ENGLISH PRO Network Edition on the UniNet in October 1999 .
Approximately one million students in Thailand will have access to the Company's
English language teaching software. The Company anticipates implementation of
the Smart School initiative in late spring, 2000 whereby approximately 500,000
students in Malaysia will have access to the Company's English language teaching
software. Through December 31, 1999, no revenues were recognized related to
these agreements.
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The Company intends to further promote the sale and use of its educational
software products by:
o Actively pursing other ministries of education in Asia,Europe, Latin
America and South America;
o Making its educational software products available free to Internet
users; and
o Co-branding agreements with web portals, ISPs and PC manufacturers.
Distribution Through Traditional Retail Channels. The Company currently
distributes its shrink-wrapped CD-ROM product, ENGLISH PRO, through traditional
retail outlets, such as retail computer stores and bookstores. The Company
intends by the end of 2000 to exit the traditional retail distribution market
and stop selling its English language software through this network.
Free Distribution over the Internet. Since December 1998, the Company has
distributed its Internet-enabled software ENGLISH PRO Web Edition free of charge
from its Web vortal at http://www.freeENGLISH.com. To date, the Company has
20,000 registered users on its Web vortal . The Company plans to generate
revenues from this product by charging fees for advertising that is placed
within the ENGLISH PRO Web Edition software. The Company is also distributing
its products through Ministry of Education Intranets. In most countries, the
Ministry of Education ("MOE") Intranets represent the largest network of
computer users and is often many times larger than the country's Internet
population.
The first such partnership agreement was made with the Ministry of
University Affairs in Thailand to deliver ENGLISH PRO to 24 public universities
and 37 Information Technology campuses via Thailand's University Network
(UniNet). UniNet currently supports 70,000 workstations nationwide, giving
eduverse.com a potential 1 million users. The system is currently being
installed and the Company expects to have 200,000 registered users by December
31, 2000 . The Company is also establishing itself with the private Universities
in Thailand and expects to announce results in the near future.
The second partnership under the Company's business model is with SJK (C )
Smart School Project in Malaysia. The SJK (C ) Smart School Project is offered
to 1,290 National Type Chinese Schools giving eduverse.com a potential 500,000
users.
The Company is actively marketing itself as a content provider whereby it
provides its English language programs and co-brands its product and educational
games with web portals, ISPs and PC manufacturers. Typically, in this type of
program the Company and its partner share the revenues generated on an equal
basis. The first such agreement is with StarTV(http://www.startv.com), the
largest satellite TV network in Asia. The Company has agreed to supply StarTV
initially with 10 educational games, 9 of which have already been delivered to
StarTV.
During 1999, the Company entered into the following agreements:
Ministry of University Affairs - Thailand
SJK (C) Smart School Project - Malaysia
Satellite Television Asian Region Limited (STAR TV)
Foreign Educational Institutions and Private Online Networks. In addition
to retail software sales and distribution over the Internet, the Company plans
to provide its ENGLISH PRO Network Edition software to educational and other
institutions that operate private computer networks and collect advertising fees
for advertisements placed within the software. ENGLISH PRO Network Edition is a
multi-user version of ENGLISH PRO Web Edition. The Company's wholly-owned
subsidiary, EDUVERSE DOT COM INC, recently signed an agreement with the Ministry
of University Affairs in Thailand to provide ENGLISH PRO Network Edition to 24
Universities and 37 Information Technology campuses (a combined total of 70,000
workstations) on the University Network (UniNet) in Thailand. Under terms of the
agreement, the Company has agreed to provide installation, support and upgrades
necessary to provide ENGLISH PRO Network Edition to approximately one million
university students using the UniNet. Installation is comprised of the Company
placing approximately six ENGLISH PRO Network Edition servers (running Windows
NT, Microsoft SQL Server, Microsoft Internet Server and ENGLISH
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PRO Network Edition server software) on the UniNet. These servers control the
data flow between the workstations and the Company's central server located in
Canada. The estimated cost for hardware, software and travel for installation of
the Company's servers on the UniNet is approximately $35,000. In addition, the
Company has agreed to provide support services comprised of a Web-based
installation and management system, which controls the installation of ENGLISH
PRO Network Edition on the workstations and manages the connection to the
ENGLISH PRO Network Edition servers. The Company expects there will be no
significant additional costs incurred by the Company for providing this support
as the web-based installation and management system is a key component of the
ENGLISH PRO Network Edition software. The Company, via the ENGLISH PRO Network
Edition servers and workstation software and the web-based installation and
management system provides upgrades immediately upon their release. Under the
terms of the agreement, the Ministry will receive a 15% commission on gross
revenues generated from advertising displayed on the Company's software that is
accessed through its private computer network. The same framework is expected to
occur with the agreement signed with the SJK (C ) Smart School Project in
Malaysia that provides ENGLISH PRO Network Edition to approximately 500,000
students.
The Company is currently meeting with other educational ministries in Hong
Kong, Taiwan, Japan, South Korea and China and with private corporations in Asia
which require English language training. The Company's goal is to enter into
similar agreements with one of these ministries and with one or more private
corporations prior to June 30, 2000.
Markets
The Company has identified 30 countries that it believes have the largest
market potential for its products. The major geographical regions these
countries fall into are: Asia Pacific, Latin & South America, North America,
Western Europe and the Middle East. Within these geographic regions, the Company
has identified the following market segments for its English language tutorial
products.
Foreign Educational Institutions. The Company intends to offer its ENGLISH
PRO Network Edition software free to educational institutions that allow
advertisements to be displayed to their students. The Company currently has an
affiliate program agreement with the Ministry of University Affairs in Thailand
and the SJK Smart School Project in Malaysia, to distribute its English language
teaching software on its private computer network. The Company is presenting the
opportunity to use ENGLISH PRO Network Edition on school networks to ministries
of education in Hong Kong, Taiwan, Japan and China. Sales agents acting on
behalf of the Company are presenting this same opportunity to ministries in
South Korea and Colombia. At present, the Company does not have any advertising
agreements for its installation in Thailand or Malaysia.
Product Development
Research and development costs are expensed as incurred. Computer software
development costs incurred after technological feasibility of a product is
established are capitalized. Technological feasibility is generally not
established until substantially all related product development is complete and
the product is released.
The Company develops all of its products and Internet Web sites internally.
The Company's development team includes software programmers, Web site
developers, English course material developers and graphic artists.
Currently, the Company is developing additional features and course
materials for ENGLISH PRO Web Edition, including whole language instruction;
interactive lesson breaks that provide information about an advertiser's
products and services; interactive chat services via the Internet and via the
local or wide area network; message boards via the Internet and via the local or
wide area network; user-generated design of the user interface; and support for
additional advertising models. The course materials include lessons specific to
"going shopping," "going to a restaurant," "meeting a friend," "having a job
interview" and other practical situations. Also in development are tools
providing better controls for targeting advertisements and reporting statistical
data to advertisers. The Company has also developed ten educational games that
focus on sound differentials, spelling, listening comprehension and grammar.
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Government Regulation
The Company is not currently subject to direct federal, state or local
regulation in the United States other than regulations applicable to businesses
generally or directly applicable to electronic commerce. However, because the
Internet is becoming increasingly popular, it is possible that a number of laws
and regulations may be adopted in the United States with respect to the
Internet. These laws may cover issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. Furthermore,
the growth of electronic commerce may prompt calls for more stringent consumer
protection laws. Several states have proposed legislation to limit the use of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has indicated that it
may propose legislation on this issue to Congress in the near future and has
initiated action against at least one online service regarding the manner in
which personal information was collected from users and provided to third
parties. The adoption of such consumer protection laws could create uncertainty
in Internet usage and reduce the demand for all products and services. The
Company does not provide customer information to third parties and, therefore,
does not anticipate any current or proposed legislation relating to online
privacy to directly affect its activities to a material extent.
The Company is not certain how its business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. The vast majority of those laws were
adopted prior to the advent of the Internet. As a result, they do not
contemplate or address the unique issues of the Internet and related
technologies. Changes in laws intended to address such issues could create
uncertainty in the Internet marketplace. That uncertainty could reduce demand
for the Company's products or services or increase the cost of doing business as
a result of litigation costs or increased service delivery costs.
In addition, because the Company's products and services are available over
the Internet in multiple states and foreign countries, other jurisdictions may
claim that the Company is required to qualify to do business and pay taxes in
each state or foreign country. The Company is qualified to do business only in
Nevada. The Company's failure to qualify in other jurisdictions when it is
required to do so could subject it to penalties. It could also hamper the
Company's ability to enforce contracts in those jurisdictions. The application
of laws or regulations from jurisdictions whose laws do not currently apply to
the Company's business could have a material adverse affect on its business,
results of operations and financial condition.
The European Union has adopted a policy directive that went into effect in
1998. Under this directive, business entities domiciled in member states of the
EU are limited in the transactions they may do with business entities domiciled
outside the EU unless they are domiciled in a jurisdiction with privacy laws
comparable to the EU privacy directive. The United States presently does not
have laws that satisfy the EU. Discussions between representatives of the EU and
the United States are ongoing and may lead to certain safe harbor provisions
which, if adhered to, would allow business entities in the EU and the United
States to continue to do business without limitation. If these negotiations are
not successful and the EU begins enforcement of the privacy directive, there
could be an adverse impact on international Internet business. If the Company
does business directly in the EU in the future the Company will be required to
comply with the privacy directive of the EU.
Plan of Operation
During the next twelve months, the Company plans to release the following
new software products and upgrades to existing products:
ENGLISH PRO Web Edition is a continuously updated software program. Updates
to the program are made available over the Company's freeENGLISH.com Internet
Web site each month with additional course materials being made available each
week. The Company plans to continue this upgrade schedule for the foreseeable
future.
ENGLISH PRO Network Edition is also a continuously updated software program
and updates are made available to institutional clients. Course materials for
ENGLISH PRO Web Edition are compatible with ENGLISH
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PRO Network Edition and as such are made available to ENGLISH PRO Network
Edition users shortly after being made available to ENGLISH PRO Web Edition
users.
New features are added to the Company's freeENGLISH.com Internet Web side
on average every three months. Under this schedule, the Company expects to
deliver approximately 10 new games and quizzes on its freeENGLISH.com Internet
Web site through the end of third quarter 2000. Additional features which the
Company plans to add to the freeENGLISH.com Internet Web site in 2000, include
chat rooms, message boards and an education-focused Internet search engine.
www.freeENGLISH.com is currently available in English, Chinese (simplified
Chinese), Spanish, Thai and Portuguese. The Company plans to add British
English, Thai , Chinese (traditional Chinese), Japanese, German, French and
Italian prior to the end of second quarter 2000.
The Company plans to focus its marketing efforts for ENGLISH PRO Web
Edition and ENGLISH PRO Network Edition on current initiatives in Thailand,
Malaysia and expected agreements in Hong Kong, Columbia, Taiwan, and China. The
marketing focus is likely to be split between signing new ISPs, Web portals and
educational institutions in new markets and generating advertising revenues in
countries where ENGLISH PRO Web Edition and/or ENGLISH PRO Network Edition
currently have a presence. The Company expects a large portion of its
advertising marketing efforts will be directed at Thailand, where the Company is
currently implementing ENGLISH PRO Network Edition on the private computer
network operated by the Ministry of University Affairs in Thailand. The Company
expects that it will begin generating revenues from these efforts in third
quarter of 2000. Further research and development of ENGLISH PRO Web Edition,
and Network Edition, will focus on the development of: additional phonetic
English language modules; whole language English conversation practice modules;
reading comprehension practice modules; grammar practice modules; vocabulary
building exercise modules; support for interactive tests and quizzes.
Additionally, new advertising models are continuously being developed for the
products along with the necessary Web-based management tools to deliver, manage
and support the advertisings.
Currently, the Company's working capital needs are approximately US$80,000
per month. The Company will increase its expenditures upon receipt of additional
funding. The Company is currently seeking financing for its operations and
expects that it may need additional financing in the future. In March 2000, the
Company announced a financing via private placement offering under Regulation D,
Rule 506 of the Securities and Exchange Commission. The Company intends to offer
and sell 1,000,000 units at $1 per unit, consisting of one share of restricted
common stock and two warrants. Each warrant entitles the holder to purchase one
additional share of restricted common stock at $2.50 per share and $5.00 per
share, respectively.
Employees
As at December 31, 1999, the Company had 18 employees, including 10 in
research and development, 3 in marketing and sales and 5 in management, finance
and administration. The Company's success will depend in large part on its
ability to attract and retain skilled and experienced employees. None of the
Company's employees are covered by a collective bargaining agreement and the
Company believes that relations with its employees are good. The Company does
not currently have key man life insurance on any of its directors or executive
officers.
Risk Factors
The business of the Company involves a number of risks and uncertainties
that could cause actual results to differ materially from results projected in
any forward-looking statement in this report. These risks and uncertainties
include the risks set forth below. The Company's securities are speculative and
investment in the Company's securities involves a high degree of risk and the
possibility the investor will suffer the loss of the entire amount invested.
Limited Operating History; History of Losses; Increased Expenses
The Company incurred a net loss of $1,127,327 for the year ended December
31, 1999. The Company has had minimal revenue since inception , it has never
been profitable and there can be no assurance that, in the future, the Company
will be profitable on a quarterly or annual basis. In addition, the Company
plans to increase its operating expenses to expand its sales and marketing
operations, fund greater levels of research and development,
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broaden its customer support capabilities and increase its administration
resources. In view of the rapidly evolving nature of the Company's business,
markets and limited operating history, the Company believes that
period-to-period comparisons of financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance.
Need for Additional Financing
The Company has accumulated losses of $1,544,043 since it began operations
in May 1998 and will require additional working capital to complete its business
development activities and generate revenue adequate to cover operating and
further development expenses. The Company incurred a loss of $1,127,327 for the
year ended December 31, 1999, and as of December 31, 1999 had a working capital
deficiency of $145,620. Management recognizes that the Company must obtain
additional financial resources by raising capital from shareholders or other
sources or consider a reduction in operating costs to enable it to continue
operations with available resources. However, no assurances can be given that
the Company will be successful in raising additional capital. Further, there can
be no assurance, assuming the Company successfully raises additional funds that
the Company will achieve positive cash flow. If the Company is unable to obtain
adequate financing, management will be required to sharply curtail the Company's
operating expenses.
ITEM 2 DESCRIPTION OF PROPERTY
EDUVERSE DOT COM INC. , a wholly-owned subsidiary of the Company, currently
leases approximately 5,000 square feet of office space on a month-to-month basis
in Vancouver, British Columbia, Canada. The monthly rent is approximately
US$1,070. The Company's www.eduverse.com Web site and its www.freeENGLISH.com
Web site are located on a Company-owned and operated server housed at
SMARTT.COM, a Canadian server farm. The Company's servers operating the Ministry
of University Affairs ENGLISH PRO Network Edition software are currently located
on servers owned and operated by the Company and located in the offices of the
Ministry of University Affairs in Bangkok, Thailand. The Company also maintained
a small office in Bangkok, Thailand during 1999 at a cost of approximately
US$1,000 per month.
ITEM 3 LEGAL PROCEEDINGS
The Company is not a party to, and none of the Company's property is
subject to, any material pending or threatened legal proceeding.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during 1999.
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on the NASD Over-The-Counter Market
Bulletin Board ("OTCBB") since July 6, 1998 under the symbol "EDUV." The
following is a summary of trading, on a calendar quarter basis, in the shares on
the OTCBB during 1999:
1999 High Low Volume
---- ---- --- ------
First Quarter $1.59 $0.63 6,419,700
Second Quarter $2.00 $0.69 4,050,600
Third Quarter $1.50 $0.50 1,080,700
Fourth Quarter $0.82 $0.31 1,264,800
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The price for the Company's Shares on the OTCBB at December 31, 1999, was
$0.50 (High) and $0.41 (Low), and the close price was $0.50.
Other than described above, the Company's shares are not and have not been
listed or quoted on any other exchange or quotation system.
As at December 31, 1999, the Company had approximately 800 shareholders of
record (including nominees and brokers holding street accounts) of the Company's
Common Stock.
The Company has never paid dividends on its Common Stock. The Company
currently intends to retain earnings for use in its business and does not
anticipate paying any dividends in the foreseeable future. As at December 31,
1999 there are outstanding options to purchase 1,577,500 shares of common stock.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 50,000,000 shares of Common Stock,
$0.001 par value, of which 13,185,089 were outstanding at December 31, 1999.
Holders of Common Stock are entitled to dividends, pro rata, when, as and if
declared by the Board of Directors out of funds available therefore. Holders of
Common Stock are entitled to cast one vote for each share held at all
stockholder meetings for all purposes, including the election of directors. The
holders of more than 50% of the Common Stock issued and outstanding and entitled
to vote, present in person or by proxy, constitute a quorum at all meetings of
stockholders. The vote of the holders of a majority of Common Stock present at
such a meeting will decide any question brought before such meeting, except for
certain actions such as amendments to the Company's Articles of Incorporation,
mergers or dissolutions which require the vote of the holders of a majority of
the outstanding Common Stock. Upon liquidation or dissolution, the holder of
each outstanding share of Common Stock will be entitled to share equally in the
assets of the Company legally available for distribution to such stockholder
after payment of all liabilities. Holders of Common Stock are not granted any
preemptive, subscription, redemption rights or registration rights. All
outstanding shares of Common Stock are fully paid and nonassessable.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of Preferred Stock,
$0.001 par value, of which no shares are currently outstanding at December 31,
1999. Holders of Preferred Stock are not entitled to any voting rights. The
Company does not have any plans or arrangements to issue any Preferred Stock.
Anti-Takeover Provisions
Provisions of applicable Nevada law may affect potential changes in
control. The cumulative effect of these provisions may make it more difficult to
acquire and exercise control and to make changes in management.
Nevada law prohibits combinations between Nevada corporations and
interested stockholders for a period of three years after the interested
stockholder's date of acquiring shares unless the combination or the purchase of
the shares by the interested stockholder is approved by the board of directors.
Applicable Nevada law also prohibits business combinations between Nevada
corporations and interested stockholders following the expiration of three years
after the interested stockholder's date of acquiring shares, unless the
combination meets the requirements specified in Section 78.439 for director and
stockholder approvals or Sections 78.441 to 78.444 inclusive with respect to the
consideration to be received in the combination by all stockholders other than
the interested stockholder. Applicable Nevada law defines "interested
stockholders" to include persons who, alone or together with affiliates,
beneficially own at least 10% of the outstanding stock of the corporation. A
Nevada corporation may opt out of the application of these provisions, but the
Company has not opted out.
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Applicable Nevada law also denies voting rights to a stockholder who
acquires a controlling interest in a Nevada corporation, unless the voting
rights are approved by a majority of the voting powers of the corporations. A
Nevada corporation may opt out of the application of these provisions, but the
Company has not opted out.
Nevada law does not require a stockholder vote of the surviving corporation
of the merger if:
o the merger does not amend the existing articles of incorporation;
o each outstanding share of the surviving corporation before the merger
is unchanged; and
o the number of shares to be issued by the surviving corporation in the
merger does not exceed 20% of the shares outstanding immediately prior
to such issuance.
The effect of these provisions may make it difficult to accomplish a merger
or other takeover or change in control. To the extent these provisions have this
effect, removal of the Company's incumbent Board of Directors and management may
be rendered more difficult. Further, these provisions may make it more difficult
for stockholders to participate in a tender or exchange offer for common stock
and in so doing may diminish the market value of the common stock.
Transfer Agent and Registrar
The registrar and transfer agent of the Company is Holladay Stock Transfer,
Inc., 2939 North 67th Place, Scottsdale, Arizona, US 85251
RECENT SALES OF UNREGISTERED SECURITIES
On January 1, 1999, the Company issued 7,500 shares of common stock to
Vaughn Barbon at a price per share of $1.093 for services rendered of$8,203. The
shares were issued to a holder outside the United States pursuant to an
exclusion from registration under Regulation S under the Securities Act.
On January 12, 1999, the Company issued 35,211 shares of common stock to
Tantum Ltd. at a price per share of $0.71 for an aggregate purchase price of
$24,999.81. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under Regulation S under the
Securities Act.
On January 29, 1999, the Company issued 30,768 shares of common stock to
Tantum Ltd. and Bingo, Inc. at a price per share of $0.65 for an aggregate
purchase price of $19,999.20. The shares were issued to holders outside the
United States pursuant to an exclusion from registration under Regulation S
under the Securities Act.
In February 1999 and March 1999, the Company issued an aggregate of 119,038
shares of common stock to Tantum Ltd. at prices per share ranging from $0.59 to
$1.00 for an aggregate purchase price of $85,998.98. The shares were issued to a
holder outside the United States pursuant to an exclusion from registration
under Regulation S under the Securities Act.
On March 3, 1999, the Company issued an aggregate 700,000 shares of common
stock to Bona Vista West Ltd. at prices per share ranging from $0.75 to $1.00
for an aggregate purchase price of $575,000. The shares were issued pursuant to
an exemption from registration provided by Rule 504 under the Securities Act.
On March 15, 1999, the Company issued an aggregate of 49,999 shares of
common stock to Mark Bruk, Marshall Farris and Zina Weston at a price per share
of $1.06 in exchange for services and interest expense of $53,125 accrued on
inventory loans. The shares were issued to holders outside the United States
pursuant to an exclusion from registration under Regulation S under the
Securities Act.
9
<PAGE>
On March 31, 1999, the Company issued 5,294 shares of common stock to
Vaughn Barbon at a price per share of $0.88 for services rendered of $4,632 .
The shares were issued to a holder outside the United States pursuant to an
exclusion from registration under Regulation S under the Securities Act.
On March 31, 1999, the Company issued 3,393 shares of common stock to
Marshall Farris at a price per share of $0.88 for services rendered of $2,969.
The shares were issued to a holder outside the United States pursuant to an
exclusion from registration under Regulation S under the Securities Act.
On May 21, 1999, the Company issued 102,669 shares of common stock to
Re/Max Realty Investments Ltd. at a price per share of $0.487 for an aggregate
purchase price of $49,999.80. The shares were issued to a holder outside the
United States pursuant to an exclusion from registration under Regulation S
under the Securities Act.
On July 19, 1999, the Company issued 2,345 shares of common stock to Vaughn
Barbon at a price per share of $1.31 for services rendered of $3,078 . The
shares were issued to a holder outside the United States pursuant to an
exclusion from registration under Regulation S under the Securities Act.
On October 13, 1999 the Company issued 50,000 shares of common stock to
Douglas Cairns at a price per share of $0.50 for an aggregate purchase price of
$25,000.00. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under the Regulation S under the
Securities Act.
On October 13, 1999 the Company issued 40,000 shares of common stock to
Lambeth Investments Ltd. at a price per share of $0.50 for an aggregate purchase
price of $20,000.00. The shares were issued to a holder outside the United
States pursuant to an exclusion from registration under the Regulation S under
the Securities Act.
On October 14, 1999 the Company issued 50,000 shares of common stock to
Michael Frost at a price per share of $0.50 for an aggregate purchase price of
$25,000.00. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under the Regulation S under the
Securities Act.
On October 18, 1999 the Company issued 4,000 shares of common stock to
Vaughn Barbon at a price per share of $0.63 for services rendered of $2,500 .
The shares were issued to a holder outside the United States pursuant to an
exclusion from registration under the Regulation S under the Securities Act.
On October 18, 1999 the Company issued 30,000 shares of common stock to
Struan Robertson at a price per share of $0.50 for an aggregate purchase price
of $15,000.00. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under the Regulation S under the
Securities Act.
On October 19, 1999 the Company issued 100,000 shares of common stock to
Jean de Gerlache de Gomery at a price per share of $0.50 for an aggregate
purchase price of $50,000.00. The shares were issued to a holder outside the
United States pursuant to an exclusion from registration under the Regulation S
under the Securities Act.
On October 20, 1999 the Company issued 60,000 shares of common stock to
Mark Chewter at a price per share of $0.50 for an aggregate purchase price of
$30,000.00. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under the Regulation S under the
Securities Act.
On November 11, 1999 the Company issued 60,000 shares of common stock to
Michael Fernandez at a price per share of $0.50 for an aggregate purchase price
of $30,000.00. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under the Regulation S under the
Securities Act.
On November 11, 1999 the Company issued 40,000 shares of common stock to
Theodore Bardacke at a price per share of $0.50 for an aggregate purchase price
of $20,000.00. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under the Regulation S under the
Securities Act.
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From July 1998 to June 1999, the Company issued non-interest bearing notes
with no specific terms of repayment in the aggregate amount of $95,000. The
notes were issued pursuant to an exclusion from registration under Regulation S
under the Securities Act. The outstanding principal amounts of these notes was
paid in full as of August 27, 1999.
In 1999 and 1998, the Company issued an aggregate of 1,727,500 options to
purchase its common stock, with exercise prices ranging from $0.38 to $5.50 per
share, to employees, directors, advisors and service providers under its 1998
Stock Option Plan. Of these options, 150,000 were forfeited in 1999. The
issuance of these options and the underlying shares were exempt from
registration under Rule 701 under the Securities Act.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Nevada General Corporation Law (the "Nevada Act") authorizes Nevada
corporations to indemnify any person who was or is a party to any proceeding
(other than an action by, or in the right of, the corporation), by reason of the
fact that he or she is or was a director, officer, employee, or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation or other entity,
against liability incurred in connection with such proceeding, including any
appeal thereof, if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. In the case of an
action by or on behalf of a corporation, indemnification may not be made if the
person seeking indemnification is adjudged liable, unless the court in which
such action was brought determines such person is fairly and reasonably entitled
to indemnification. The indemnification provisions of the Nevada Act require
indemnification if a director or officer has been successful on the merits or
otherwise in defense of any action, suit, or proceeding to which he or she was a
party by reason of the fact that he or she is or was a director or officer of
the corporation. The indemnification authorized under Nevada law is not
exclusive and is in addition to any other rights granted to officers and
directors under the Articles of Incorporation or Bylaws of a corporation or any
agreement between officers and directors and a corporation. A corporation may
purchase and maintain insurance or furnish similar protection on behalf of any
officer or director against any liability asserted against the officer or
director and incurred by the officer or director in such capacity, or arising
out of the status, as an officer or director, whether or not the corporation
would have the power to indemnify him or her against such liability under the
Nevada Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, or persons controlling the Company
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed in these forward-looking statements as a result of various
factors, including those set forth in "risk factors" and elsewhere in this
annual report. The following discussion should be read in conjunction with the
financial statements and notes thereto included elsewhere in this annual report.
See "Forward-looking Statements" and "Business-Risk Factors."
Overview
The Company is a technology-based company focused on developing and
marketing interactive multimedia educational software products. At December 31,
1999, the Company's principal markets include Canada and USA. The Company
generates revenues from the retail sale of its English language tutorial
software product ENGLISH PRO. In late 1998, the Company started pioneering a new
e-commerce educational delivery model that provides users with free access to
online education. The Company expects to generate the majority of its future
revenues from advertising revenues by including an advertiser's message as part
of the ENGLISH PRO tutorial. In 1999 and 1998, the Company recognized no
advertising revenues.
11
<PAGE>
Pursuant to a series of transactions on May 28, 1998 and May 29, 1998, the
Company acquired all of the issued and outstanding share capital of ESL PRO
Systems Inc. ("ESL") and M&M Information and Marketing Services Inc. ("M&M"),
both Nevada companies incorporated on May 5, 1998 and under common control. The
Company exchanged 2,000,000 common shares and 7,000,000 common shares for all of
the outstanding share capital of ESL and M&M, respectively. As a result of these
acquisitions, the previous shareholders of ESL and M&M, as a group, owned more
than 50% of the issued and outstanding voting shares of the Company.
Consequently, this business combination has been accounted for as a reverse
acquisition whereby ESL and M&M are deemed to have been combined in a manner
similar to a pooling of interests, and to have acquired the Company.
Accordingly, these transactions reflect the recapitalization of businesses of
ESL and M&M on a combined basis.
As at May 29, 1998, the Company had net monetary assets of $1.00. For
purposes of the acquisition, the fair value of the net monetary assets of $1 has
been ascribed to the 2,250,000 previously outstanding common shares of the
Company deemed to be issued in the acquisition.
On June 20, 1998, the Company formed EDUVERSE Accelerated Learning Systems
(Canada) Inc. and changed its name to EDUVERSE DOT COM INC. on October 18, 1999
("EDUVERSE Canada"). EDUVERSE Canada operates the Company's development and
marketing operations.
The Company licensed the core software application contained in ENGLISH PRO
Version 6.2 in May 1998 and began shipping ENGLISH PRO Version 6.2 to computer
retailers and bookstores in Canada in December 1998. In first quarter 1999, the
Company began offering its products in the United States. In order to direct
more of its internal resources to establishing awareness of its Internet-enabled
products, in March 1999, the Company appointed Tri Synergy, Inc. ("Tri Synergy")
as a non-exclusive North American retail marketer of its CD-ROM based products.
In 1999, the Company began to exit its strategy of selling its software through
traditional distribution channels and expects to be completely out of this side
of the business by the end of 2000. The Company will focus on its
Internet/Intranet advertising based business model.
The Company began development of its Internet-enabled software product in
August 1998 and released the first version of ENGLISH PRO Web Edition on its
freeENGLISH.com Internet Web site in December 1998. Since that time, the Company
has upgraded the program and added additional course materials. The first
version of ENGLISH PRO Network Edition is currently being installed in Thailand
on the Ministry of University Affairs University Network; a private computer
network operated by the Ministry and is expected to be installed in the
Malaysian SJK Smart School Project in June 2000. ENGLISH PRO Web Edition and
ENGLISH PRO Network Edition are delivered free to consumers over the Internet,
private computer networks and local and wide area networks.
The Company derives revenues from the sale of CD-ROM products in the retail
marketplace and plans to derive its revenues from the sale of advertisements
embedded in the ENGLISH PRO Web Edition and ENGLISH PRO Network Edition software
and on its freeENGLISH.com Internet Web site. Revenues are recognized on its
CD-ROM products upon shipping to its retailers or distributors. Typically, the
Company enters into reseller and distribution arrangements with retailers and
distributors for the sale of its CD-ROM products. Resellers are normally offered
a 40% discount off of the manufacturer's suggested list price, which for ENGLISH
PRO Version 6.2 is $29.99. Distributors are normally offered an additional
discount up to 30%.
To date, the Company has not derived any revenues from the sales of
advertising embedded in its Internet-and network-enabled software. However, in
order to increase the number of users of its ENGLISH PRO Web Edition software
and its ENGLISH PRO Network Edition software, the Company has entered into
affiliate program agreements with ISPs, Web portals, private corporations and
governmental and educational institutions, pursuant to which the Company has
agreed to share gross revenues derived from advertising and from the sale of
products and services on a third party's Web site that result from traffic
directed from an affiliate program participant's Web site. The agreements
typically require the Company to share 15% of any gross revenues generated;
however, this percentage may be higher depending upon the nature of the
contributions by the third party. The Company has entered into an agreement with
the Ministry of University Affairs in Thailand to install its ENGLISH PRO
Network Edition software on a private computer network operated by the Ministry
and with the SJK Smart School Project in
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<PAGE>
Malaysia. The Company estimates that upon implementation, approximately one
million students in Thailand will have access to the Company's English language
teaching software. The Company expects to begin generating advertising revenues
from this contract in the third quarter of 2000.
The Company has incurred losses since inception, and at December 31, 1999,
had an accumulated deficit of $1,544,043 . The Company has recently increased
its sales and marketing and general and administrative expenses as it has
focused the entire efforts of its direct sales force to signing agreements with
ISPs, Web portals and foreign governmental and educational institutions. The
Company has also increased research and development expenses as it has focused
almost entirely on continued development of the ENGLISH PRO Web Edition and
ENGLISH PRO Network Edition software and its freeENGLISH.com Internet Web site.
The Company plans to continue increasing operating expenses to expand its sales
operations, fund greater levels of research and development for its
Internet-based product lines, improve its operational and financial systems and
expand its international operations. As a result, the Company is likely to
continue to incur losses, and if the Company's revenues do not continue to grow
significantly, the Company may not ever be profitable.
Results of Operations
The following table presents the Company's results of operations for the
period from May 5, 1998 (inception) to December 31, 1998 and results of
operations for the year ended December 31, 1999. This data should be read in
conjunction with the Company's consolidated financial statements included in
this annual report.
<TABLE>
Period from
May 5,1998
Year ended (inception) to
31-Dec 31-Dec
1999 1998
------------- ------------
<S> <C> <C>
Revenues:
Software $100,119 $14,824
Distribution Royalties 20,596 0
------------- ------------
Total Revenues 120,715 14,824
Cost of Goods Sold
Cost of goods sold (38,597) (6,873)
------------- ------------
Gross Profit 82,118 7,951
------------- ------------
Expenses
Amortization and write-down of deferred charges 159,800 52,000
Foreign currency translation loss 33,217 0
Depreciation 17,705 4,205
General and administrative 557,917 207,644
Marketing 276,103 57,485
Research and development 294,924 103,333
------------- ------------
Total Expenses 1,339,666 424,667
Operating Loss (1,257,548) (416,716)
------------- ------------
Other income 130,221 0
------------- ------------
Net Loss for the period (1,127,327) (416,716)
Deficit Beginning of period (416,716) 0
Deficit end of period (1,544,043) (416,716)
</TABLE>
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<PAGE>
Year Ended December 31, 1999 Compared to Period from May 5, 1998 (inception) to
December 31, 1998
Revenues. The Company derives its revenues from the retail sales of its
software products and royalties received from distributors of its software
products. Royalties are fees paid by third parties to obtain the exclusive right
to sell the Company's software products in a country or region for a fixed
period of time. For the year ended December 31, 1999, 57% of the Company's
software sales were derived from one customer. Revenues for the year ended
December 31, 1999 were $120,715 compared with $14,824 for the period from May 5,
1998 (inception) to December 31, 1998. This increase is primarily due to the
continuation of introducing the Company's ENGLISH PRO Version 6.2 product into
the retail marketplace in Canada and the United States that started in December
1998. The Company intends to exit the retail sale of its ENGLISH PRO 6.2
software during 2000. The Company anticipates minimum revenues from retail sales
of its software products during 2000. In addition, it is anticipated that
additional revenues from the sale of advertising embedded in the Company's
Internet-enabled software product will be generated beginning the second quarter
of 2000.
Cost of Goods Sold. Cost of Goods Sold consists of expenses associated with
the physical production of the "boxed" software packages that are sold in the
retail market. During the year ended December 31, 1999, cost of goods sold
increased to $38,597 from $6,873 for the period from May 5, 1998 (inception) to
December 31, 1998. This increase is primarily due to increased costs associated
with the increase in the sales of software packages.
Amortization and Write Down of Deferred Charge. The amortized deferred
charge represents a license fee for the use of ENGLISH PRO 6.2 and was being
amortized on a straight-line basis over the three-year minimum term of the
license agreement. As the Company does not expect to obtain any future value
from this licensing agreement, the entire deferred charge balance of $159,800
was written off to expense in 1999.
Depreciation. Depreciation expenses consist of depreciation on computer
equipment, office equipment and furniture. Capital assets such as computer
equipment and furniture and office equipment are depreciated on a straight-line
basis over their estimated useful lives, computer equipment over three years and
furniture and office equipment over five years. During the year ended December
31, 1999, depreciation expenses increased to $17,705 from $4,205 for the prieod
from May 5, 1998 (inception) to December 31, 1998. This is due to increased
depreciation costs associated with the increase in purchases of computer
equipment by the Company.
General and Administrative Expenses. General and administrative expenses
primarily consist of management, financial and administrative personnel expenses
and related costs and professional service fees. General and administrative
expenses were $557,917 for the year ended December 31, 1999, which represents an
increase of 169% over the period from May 5, 1998 (inception) to December 31,
1998. This increase is due primarily to an increase in expenses related to
auditing the Company's financial statements for the fiscal period ended December
31, 1999 and legal fees relating to the filing of the Company's 10-SB and
10-QSB. The Company anticipates that general and administrative expenses will
increase significantly in the next year due to the implementation of its
Internet/Intranet enabled software initiatives in South East Asia.
Marketing Expenses. Marketing expenses consist primarily of marketing and
promotional costs relating to the development of the Company's brands as well as
personnel, travel and other costs. Marketing expenses were $276,103 for the year
ended December 31, 1999, which were 380% higher than those incurred from May 5,
1998 (inception) to December 31, 1998. This increase was primarily attributable
to increased travel expenses incurred to promote the Company's Internet-enabled
software products in South East Asia. The Company anticipates marketing expenses
will increase over the next 12 months as a result of its current initiatives in
Thailand and Malaysia throughout Asia and Latin America, which will require
extensive travel for the its marketing staff.
14
<PAGE>
Research and Development Expenses. Research and development expenses
primarily include personnel costs relating to developing the Company's software
and maintaining and enhancing the features content and functionality of the
Company's Internet Web site and related systems. Research and development
expenses were $294,924 for the year ended December 31, 1999 which represents an
increase of 185% over the period from May 5, 1998 (inception) to December 31,
1998. This increase was primarily due to increased staffing in the research and
development team. The Company anticipates that its research and development
staff will continue to grow through and into 2000 as the Company focuses on
improving and expanding the features and availability of its Internet/Intranet
network-enabled software products. Research and development costs are expensed
as incurred. However, computer software development costs incurred after
technological feasibility of a product is established are capitalized.
Technological feasibility is generally not established until substantially all
related product development is complete and the product is released.
Income Taxes. No provision for federal income taxes has been recorded in
1999 or 1998 as a result of losses. As at December 31,1999, the Company had a
net operating loss for United States income tax purposes of approximately
$190,000 which will begin to expire in 2018 if not utilized. In addition, the
Company has non-capital losses for Canadian income tax purposes of approximately
$900,000 at December 31, 1999, which will begin to expire in 2005 if not
utilized. The Company has recognized a valuation allowance of $500,000 equal to
the deferred tax assets due to the uncertainty of realizing the benefits of the
asset.
Other Income. Other income during the year ended December 31, 1999
increased to $130,221 compared to nil for the period from May 5, 1998
(inception) to December 31, 1998. The increase was the result of the sale of two
web domains by the Company.
Liquidity and Capital Resources
Since inception, the Company has financed operations and met its capital
expenditure requirements primarily through private sales of equity securities,
which have resulted in net proceeds of $1,199,428 through December 31, 1999. At
December 31, 1999, the Company had $43,584 in cash and cash equivalents and a
working capital deficit of $145,620. In March 2000, the Company announced a
financing via private placement offering under Regulation D, Rule 506 of the
Securities and Exchange Commission. The Company intends to offer and sell
1,000,000 units at $1 per unit, with each unit consisting of one share of
restricted common stock and two warrants. Each warrant entitles the holder to
purchase one additional share of restricted common stock at $2.50 per share and
$5.00 per share, respectively.
The Company has not yet generated positive cashflows from operating
activities. Cash used in operating activities was $815,181 and $241,396 for the
year ended December 31, 1999 and for the period from May 5, 1998 (inception) to
December 31, 1998, respectively. The Company does not expect to generate
positive cash from operations for the year ending December 31, 2000.
The Company's investing activities have consisted of capital expenditures
totaling $54,027 and $20,298 for the year ended December 31, 1999 and the period
from May 5, 1998 (inception) to December 31, 1998, respectively. The capital
expenditures related primarily to the acquisition of computer software and
equipment as well as furniture and fixtures used to support its growing employee
base.
Net cash provided by financing activities was $888,207 and $297,778 for the
year ended December 31, 1999 and the period from May 5, 1998 (inception) to
December 31, 1998, respectively. Net cash provided by financing activities
resulted primarily from issuance of capital stock, which was partially offset by
principal payments on capital leases and notes payable.
The Company does foresee an increase in operating expenses in order to
implement its Internet/Intranet enabled applications in Thailand and Malaysia as
well as the continue upgrade of its software application. Further , the Company
expects to sign additional Ministry of Education and with implementations
beginning by the second quarter of 2000. The Company expects to fund these
increase with further issuance of common stock of the Company and from
advertising revenues that are expected to begin in the third quarter of 2000.
15
<PAGE>
The Company believes that anticipated private placements of equity capital
and anticipated operating revenues will be adequate to fund the Company's
operations over the next twelve months. Thereafter, the Company expects it will
need to raise additional capital to meet its long-term operating requirements.
The Company may encounter business initiatives that require significant cash
commitments or unanticipated problems or expenses that could result in a
requirement for additional cash before that time. If the Company raises
additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of its shareholders would be reduced, and such
securities might have rights, preferences or privileges senior to its common
stock. Additional financing may not be available upon acceptable terms, or at
all. If adequate funds are not available or are not available on acceptable
terms, the Company's ability to fund its expansion, take advantage of business
opportunities, develop or enhance its products or otherwise respond to
competitive pressures would be significantly limited, and it may significantly
restrict the Company's operations.
Foreign Currency Translation and Hedging
Foreign exchange gains (losses) have not been significant to date and the
Company does not, at this time, engage in forward exchange contracts for the
purpose of hedging against fluctuations in the exchange rate between United
States and Canadian dollars.
During the second and third quarters of 2000, the Company intends to engage
in activities in foreign countries, namely Thailand, Malaysia, Columbia, Hong
Kong, Taiwan and China. These activities will likely result in development
expenses related to the installation, support and maintenance of ENGLISH PRO
Network Edition on educational networks and sales and marketing expenses related
to generating advertising revenues in these regions. The Company has no
immediate plans for hedging against fluctuations in these currencies.
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements listed under the heading
"Exhibits, Financial Statements Schedules and Reports on Form 8-K" of Item 13
herein, which financial statements are incorporated herein by reference in
response to this Item 7.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On May 28, 1998, upon recommendation by its Board of Directors, the Company
dismissed the accounting firm Barry L. Friedman, P.C., of 1582 Tulita Drive, Las
Vegas, Nevada, US 89123, as the auditors for the Company. On March 22, 1999, the
Company retained Ernst & Young LLP, of 700 West Georgia Street, Vancouver,
British Columbia, Canada V7Y1C7, as auditors for the Company.
In connection with the audits of the most recent fiscal years and any
interim period preceding dismissal, no disagreements exist with any former
accountant on any matter of accounting principles or procedure, which
disagreements if not resolved to the satisfaction of the former accountant would
have caused him to make reference in connection with his report to the subject
matter of the disagreement(s).
The principal accountant's report on the financial statements for any of
the past two years contained no adverse opinion or a disclaimer of opinion nor
was qualified as to uncertainty, audit scope or accounting principles.
16
<PAGE>
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Executive Officers and Directors
The following table sets forth certain information concerning the certain
executive officers and directors of the Company and its subsidiaries as of
December 31, 1999.
Name Age Subsidiary
---- --- ----------------------------
Mark E. Bruk 41 President, Chief Executive Officer,
Treasurer and Chairman of the Board
and Director
Robert Harris 51 Manager of Creative Research,
EDUVERSE DOT COM (Canada) INC. ,
Secretary and Director
Marc Crimeni 41 Executive Vice President, EDUVERSE
DOT COM (Canada) INC.
Jeffrey Mah 38 Chief Technology Officer, EDUVERSE
DOT COM (Canada) INC.
Lorne Reicher 43 Vice President, Operations, EDUVERSE
DOT COM (Canada) INC.
Peter O'Donnell 48 Director
Mark E. Bruk has served as the Company's President, Treasurer, CEO and
Chairman since May 28, 1998. He is also President, Treasurer, CEO and Chairman
of the Company's wholly-owned subsidiary EDUVERSE DOT COM INC..; President,
Secretary, Treasurer and sole Director of the Company's wholly owned subsidiary
ESL PRO Systems, Inc.; and President, Secretary, Treasurer and sole Director of
the Company's wholly owned subsidiary M&M Information & Marketing Services, Inc.
From July 1996 to August 1997, Mr. Bruk served as Vice President of Applications
and then Vice President of Research & Development for InMedia Presentations,
Inc., a multimedia and software company ("InMedia"). From August 1995 to May
1996, Mr. Bruk served as the Product Manager for Boswell International
Technologies Ltd., a software development company, where he supervised the
redesign, development and production of the Boswell ESL system which the Company
has subsequently licensed. From October 1994 to July 1995, Mr. Bruk founded and
served as the President of News4U, an information service for delivering news
via alpha-numeric and numeric pagers. From October 1993 to October 1994, Mr.
Bruk served as President of CanFuture Development Inc., a custom software
development company.
Robert Harris has served as the Manager of Creative Research of the
Company's wholly owned subsidiary EDUVERSE DOT COM INC and as Secretary and
Director of the Company since June 3, 1998. From 1996 to 1998, Mr. Harris served
as executive assistant to the Investment Director of a private investment
corporation based in Vancouver and Riyadh, Saudi Arabia and as the assistant to
the President for Wayburn Resources Inc., a mineral exploration company. From
November 1990 to November 1995, Mr. Harris served as a compliance officer and a
director for SZL Sportsight Inc., a sports entertainment technology company.
Marc Crimeni has served as the Executive Vice President of the Company's
wholly owned subsidiary EDUVERSE DOT COM INC. since August 1, 1998. From
November 1996 to July 1997, Mr. Crimeni served as Vice President of Sales and
Marketing at InMedia. From February 1994 to November 1996, he served as the
International Sales Manager for Inetco Systems Inc., a software company. From
June 1992 to July 1993, Mr. Crimeni served as International Sales Manager for
Prologic Computer Corporation, a software development company. On September 3,
1998, the British Columbia Securities Commission fined Mr. Crimeni Cdn$10,000
for failing to disclose in a regulatory filing a pending criminal proceeding
involving the improper storage of a firearm.. As a result of this action, Mr.
Crimeni agreed to resign any position he held as a director or officer of a
reporting issuer in British Columbia, to not serve as a director or officer of
any reporting issuer in British Columbia and to not engage in any investor
relations activities until December 4, 1999. Mr. Crimeni completed an
educational program relating to securities and is eligible to serve as a
director or executive officer of a British Columbia reporting issuer.
17
<PAGE>
Jeffrey Mah has served as the Chief Technology Officer of the Company's
wholly-owned subsidiary EDUVERSE DOT COM INC. , since August 1, 1998. From
January 1998 to May 1998, Mr. Mah founded and was President of e-werks Software,
Inc., an educational software development firm. From March 1997 to January 1998,
he served as Senior Java Programer at InMedia. From May 1996 to November 1996,
Mr. Mah was a member of the Scientific and Engineering Staff at MacDonald
Dettwiler and Associates, an information technology company. From May 1994 to
May 1996, Mr. Mah founded and was President of Stormchaser Productions, an
information technology strategy and systems development and integration company.
Mr. Mah is also serving as an Instructor at the British Columbia Institute of
Technology, offering courses in object oriented application design in Java and
structured programming. He received his Bachelor of Science Degree in Computer
Science from the University of British Columbia in 1985.
Lorne Reicher has served as the Vice President of Operations of the
Company's wholly owned subsidiary EDUVERSE DOT COM INC. , since January 1, 1999.
From June 1991 to January 1998, Mr. Reicher was the Director of Franchising,
Western Region for Hartco Enterprises Inc., a franchisor of systems integrators,
computer resellers and computer retailers. From June 1985 to Jun 1991, Mr.
Reicher founded and was a partner and General Manager of the Penny Group, an
independent computer reseller association.
Peter O'Donnell has served as a Director of the Company since May 28, 1998.
Mr. O'Donnell is currently serving as the Vice-President, Marketing, of Intracom
Corporation, an Internet medical imaging company and as the Chief Operating
Officer of Personal Internet Assistants, Inc., an Internet research service.
From 1997 to 1998, Mr. O'Donnell served as the Chief Executive Officer of Soqual
Creative Marketing Services, a marketing company, and as the Executive
Vice-President, Marketing, of The Black Vodka Company. From 1994 to 1997, Mr.
O'Donnell served as the Executive Vice-President of Sales and Marketing for
OneVoice Corp., a multi-lingual Web content and translation/localization
service. Mr. O'Donnell currently serves on the Board of Advisors for VidBot.com,
a streaming video Internet directory company. He received his Bachelor's Degree
in Journalism in 1972 from the University of Florida.
Board of Directors
Each member of the Board of Directors is elected annually and holds office
until the next annual meeting of shareholders or until his successor has been
elected or appointed, unless his office is earlier vacated in accordance with
the Bylaws of the Company. Officers serve at the discretion of the Board and are
appointed annually. The Board currently has no committees.
None of the Company's directors or executive officers are parties to any
arrangement or understanding with any other person pursuant to which said
individual was elected as a director or officer of the Company. No director or
executive officer of the Company has any family relationship with any other
officer or director of the Company.
ITEM 10 EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table sets forth compensation information for the Company's
Chief Executive Officer during the year ended December 31, 1999 and the period
from May 5, 1998 (inception) to December 31, 1998:
<TABLE>
Summary Compensation Table
Compensation
Other Annual
Name and Period Salary Bonus Compensation
Principal Position ------ ------ ----- ------------
------------------ ($) ($) ($)
<S> <C> <C> <C> <C>
Mark E. Bruk Year ended 60,000 -- --
President, CEO and Dec. 31,
Chairman 1999 and
period from
May 5, 1998
(inception)
to Dec. 31,
1998
</TABLE>
18
<PAGE>
Option/SAR Grants in Last Fiscal Year
The following table shows information regarding grants of stock options to
the Company's Chief Executive Officer during the year ended December 31, 1998
and outstanding as of December 31, 1999.
<TABLE>
Individual Grants
-----------------------------------------------------------------------
Percent of
Number of Total Options
Shares Granted to
Underlying Employees in Exercise
Options Fiscal Price Expiration
Name Granted(#)(3) Year(%)(2) ($/Share)(1) Date
- -------------- ------------- ---------- ------------ ----
<S> <C> <C> <C> <C>
Mark E. Bruk 300,000 19.3% $0.75 6/3/02
</TABLE>
- ------------------------
(1) The exercise price per share of each option is equal to the fair market
value per share plus a premium of 10% of the fair market value per share of
the underlying common stock on the date of grant.
(2) Options to purchase 1,577,500 shares of common stock were granted by the
Company to its employees, consultants and directors.
(3) The options vest 2% per month for a period of 50 months from June 3, 1998.
Employment Agreements
As at May 3, 1999, Marc Crimeni, Robert Harris, Jeffrey Mah and Lorne
Reicher have entered into employment agreements with EDUVERSE DOT COM INC., the
Company's wholly-owned subsidiary, providing for annual salaries of Cdn$90,000,
Cdn$36,000, Cdn$108,000 and Cdn$60,000, respectively. The employment agreements
may be terminated by the Company with 14 days written notice and by the
employees with 30 days written notice. Each of the above named employees has
entered into confidentiality and non-competition agreements with the Company.
Stock Option and Purchase Plans
1998 Stock Option Plan. The Board of Directors and shareholders of the
Company adopted the 1998 Stock Option Plan (the "1998 Plan") on June 3, 1998 and
amended it on May 30, 1999 and again on June 30, 1999. The 1998 Plan will
terminate on the earlier of June 3, 2008 or such other date as the Board of
Directors or committee thereof may determine. The 1998 Plan is administered by
the Board of Directors or by a committee thereof (the "Plan Administrator") and
provides that options may be granted to employees and officers of the Company or
any of its subsidiaries and to directors of the Company who are employees of the
Company or any of its subsidiaries, based on the eligibility criteria set out in
the 1998 Plan.
The 1998 Plan authorizes the grant of "incentive stock options" as defined
in Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"),
and "non-qualified" stock options. The options issued under the Stock Option
Plan are exercisable at a price fixed by the Plan Administrator, in its sole
discretion, subject to specific requirements relating to incentive stock options
under the Code. Non-qualified and incentive stock options generally expire ten
years from the grant date, except non-qualified and incentive stock options
which are granted to a person owning more than 10% of the combined voting power
of all classes of stock of the Company or any parent or subsidiary of the
Company expire after five years from the grant date.
The maximum number of the shares reserved for issuance under the 1998 Plan,
including options currently outstanding, are 2,500,000 shares. As at December
31, 1999, a total of 1,552,500 options are outstanding .
19
<PAGE>
1998 Director's Stock Option Plan . The Board of Directors and stockholders
of the Company adopted the 1998 Director's Stock Option Plan (the "1998
Directors Plan") on June 3, 1998. The 1998 Directors Plan will terminate on the
earlier of June 30, 2008 or such other date as the Board of Directors or
committee thereof may determine. The 1998 Directors Plan is administered by the
Board of Directors or by a committee thereof (the "Plan Administrator") and
provides that options may be granted to Directors of the Company who are not
employees of the Company.
Under the 1998 Directors Plan, options may be exercised at a price not less
than the fair market value of the Company's common stock on the date of grant,
which is deemed to be the closing price of the Company's shares on NASD
Over-The-Counter Bulletin Board Market on the date of grant. Options are granted
under the 1998 Directors Plan to eligible Directors in accordance with the
following formula:
1. Upon initial election or appointment to the Board of Directors each
director is entitled to receive an option to purchase up to 25,000
share of the Company's common stock.
2. Upon re-election to the Board of Directors each director is entitled
to receive and option to purchase up to 8,000 shares of the Company's
common stock.
In the event a Director serves only a partial term before re-election, the
number of options to purchase shares granted upon their re-election is prorated
to reflect the amount of time served as a Director. Options typically vest 2%
each month and expire 10 years from the date of grant.
At December 31, 1999, the granting of 25,000 options at an exercise price
of $0.68 per share had been authorized by the Board of Directors; however, no
option agreements had been executed during 1999.
The maximum number of shares reserved for issuance under the 1998 Directors
Plan, including options currently outstanding, are 150,000 shares. As of
December 31, 1999, a total of 25,000 options are issued and outstanding.
1998 Employee Stock Purchase Plan. The Company has established a share
compensation arrangement for its employees known as the 1998 Employee Stock
Purchase Plan (the "1998 Purchase Plan"). The 1998 Purchase Plan became
effective as of June 3, 1998 and will terminate on the earlier of June 3, 2008,
the date on which all authorized shares under the 1998 Purchase Plan are
distributed or on a date determined by the Board of Directors. The 1998 Purchase
Plan is administered by the Board of Directors or committee thereof (the "Plan
Administrator"). Under the terms of the 1998 Purchase Plan, the aggregate number
of shares that may be issued pursuant to the plan is 500,000.
The 1998 Purchase Plan provides that each full-time employee (subject to
certain limited exceptions) of the Company may purchase shares of the Company's
common stock by payroll deduction up to an amount equal to the lesser of (1) the
maximum number of shares set by the Plan Administrator, or (2) 200% of the
number of shares determined by dividing the dollar amount in such employee's
payroll deduction account by 85% of the closing bid price on the NASD OTC
Bulletin Board on the day previous to the purchase. The number of shares which
an employee may purchase during any given offering period is determined by
dividing the amount accumulated in such employee's payroll deduction account
during the offering period by the lower of (1) eighty-five percent of the fair
market value of a share of the Company's common stock on the first day of the
offering period, or (2) eighty-five percent of the fair market value of the
Company's common stock on the purchase date. At December 31, 1999, no employees
had yet been offered participation in the 1998 Purchase Plan.
Compensation of Directors
During the most recently completed financial year ended December 31, 1999,
there was no compensation paid by the Company to the directors for their
services as directors except as otherwise disclosed herein. There are no
standard arrangements for any such compensation to be paid other than
reimbursement for expenses incurred in connection with their services as
directors, although the Company from time to time may grant options to acquire
Common Shares for directors. As at the date hereof the Company has no
outstanding options to Directors that have been granted for their services as
such.
20
<PAGE>
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the number of
shares of Common Stock owned beneficially as of December 31, 1999 by: (i) each
person known to the Company to own more than five percent (5%) of any class of
the Company's voting securities; (ii) each director of the Company; and (iii)
all directors and officers as a group. Unless otherwise indicated, the
shareholders listed possess sole voting and investment power with respect to the
shares shown.
<TABLE>
Amount and Nature of Percent of
Title of Class Name and Address (7) of a Beneficial Owner Beneficial Owner Class(1)
- -------------- ------------------------------------------ ---------------- --------
<S> <C> <C> <C>
Common Stock Mark E. Bruk (2) 3,897,100 29.5%
Common Stock Marc Crimeni (3) 3,694,100 28.0%
Common Stock Robert Harris (4) 34,500 *
Common Stock Peter O'Donnell (5) 21,500 *
Common Stock All directors and officers of the Company as 3,953,100 29.9%
a group (3 persons) (6)
- ---------------------
</TABLE>
* Represents less than 1% of the outstanding shares of common stock.
(1) Based on an aggregate 13,185,089 shares outstanding as of December 31, 1999
(2) Includes options to purchase 114,000 shares exercisable within 60 days of
December 31, 1999.
(3) Includes options to purchase 38,000 shares exercisable within 60 days of
December 31, 1999.
(4) Includes options to purchase 19,500 shares exercisable within 60 days of
December 31, 1999.
(5) Includes options to purchase 6,500 shares exercisable within 60 days of
December 31, 1999.
(6) Includes options to purchase 140,000 shares exercisable within 60 days of
December 31, 1999.
(7) Unless otherwise noted, the address of each beneficial owner is 2nd Floor,
1235 West Pender Street, Vancouver, British Columbia V6E 2V1.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as otherwise disclosed herein, no director, senior officer,
principal shareholder, or any associate or affiliate thereof, had any material
interest, direct or indirect, in any transaction since the beginning of the last
financial year of the Company that has materially affected the Company, or any
proposed transaction that would materially affect the Company, except for an
interest arising from the ownership of shares of the Company where the member
will receive no extra or special benefit or advantage not shared on a pro rata
basis by all holders of shares in the capital of the Company.
During 1998, Mr. Bruk loaned an aggregate of $48,685 to the Company, of
which amount $45,000 represented deferred consulting fees payable to Mr. Bruk.
The loan was interest free and contained no repayment terms. As of December 31,
1999, all amounts outstanding under the loan have been repaid.
In May 1999,EDUVERSE DOT COM INC. entered into employment agreements with
Marc Crimeni, Robert Harris, Jeffrey Mah and Lorne Reicher. See "Executive
Compensation -- Employment Agreements."
21
<PAGE>
ITEM 13 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
1. The following financial statements of the Registrant and the Report of
Independent Chartered Accountants thereon are included herewith in
Item 7 above:
Page
----
Report of Independent Chartered Accountants...............................F-1
Consolidated Balance Sheets...............................................F-2
Consolidated Statements of Operations.....................................F-3
Consolidated Statements of Shareholders' Deficit..........................F-4
Consolidated Statements in Cash Flows.....................................F-5
Notes to Financial Statements.............................................F-6
2. Consolidated financial statement schedules and Report of Independent
Accountants in those schedules are included as follows:
Not Applicable.
3. Exhibits.
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
*2.1 Articles of Incorporation of the Registrant, as amended
*2.2 Bylaws of the Registrant
*3.1 Form of Common Stock share certificate
*6.1 1998 Stock Option Plan, as amended
*6.2 1998 Directors Stock Option Plan, as amended
*6.3 1998 Employee Stock Purchase Plan
*6.4 Form of Stock Option Agreement (1998 Stock Option Plan)
*6.5 Form of Stock Option Agreement (1998 Director's Stock Option
Plan)
*6.6 Form of Subscription Agreement (1998 Employee Stock Purchase
Plan)
*6.7 Form of Affiliate Program Agreement
*6.8 Form of Confidentiality and Non-Competition Agreement
*6.9 freeENGLISH Non-Exclusive Linking Agreement dated May 20,
1999 between the Registrant and the Ministry of University
Affairs (Thailand)
*6.10 Memorandum of Understanding between EDUVERSE Accelerated
Learning Systems (Canada), Inc. and the Ministry of
University Affairs (Thailand)
*6.11 Manufacturer's Representation Agreement dated March 1, 1999
between the Registrant and Tri Synergy, Inc.
*6.12 Software License Agreement dated May 7, 1998 by and among
the Registrant, Boswell International Technologies Ltd. And
Boswell Industries Inc.
22
<PAGE>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
*6.13 Employment Agreement effective May 3, 1999 between EDUVERSE
Accelerated Learning Systems (Canada ) Inc. and Marc Crimeni
*6.14 Employment Agreement effective May 3, 1999 between EDUVERSE
Accelerated Learning Systems (Canada) Inc. and Robert Harris
*6.15 Employment Agreement effective May 3, 1999 between EDUVERSE
Accelerated Learning Systems (Canada) Inc. and Jeffery Mah
*6.16 Employment Agreement effective May 3, 1999 between EDUVERSE
Accelerated Learning Systems (Canada) Inc. and Lorne Reicher
*8.1 Stock Exchange Agreement and Plan of Reorganization dated
May 28, 1998 between the Registrant and ESL Pro Systems Inc.
*8.2 Stock Exchange Agreement and Plan of Reorganization dated
May 29, 1998 between the Registrant and Marketing Services
Inc.
8.3 Agreement dated October 1999 between the Registrant and
Satellite Television Asian Region Limited.
27.1 Financial Data Schedule
- ---------------------------
* Previously filed with the Company's Registration Statement on Form 10-SB
filed September 3, 1999.
(b) Reports on Form 8-K.
None.
23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EDUVERSE.COM
Date: April 13, 1999 By /s/ Mark E. Bruk
-----------------------------------
Mark E. Bruk
President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
to be signed by the following persons on behalf of Wade Cook Financial
Corporation in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Mark E. Bruk President, Chief Executive April 13, 2000
- --------------------------- Officer, Treasurer and
Mark E. Bruk Chairman of the Board and
Directors
/s/ Robert Harris Manager of Creative April 13, 2000
- --------------------------- Research, EDUVERSE DOT COM
Robert Harris (Canada) INC., Secretary
and Director
/s/ Marc Crimeni Executive Vice President, April 13, 2000
- --------------------------- EDUVERSE DOT COM (Canada)
Marc Crimeni INC.
/s/ Peter O'Donnell Director April 13, 2000
- ---------------------------
Peter O'Donnell
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
EDUVERSE.COM
December 31, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
eduverse.com
We have audited the accompanying consolidated balance sheets of eduverse.com
(the "Company") as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' deficit and cash flows for the year
ended December 31, 1999 and the period from May 5, 1998 (inception) to December
31, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
eduverse.com at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for the year ended December 31, 1999 and the
period from May 5, 1998 (inception) to December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has a limited source of revenue
and is dependent on its ability to raise capital from shareholders or other
sources to sustain operations. These factors, along with other matters as set
forth in Note 1, raise substantial doubt that the Company will be able to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Vancouver, Canada,
March 3, 2000. Chartered Accountants
F-1
<PAGE>
eduverse.com
CONSOLIDATED BALANCE SHEETS
<TABLE>
As at December 31 (Expressed in U.S. dollars)
1999 1998
$ $
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash 43,584 37,757
Accounts receivable, less allowance of $6,292 and $nil at
December 31, 1999 and 1998, respectively 8,826 18,477
Finished goods inventory 17,296 44,421
Other receivable 10,123 --
Prepaid expenses and other 15,360 5,651
- --------------------------------------------------------------------------------------------------
Total current assets 95,189 106,306
Capital assets, net [note 4] 53,096 31,774
Deferred charge, net of accumulated amortization of
$52,000 at December 31, 1998 [note 5] -- 159,800
- --------------------------------------------------------------------------------------------------
Total assets 148,285 297,880
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current
Accounts payable 106,824 83,055
Accrued expenses 19,585 19,723
Capital lease obligations -- 7,041
Loans payable [note 7] 10,000 78,685
Current portion of royalty payable [note 5] 104,400 29,400
Unearned revenue -- 20,138
- --------------------------------------------------------------------------------------------------
Total current liabilities 240,809 238,042
Royalty payable [note 5] 48,900 130,400
- --------------------------------------------------------------------------------------------------
289,709 368,442
- --------------------------------------------------------------------------------------------------
Commitment [note 11]
Shareholders' deficit
Share capital [note 9]
Common stock - $0.001 par value
Authorized shares: 50,000,000
Issued and outstanding shares: 13,185,089 shares at
December 31, 1999 and 11,607,046 shares at December 31, 13,185 11,607
1998
Preferred stock - $0.001 par value
Authorized shares: 5,000,000
Issued and outstanding shares: nil -- --
Shares to be issued 3,078 46,747
Additional paid in capital 1,384,683 286,127
Accumulated deficit (1,544,043) (416,716)
Accumulated other comprehensive income 1,673 1,673
- --------------------------------------------------------------------------------------------------
Total shareholders' deficit (141,424) (70,562)
- --------------------------------------------------------------------------------------------------
Total liabilities and shareholders' deficit 148,285 297,880
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
On behalf of the Board:
Director Director
- ---------------------- ----------------------
F-2
<PAGE>
eduverse.com
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
(Expressed in U.S. dollars)
Period from
May 5, 1998
Year ended (inception)
December 31, to December 31,
1999 1998
$ $
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Software sales [note 3] 100,119 14,824
Distribution royalties 20,596 --
- --------------------------------------------------------------------------------------------------
Total revenues 120,715 14,824
Cost of goods sold 38,597 6,873
- --------------------------------------------------------------------------------------------------
Gross profit 82,118 7,951
- --------------------------------------------------------------------------------------------------
EXPENSES
Writedown and amortization of deferred charge [note 5] 159,800 52,000
Foreign currency transaction loss 33,217 --
Depreciation 17,705 4,205
General and administrative [note 6] 557,917 207,644
Marketing 276,103 57,485
Research and development 294,924 103,333
- --------------------------------------------------------------------------------------------------
1,339,666 424,667
- --------------------------------------------------------------------------------------------------
Operating loss (1,257,548) (416,716)
Other income [note 12] 130,221 --
- --------------------------------------------------------------------------------------------------
Net loss for the period (1,127,327) (416,716)
- --------------------------------------------------------------------------------------------------
Comprehensive loss
Net loss for the period (1,127,327) (416,716)
Foreign currency translation -- 1,673
- --------------------------------------------------------------------------------------------------
Comprehensive loss for the period (1,127,327) (415,043)
- --------------------------------------------------------------------------------------------------
Net loss per common share:
Basic and diluted (0.09) (0.04)
- --------------------------------------------------------------------------------------------------
Weighted average number of common shares:
Basic and diluted 12,641,546 9,512,400
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-3
<PAGE>
eduverse.com
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(Expressed in U.S. dollars)
Common stock Accumulated
---------------------- Additional other
Number Shares to be paid in comprehensive Accumulated
of shares Amount issued capital income deficit Total
# $ $ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
[note 9]
Balance on May 5, 1998
(inception) -- -- -- -- -- -- --
Shares issued upon
incorporation 9,000,000 9,000 -- 10,560 -- -- 19,560
Additional shares issued
as a result of the
reverse acquisition 2,250,000 2,250 -- (2,249) -- -- 1
Cash proceeds from issuance
of common stock 277,046 277 -- 177,896 -- -- 178,173
Cash proceeds from common
stock to be issued
[note 9(b)] 52,630 -- 30,000 -- -- -- 30,000
Shares to be issued for
services rendered 37,541 -- 16,747 -- -- -- 16,747
Shares issued for settlement
of royalty payable [note 9(b)] 80,000 80 -- 51,920 -- -- 52,000
Stock based compensation -- -- -- 48,000 -- -- 48,000
Foreign currency adjustment -- -- -- -- 1,673 -- 1,673
Net loss -- -- -- -- -- (416,716) (416,716)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 11,697,217 11,607 46,747 286,127 1,673 (416,716) (70,562)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash proceeds from issuance
of common stock 1,417,686 1,418 -- 970,277 -- -- 971,695
Shares to be issued for
services rendered [note 14] 2,345 -- 3,078 -- -- -- 3,078
Shares issued for cash received
in 1998 [note 9(b)] -- 90 (46,747) 46,657 -- -- --
Shares issued for services
rendered [note 9(b)] 45,187 45 -- 52,707 -- -- 52,752
Shares issued for interest
expense [note 9(b)] 24,999 25 -- 20,652 -- -- 20,677
Stock based compensation
[note 9(c)] -- -- -- 6,120 -- -- 6,120
Beneficial conversion feature
of inventory loan -- -- -- 2,143 -- -- 2,143
Net loss -- -- -- -- -- (1,127,327) (1,127,327)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 13,187,434 13,185 3,078 1,384,683 1,673 (1,544,043) (141,424)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-4
<PAGE>
eduverse.com
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
(Expressed in U.S. dollars)
Period from
May 5, 1998
Year ended (inception)
December 31, to December 31,
1999 1998
$ $
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss (1,127,327) (416,716)
Adjustment to reconcile net loss to net cash used in
operating activities:
Common shares to be issued for services rendered 3,078 16,748
Common shares issued for services rendered 52,752 --
Common shares issued in lieu of interest expense 20,677 --
Writedown and amortization of deferred charge 159,800 52,000
Depreciation 17,705 4,205
Effect of foreign currency 33,217 --
Stock based compensation 6,120 48,000
Beneficial conversion feature of inventory loan 2,143 --
Loss from theft of capital assets 294 --
Provision for doubtful accounts 6,193 --
Changes in operating assets and liabilities:
Accounts receivable 4,176 (18,477)
Finished goods inventory 27,801 (44,421)
Other receivable (9,834) --
Prepaid expenses and other (9,655) (5,651)
Accounts payable 18,831 102,778
Accrued expenses (98) --
Unearned revenue (21,054) 20,138
- --------------------------------------------------------------------------------------------------
Net cash used in operating activities (815,181) (241,396)
- --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (54,027) (20,298)
Proceeds from insurance company for theft of capital assets 17,270 --
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (36,757) (20,298)
- --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash proceeds from loans payable 10,000 78,685
Payments of loans payable (79,764) --
Payments under capital lease obligations (7,224) (8,640)
Repayment of royalty payable (6,500) --
Cash proceeds from issuance of common stock 971,695 197,733
Cash received on common stock to be issued -- 30,000
- --------------------------------------------------------------------------------------------------
Net cash provided by financing activities 888,207 297,778
- --------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash (30,442) 1,673
Net increase in cash 5,827 37,757
Cash, beginning of period 37,757 --
- --------------------------------------------------------------------------------------------------
Cash, end of period 43,584 37,757
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-5
<PAGE>
eduverse.com
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Expressed in U.S. dollars)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
eduverse.com (the "Company") was incorporated on October 22, 1991, under the
laws of the State of Nevada, as Ward's Futura Automotive, Ltd. The Company's
name was subsequently changed to Perfect Future, Ltd. On June 11, 1998 its name
was changed to Eduverse Accelerated Learning Systems, Inc. and on May 19, 1999
to eduverse.com.
Pursuant to a series of transactions on May 28, 1998 and May 29, 1998, the
Company acquired all of the issued and outstanding share capital of ESL Pro
Systems Inc. ("ESL") and M&M Information and Marketing Services Inc. ("M&M"),
both Nevada companies incorporated on May 5, 1998 and under common control. The
Company exchanged 2,000,000 common shares and 7,000,000 common shares for all of
the outstanding share capital of ESL and M&M, respectively. As a result of these
acquisitions, the previous shareholders of ESL and M&M, as a group, owned more
than 50% of the issued and outstanding voting shares of the Company.
Consequently, this business combination has been accounted for as a reverse
acquisition whereby ESL and M&M are deemed to have been combined in a manner
similar to a pooling of interests, and to have acquired the Company.
Accordingly, these transactions represent the recapitalization of the businesses
of ESL and M&M on a combined basis.
These consolidated financial statements are issued under the name of the
Company, but are a continuation of the combined financial statements of ESL and
M&M and reflect the accounts of ESL and M&M since their inception at their
historic net book values. As at May 29, 1998, the Company had net monetary
assets of $1. For purposes of the acquisition, the fair value of the net
monetary assets of $1 has been ascribed to the 2,250,000 previously outstanding
common shares of the Company deemed to be issued in the acquisition.
Description of business
The Company is a technology-based company focused on developing and marketing
interactive multimedia educational software products. At December 31, 1999, the
Company's principal markets include Canada and U.S.A. The Company generates
revenues from the retail sale of its English language tutorial software products
ENGLISH PRO. In late 1998, the Company started pioneering a new e-commerce
educational delivery model that provides users with free access to online
education. The Company expects to generate the majority of its future revenues
from advertising revenues by including an advertiser's message as part of the
ENGLISH PRO tutorial. In 1999 and 1998, the Company recognized no advertising
revenues.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Expressed in U.S. dollars)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS (cont'd.)
Going concern
The Company's financial statements for the year ended December 31, 1999 have
been prepared on a going concern basis which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business for the foreseeable future. The company incurred a loss of $1,127,327
for the year ended December 31, 1999, and as of December 31, 1999 had a working
capital deficiency of $145,620. Management recognizes that the Company must
obtain additional financial resources by raising capital from shareholders or
other sources or consider a reduction in operating costs to enable it to
continue operations with available resources. However, no assurances can be
given that the Company will be successful in raising additional capital.
Further, there can be no assurance, assuming the Company successfully raises
additional funds, that the Company will achieve positive cash flow. If the
Company is unable to obtain adequate additional financing, management will be
required to sharply curtail the Company's operating expenses. Accordingly, the
company's continuation as a going concern is in substantial doubt.
These financial statements do not include any adjustments to the carrying values
and classification of assets and liabilities which may be necessary if the
company is unable to continue its operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries: eduverse dot com inc. (British Columbia, Canada),
ESL Pro Systems Inc. (Nevada, USA), and M&M Information and Marketing Services
Inc. (Nevada, USA). All significant intercompany accounts and transactions have
been eliminated.
Cash and cash equivalents
Cash and cash equivalents consist of cash and highly liquid financial
instruments with remaining maturities of three months or less when acquired and
which are readily convertible to cash.
Finished goods inventory
Finished goods inventory consists of English language tutorial software products
and is carried at the lower of weighted average cost and net realizable value.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Expressed in U.S. dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Capital assets
Capital assets are stated at cost. Depreciation is computed on a straight-line
basis for financial reporting purposes over the estimated useful life of the
asset as follows:
Computer equipment 3 years
Furniture and office equipment 5 years
Web-site development costs
Web-site development costs have been expensed as incurred.
Impairment of long-lived assets
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
Leases
Leases which transfer substantially all the benefits and risks of ownership of
the leased property are accounted for as capital leases whereby the property is
recorded as an asset and the obligation incurred is recorded as a liability.
Under this method of accounting for leases, the asset is amortized on a
straight-line basis over its estimated useful life and the obligation, including
interest thereon, is amortized over the life of the lease. Operating lease
payments are expensed as incurred.
Financial instruments
At December 31, 1999, the Company has the following financial instruments: cash,
accounts receivable, other receivable, accounts payable, accrued expenses, loans
and royalty payable. The carrying value of these financial instruments is
considered to approximate fair value based on their short term nature.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Expressed in U.S. dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Advertising costs
Advertising costs are expensed as incurred. The Company incurred advertising
expense of $84,190 in 1999. No advertising expense was incurred in 1998.
Deferred charge
The deferred charge represents a license fee for the use of software and was
being amortized on a straight-line basis over the three year minimum term of the
license agreement. As the Company does not expect to obtain any future value
from this licensing agreement, the entire deferred charge balance of $159,800
was written off to expense in 1999.
Income taxes
The Company accounts for income taxes using the liability method of tax
allocation. Under this method, deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes at
enacted tax rates expected to be in effect when the differences reverse.
Research and development
Research and development costs are expensed as incurred. However, computer
software development costs incurred after technological feasibility of a product
is established are capitalized. Technological feasibility is generally not
established until substantially all related product development is complete and
the product is released.
Stock-based compensation
The Company accounts for stock-based compensation to employees based on
Accounting Principles Board Opinion No. 25 and related interpretations, whereby
the intrinsic value of options granted is recorded at the measurement date. The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation
for stock options granted to employees.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Expressed in U.S. dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net loss per common share
The basic loss per share is computed by dividing the loss attributable to common
shareholders by the weighted average number of common shares outstanding for
that period. Diluted loss per share is computed giving effect to all dilutive
potential common shares that were outstanding during the period. For the periods
ended December 31, 1999 and 1998, there were no dilutive potential common shares
outstanding since the Company is in a loss position.
Foreign currency translation
In 1998, the functional currency of the Company was the Canadian dollar, while
the reporting currency in the financial statements was the U.S. dollar. Asset
and liability accounts were translated into United States dollars at the
exchange rate in effect at the balance sheet date. Revenue and expense amounts
were translated at the average exchange rate for the period from May 5, 1998
(inception) to December 31, 1998. Gains or losses arising on foreign currency
translation were recorded in shareholders' equity as an adjustment to other
accumulated comprehensive income/loss.
In 1999, the functional currency of the Company changed to the U.S. dollar.
Accordingly, for the Canadian subsidiary, monetary assets and liabilities are
translated into U.S. dollars at exchange rates prevailing at the balance sheet
date and non-monetary items are translated at exchange rates prevailing at the
historic rate. Revenue and expenses, except amortization are translated at the
average exchange rate in the year. Amortization is translated at the same rate
as the related non-monetary assets. Gains or losses arising on this foreign
currency translation are recorded in income.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Expressed in U.S. dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Revenue recognition
Revenue from the sale of software products is recognized at the time products
are shipped to customers. Distribution royalty revenue is recognized when the
terms of the distribution agreement have been met. Revenue received in advance
of shipment is recorded as unearned revenue.
Comprehensive loss
Comprehensive loss includes all changes in shareholders' deficit during a period
except those resulting from capital transactions. Accumulated other
comprehensive income represents accumulated foreign currency adjustments for all
periods presented.
Recent pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 will be effective for the Company's year end
December 31, 2001.
The Financial Accounting Standards Board has issued EITF 00-2 "Accounting for
Web Site Development Costs." EITF 00-2 will be effective for the Company's year
end December 31, 2000.
The Company has not determined the impact, if any, of these pronouncements on
its consolidated financial statements.
3. MAJOR CUSTOMERS
For the year ended December 31, 1999, 57% of software sales were derived from
one customer. At December 31, 1999, the aggregate accounts receivable balance
relating to this customer was $nil.
For the period from May 5, 1998 (inception) to December 31, 1998, 36% of
software sales were derived from one customer. At December 31, 1998, the
aggregate accounts receivable balance relating to this customer was $5,715.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Expressed in U.S. dollars)
4. CAPITAL ASSETS
<TABLE>
Accumulated Net Book
Cost Depreciation Value
$ $ $
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1999
Computer equipment 58,566 15,590 42,975
Furniture and office equipment 13,320 3,200 10,120
- --------------------------------------------------------------------------------------------------
71,886 18,790 53,096
- --------------------------------------------------------------------------------------------------
December 31, 1998
Computer equipment 28,230 3,430 24,800
Furniture and office equipment 7,749 775 6,974
- --------------------------------------------------------------------------------------------------
35,979 4,205 31,774
- --------------------------------------------------------------------------------------------------
</TABLE>
Computer equipment under capital leases has a cost of $15,681 and related
accumulated depreciation of $2,348 at December 31, 1998. There was no equipment
under capital leases at December 31, 1999.
In May 1999, several of the Company's fixed assets were stolen from its
operating facilities. All capital assets were fully insured and the Company
received total insurance proceeds of $15,699 for assets with a net book value of
$15,993 at the time of the theft, which resulted in a loss on the theft of $294.
5. DEFERRED CHARGE
On May 7, 1998, the Company entered into a license agreement with Boswell
International Technologies Ltd. (Boswell) to acquire certain rights to developed
software. Pursuant to the license agreement, the Company is required to make
certain minimum annual royalty payments and may be required to pay additional
amounts based on sales levels for a minimum period of 3 years.
In 1998, the Company capitalized the total value of the contract of $211,800 as
a deferred charge, to be amortized on a straight-line basis over the three year
contract term. The Company also recorded a royalty payable for $211,800, to be
paid to Boswell based on a pre-determined schedule, as defined in the contract.
The Company was required to make a minimum royalty payment of $29,400 in 1999.
However, only $6,500 was repaid. Future minimum payments, including the
remaining amount due in 1999, under the terms of this contract are: 2000 -
$104,400 and 2001 - $48,900.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Expressed in U.S. dollars)
5. DEFERRED CHARGE (cont'd.)
As the Company is changing its software delivery system from in-store retail to
on-line delivery, it is no longer using the developed software licensed from
Boswell International Technologies Ltd. As no future benefit will be derived
from this deferred license fee, the amount of $159,800 has been written off to
expense for the year ended December 31, 1999.
6. RELATED PARTY TRANSACTIONS
General and administrative expenses include consulting fees of $65,000 and
$57,467 paid to officers of the Company during the year ended December 31, 1999
and the period from May 5, 1998 (inception) to December 31, 1998, respectively.
General and administrative expenses include professional fees of $54,000 paid to
a relative of the Company's president in 1999 [1998 - nil].
7. LOANS PAYABLE
December 31,
--------------------------
1999 1998
$ $
- -------------------------------------------------------------------------------
Stockholder Loan -- 48,685
Inventory Loans 10,000 15,000
Third Party Loan -- 15,000
- -------------------------------------------------------------------------------
10,000 78,685
- -------------------------------------------------------------------------------
The Stockholder Loan, due to a stockholder who is also an officer of the
Company, and the Third Party Loan that were outstanding at December 31, 1998
were non-interest bearing. Amounts were repaid in full in 1999.
The Inventory Loans outstanding at December 31, 1999 bear interest at 70%. These
loans are unsecured, with no maturity date. At the option of the holder the
loans may be converted into common shares of the Company at a conversion rate
equal to 65% of the market value of the common stock on the date of conversion.
The amount of the beneficial conversion has been expensed in 1999 and is
presented in additional paid in capital.
Interest expense amounted to $27,406 for the year ended December 31, 1999 [1998
- - $2,380].
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Expressed in U.S. dollars)
8. NON-MONETARY TRANSACTIONS
In December 1999, the Company entered into a non-monetary advertising barter
transaction, whereby it exchanged advertising services from a magazine in return
for advertising services on its website. As the Company does not have a
historical practice of receiving or paying cash for similar advertising
transactions, evidencing fair market value of the services exchanged, the
Company has not recorded the revenue and expense related to this non-monetary
transaction.
9. SHARE CAPITAL
[a] Authorized
The authorized capital of the Company consists of 50,000,000 voting common
shares with $0.001 par value and 5,000,000 non-voting preferred shares with
$.001 par value.
[b] Issued and outstanding
On December 31, 1998, the Company issued 80,000 shares of common stock to settle
$52,000 of royalties payable. These shares were issued at fair market value, as
determined by the closing trading price of the common stock on the date of
issuance.
In 1998, cash of $30,000 was received for shares issued in 1999.
In 1998, the Company awarded 37,541 shares of common stock for services rendered
of $16,747. These shares were issued in 1999, at fair market value, as
determined by the closing trading price of the common stock on the date of
award.
In 1999, the Company issued 45,187 common shares for services rendered at
$52,752. These shares were issued at fair market value, as determined by the
closing trading price of the common stock on the date of issuance.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Expressed in U.S. dollars)
9. SHARE CAPITAL (cont'd.)
In 1999, the Company issued 24,999 common shares in lieu of payment of interest
expense of $20,677, related to the inventory loans. These shares were issued at
fair market value, as determined by the closing trading price of the common
stock on the date of issuance.
[c] Stock options
In 1998, the Board of Directors approved the creation of the "1998 Employee
Stock Purchase Plan" pursuant to which the Company has reserved 500,000 shares
of common stock. No options have been granted under this plan.
In 1998, the Board of Directors approved the creation of an employee stock
option plan (the "1998 Stock Option Plan") and a director stock option plan (the
"1998 Directors' Stock Option Plan") pursuant to which the Company reserved
1,500,000 and 150,000 common shares, respectively, for issuance. On June 30,
1999, the Board of Directors amended the 1998 Stock Option to increase the
maximum number of shares of common stock reserved for issuance from 1,500,000 to
2,500,000. Options granted vest in equal amounts at 2% per month.
In 1998, the Company granted certain stock options to employees below the market
price of the underlying stock on the date of grant. In addition, in 1998 the
Company granted stock options to a consultant at the market price of the
underlying stock on the date of grant. Compensation expense of $6,120 related to
these options has been reflected in 1999 [1998 - $48,000].
Stock option transactions for the respective periods and the number of stock
options outstanding under the 1998 Stock Option Plan and the 1998 Directors'
Stock Option Plan are summarized below:
<TABLE>
Outstanding Options
Shares -----------------------------------
Available Weighted Average
Under Option Shares Exercise Price
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, May 5, 1998 (inception) -- -- --
Reserve shares 1,650,000 -- --
Granted (1,262,500) 1,262,500 $0.70
------------------------------------------------------------------------------------------------
Balance, December 31, 1998 387,500 1,262,500 $0.70
Reserve shares 1,000,000 -- --
Granted (465,000) 465,000 $1.11
Expired 150,000 (150,000) $0.68
------------------------------------------------------------------------------------------------
Balance, December 31, 1999 1,072,500 1,577,500 $0.56
------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Expressed in U.S. dollars)
9. SHARE CAPITAL (cont'd.)
During the period ended December 31, 1998 the Company re-priced 400,000 and
362,500 stock options with exercise prices of $1.50 and $1.65 respectively, to
$0.68 and $0.75 respectively. As these options were re-priced at the market
value of the common stock on the date of the re-pricing, the Company did not
recognize any additional compensation expense.
The following table summarizes information about stock options under the plans
outstanding at December 31, 1999:
<TABLE>
Options Outstanding Options Exercisable
-------------------------------------------------------------------
Number Weighted- Number
Range of Outstanding at Average Weighted- Outstanding at Weighted-
Exercise December 31, Remaining Average December 31, Average
Prices 1999 Contractual Life Exercise Price 1999 Exercise Price
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.38 150,000 4.08 years $0.38 3,000 $0.38
$0.68 - $1.00 1,237,500 2.92 years $0.72 359,750 $0.71
$1.06 - $1.38 150,000 3.50 years $1.32 22,000 $1.31
$2.50 - $3.50 20,000 3.53 years $3.00 2,800 $3.00
$4.50 - $5.50 20,000 3.53 years $5.00 2,800 $5.00
- --------------------------------------------------------------------------------------------------
</TABLE>
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options under the fair value method
of that statement. The fair value of each option granted in 1999 and 1998 was
estimated at the date of grant using a Black-Scholes pricing model with the
following weighted average assumptions: risk free interest rates of 5% [1998 -
5%]; dividend yield of 0% [1998 - 0%]; volatility factors of the expected market
price of the Company's common stock of 1.29 [1998 - 1.1] and a weighted average
expected life of the option of 3.75 years [1998 - 3.75 years].
The weighted average fair market value of options granted during 1999 and 1998
was as follows:
1999 1998
$ $
- -------------------------------------------------------------------------------
Exercise price:
Equal to fair market value 0.64 --
Greater than fair market value 0.76 0.81
Less than fair market value -- 0.75
- -------------------------------------------------------------------------------
0.70 0.81
- -------------------------------------------------------------------------------
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Expressed in U.S. dollars)
9. SHARE CAPITAL (cont'd.)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period. The Company's pro forma
information is as follows:
<TABLE>
1999 1998
$ $
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss As reported (1,127,327) (416,716)
APB 25 compensation expense As recorded 6,120 48,000
SFAS 123 compensation expense Pro forma (278,958) (98,002)
- --------------------------------------------------------------------------------------------------
Pro forma net loss Pro forma (1,400,165) (466,718)
- --------------------------------------------------------------------------------------------------
Pro forma net loss per common share:
Basic and diluted Pro forma (0.11) (0.05)
- --------------------------------------------------------------------------------------------------
</TABLE>
10. INCOME TAXES
At December 31, 1999 the Company has a net operating loss for United States
income tax purposes of approximately $190,000 which will begin to expire in 2018
if not utilized.
In addition, the Company has non-capital losses for Canadian income tax purposes
of approximately $900,000 at December 31, 1999 which will begin to expire in
2005 if not utilized.
Deferred income taxes reflect the net effects of temporary differences between
the carrying value of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Company has recognized a
valuation allowance of $500,000 equal to the deferred tax assets due to the
uncertainty of realizing the benefits of the assets.
11. COMMITMENT
Operating lease
The Company leases its operating facilities on a month-to-month basis at a rate
of $1,500 per month.
In 1999 and 1998, the Company incurred rent expense of $20,654 and $7,176,
respectively.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Expressed in U.S. dollars)
12. OTHER INCOME
In 1999, the Company recognized $106,234 of revenues from the sale of two
website names. These revenues have been included in other income. Also included
in other income is $23,987 of interest income and other miscellaneous income.
13. SEGMENTED INFORMATION
The Company operates in one business segment, the development and marketing of
interactive multimedia educational software products. In 1999, total revenues of
$89,412 and $31,303 were to customers in the United States and Canada,
respectively [1998 - $nil and $14,824], based on the geographic location of the
customers. Predominantly all of the Company's capital assets are located in
Canada for the periods presented.
14. SUBSEQUENT EVENTS
In January 2000, the Company issued 29,840 shares of common stock in exchange
for debt outstanding at December 31, 1999. These shares were issued at prices
ranging from $0.50 - $0.75 per share.
In January 2000, the Company issued 2,345 shares of common stock to an employee
for services rendered in 1999. These shares were issued at the market price of
the stock on the date of issuance for a total of $3,078.
Pursuant to a private placement on February 14, 2000, the Company issued 369,000
shares of common stock for cash proceeds of $184,500.
In March 2000, the Company announced a financing via private placement offering
under Regulation D, Rule 506 of the Securities and Exchange Commission. The
Company intends to offer and sell 1,000,000 units at $1 per unit, with each unit
consisting of one share of restricted common stock and two warrants. Each
warrant entitles the holder to purchase one additional share of restricted
common stock at $2.50 per share and $5.00 per share, respectively.
15. COMPARATIVE FIGURES
Certain comparative figures have been reclassified in order to conform with the
presentation adopted in the current year.
F-18
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
*2.1 Articles of Incorporation of the Registrant, as amended
*2.2 Bylaws of the Registrant
*3.1 Form of Common Stock share certificate
*6.1 1998 Stock Option Plan, as amended
*6.2 1998 Directors Stock Option Plan, as amended
*6.3 1998 Employee Stock Purchase Plan
*6.4 Form of Stock Option Agreement (1998 Stock Option Plan)
*6.5 Form of Stock Option Agreement (1998 Director's Stock Option
Plan)
*6.6 Form of Subscription Agreement (1998 Employee Stock Purchase
Plan)
*6.7 Form of Affiliate Program Agreement
*6.8 Form of Confidentiality and Non-Competition Agreement
*6.9 freeENGLISH Non-Exclusive Linking Agreement dated May 20,
1999 between the Registrant and the Ministry of University
Affairs (Thailand)
*6.10 Memorandum of Understanding between EDUVERSE Accelerated
Learning Systems (Canada), Inc. and the Ministry of
University Affairs (Thailand)
*6.11 Manufacturer's Representation Agreement dated March 1, 1999
between the Registrant and Tri Synergy, Inc.
*6.12 Software License Agreement dated May 7, 1998 by and among
the Registrant, Boswell International Technologies Ltd. And
Boswell Industries Inc.
*6.13 Employment Agreement effective May 3, 1999 between EDUVERSE
Accelerated Learning Systems (Canada ) Inc. and Marc Crimeni
*6.14 Employment Agreement effective May 3, 1999 between EDUVERSE
Accelerated Learning Systems (Canada) Inc. and Robert Harris
*6.15 Employment Agreement effective May 3, 1999 between EDUVERSE
Accelerated Learning Systems (Canada) Inc. and Jeffery Mah
*6.16 Employment Agreement effective May 3, 1999 between EDUVERSE
Accelerated Learning Systems (Canada) Inc. and Lorne Reicher
<PAGE>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
*8.1 Stock Exchange Agreement and Plan of Reorganization dated
May 28, 1998 between the Registrant and ESL Pro Systems Inc.
*8.2 Stock Exchange Agreement and Plan of Reorganization dated
May 29, 1998 between the Registrant and Marketing Services
Inc.
8.3 Agreement dated October 1999 between the Registrant and
Satellite Television Asian Region Limited.
27.1 Financial Data Schedule
- ---------------------------
* Previously filed with the Company's Registration Statement on Form 10-SB
filed September 3, 1999.
This Agreement is made as of October, 1999.
BETWEEN:
Satellite Television Asian Region Limited, a company organised and
existing under the laws of Hong Kong, having its registered office at
8/F, One Harbourfront, 18 Tak Fung Street, Hunghom, Kowloon, Hong Kong
("Star TV");
AND
eduverse.com, a company incorporated under the laws of the State of
Nevada, having its registered office at 1135 Terminal Way, Suite 209,
Reno, Nevada, U.S.A. 89502-2168 ("eduverse.com").
This Agreement comprises the Principal Terms, Standard Terms and Schedule 1
appended hereto.
I. Principal Terms
Acceptance Date: As set out in clause 3.2 of the Standard Terms.
Delivery Schedule: As set out in Schedule 1.
Delivery Format: Each Game will include the necessary HTML files and
SWF files required to place/position the games within a Star
TV web page(s), together with the accompanying user manual,
if any.
Games: At least ten (10) interactive electronic educational games
to be desStar TVed and produced by eduverse.com for use by
Star TV, more particularly described in the attached
Schedule 1.
Revenue Sharing: Star TV shall pay eduverse.com a portion of the Net Revenue
in the manner as set out in clause 5 of the Standard Terms.
Net Revenue: Net Revenue shall mean the revenue actually
received by Star TV from the sale of advertising banners
appearing in the web page(s) where the Games are posted,
less non-recovered costs for producing, maintaining and
hosting such advertising banners (including, but not limited
to any required payments to third parties in connection with
generating such revenue, advertising management fees,
general sales costs, any costs for the production of the
banner, agency fees, taxes and levies etc).
Technical
Specification: As set out in Schedule 1.
Term: Subject to clause 9 of the Standard Terms, this Agreement
shall expire on the first anniversary of the Acceptance Date
of the tenth Game delivered to Star TV as per the attached
Schedule 1.
1
<PAGE>
II. Standard Terms
1. Grant of Rights
1.1 In consideration of Star TV allowing eduverse.com to create links to its
web site pursuant to clause 4 and Star TV paying to eduverse.com a portion
of the Net Revenue (if any) calculated in the manner as set out in clause
5, eduverse.com hereby grants to Star TV the exclusive right to broadcast,
distribute, re-distribute, display, exhibit, exploit, transmit, publish,
project, and simulcast the Games on the World Wide Web, through
www.startv.com or other Star TV Group properties. The exclusive right
granted herein shall last for the Term of this Agreement. Notwithstanding
the foregoing, eduverse.com may use the Games on www.freeENGLISH.com.
1.2 eduverse.com agrees not to create, design or produce any other interactive
electronic educational games for any third parties prior to termination of
this Agreement.
2. Delivery of Contents
2.1 eduverse.com shall deliver the Games in Delivery Format to Star TV.
2.2 The Games shall be delivered in accordance with the Delivery Schedule. Time
is of essence.
3. Testing and Acceptance
3.1 Star TV shall, upon receipt of the Games in Delivery Format, conduct tests
to verify whether the Games comply with the Technical Specifications as set
out in Schedule 1. Such tests may include posting Games on a Star TV web
page(s) for its viewers to conduct free trials of the Games.
3.2 Promptly after receipt of each Game, Star TV shall notify eduverse.com in
writing that it accepts the Game or, if Star TV decides that such Game is
not in compliance with the Technical Specifications or otherwise defective
in any respect, Star TV shall so notify eduverse.com in writing and
identify the reasons for such decision. eduverse.com shall forthwith
implement free of charge, such reasonable alterations or reasonable
modifications to such Game to Star TV's satisfaction and acceptance. The
date when Star TV informs eduverse.com in writing of its acceptance of a
Game(s) shall be the "Acceptance Date" of such Game.
3.3 If eduverse.com is unable to alter and/or modify a Game to Star TV's
satisfaction within one (1) month from the date of a notification pursuant
to clause 3.2 above with respect to such Game, Star TV may terminate this
Agreement forthwith upon written notice to eduverse.com.
4. Linking and On-Air Promotions
4.1 During the term of this Agreement, Star TV may use the then current URL for
the games section on www.freeENGLISH.com and the words "eduverse.com"
and/or "freeENGLISH.com" in the creation of a link from web page(s) where
the Games are posted to the games section on www.freeENGLISH.com.
4.2 During the term of this Agreement, eduverse.com may use the then current
URL for the games section on www.startv.com and the words "Star TV Games"
and/or "Star Games" and/or "StarTV.com Games" in the creation of a link
from www.eduverse.com and/or www.freeENGLISH.com to the Star TV web page(s)
where the Games are posted.
4.3 Any links created pursuant to clauses 4.1 and 4.2 above will only take the
user to the games section of the respective web sites and shall not create
any framing or other interference with the user's connection to or the
presentation or functionality of the respective web sites.
4.4 Except as set forth in clause 1.1 above, this Agreement does not grant any
rights to either party in respect of the intellectual property of the other
party.
2
<PAGE>
4.5 Either party may withdraw its permission granted pursuant to clauses 4.1
and 4.2 above immediately:
a. upon termination of this Agreement for whatever reason; or
b. by giving written notice to the other party if, in the reasonable
opinion of the party seeking withdrawal, the material posted in the
other party's web site is:
(i) harassing, libellous, abusive, threatening, harmful, vulgar,
obscene, indecent, or otherwise objectionable in any nature; or
(ii) likely to contravene any government licence, laws, regulations or
code of practice applying from time to time.
4.6 Star TV may, in its sole discretion, promote the Games and/or StarTV.com
and/or eduverse.com and/or freeENGLISH.com in any advertisements to be
broadcast or otherwise transmitted by the Star TV channels. Notwithstanding
the foregoing, Star TV will cease to refer to eduverse.com in any such
advertisements if it is advised by eduverse.com that such reference could
adversely affect eduverse.com's ability to rely on any exemption or
exclusion from registration of its securities under the securities laws of
any jurisdiction.
5. Revenue Sharing of Advertising Banners
5.1 For the period starting on the Acceptance Date of the sixth Game, "Spelling
Bee", until termination of this Agreement, the parties agree to share the
Net Revenue in the following manner:
a. for the sale of banner advertising to customers resulting directly
from an eduverse.com referral, Star TV shall pay to eduverse.com 57.5%
of the Net Revenue received from such sales.
b. for all other sales of banner advertising, Star TV shall pay to
eduverse.com 42.5% of the Net Revenue received from such sales.
5.2 For the avoidance of doubt, this revenue sharing only applies to sales of
advertising banners appearing on web page(s) where the Games are posted.
This clause 5 shall not apply to revenue generated by other web pages of
Star TV or Star TV web sites, or to other forms of exploitation of the
Games. This clause 5 shall not apply to any revenue generated prior to the
Acceptance Date of the sixth Game, "Spelling Bee".
5.3 Within 30 days after receiving a payment from a customer who places banner
advertising, Star TV shall remit to eduverse.com its share of the Net
Revenue with respect to such payment.
5.4 Star TV has the absolute discretion in accepting or declining any offer
made for the purchase / sale of advertising banner(s). Star TV does not owe
any responsibility or duty to eduverse.com to accept referrals made by
eduverse.com.
5.5 Nothing in this Agreement shall indicate or mean that either party is the
partner or agent of the other. Neither party has the power nor the right to
bind the other.
6. eduverse.com's Representations and Warranties
6.1 eduverse.com warrants and represents that:
a. it has the full power and authority to enter into and perform this
Agreement;
b. it is the beneficial owner of all rights necessary to provide the
Games in accordance with this Agreement or is assigned such rights on
such terms that allow it to fulfil its obligations to Star TV under
this Agreement, and, when the Games are delivered in accordance with
this Agreement, it will be the beneficial owner of all rights in the
Games or will have been assigned such rights on such terms that allow
it to fulfil its obligations to Star TV under this Agreement;
c. eduverse.com has obtained all requisite copyright clearances,
licences, permits and consents with respect to any music, audio
soundtrack works or other works,
3
<PAGE>
effects, logos, copyrighted materials belonging to third parties to
enable Star TV to broadcast, distribute, re-distribute, display,
exhibit, exploit, publish, transmit, project and simulcast (the
"Activities") the Games or any portion thereof, on any Star TV web
site or otherwise making the Games or any portion thereof available to
the public through the Internet or other digital media service;
d. if it is later discovered that Star TV will require additional
licences (including but not limited to copyright and trademark
licences) from eduverse.com or other third parties in order to engage
in the Activities, eduverse.com will use its commercially reasonable
best efforts to execute (and procure third parties to execute) all
documents and do all acts necessary to effectuate such licence or to
perfect the rights granted herein;
e. Star TV's engagement in the Activities will not infringe any
intellectual property or privacy rights of third parties;
f. the Games produced and delivered to Star TV will be suitable for the
purpose intended and free from any viruses or any defects preventing
compliance with the Technical Specifications as set out on Schedule 1;
g. eduverse.com will not create, produce or deliver any interactive
electronic educational games for any third party other than Star TV
where the theme, format, genre or other characteristics of such
interactive games are reasonably likely to mislead the public to
believe that such interactive games are sequels or otherwise
associated with the Games.
6.2 All representations and warranties made pursuant to this Agreement shall
survive for a period of two years from the date of termination of this
Agreement.
7. Star TV's Representations and Warranties
7.1 Star TV warrants and represents that it has the full power and authority to
enter into and perform this Agreement.
7.2 All representations and warranties made pursuant to this Agreement shall
survive for a period of two years from the date of termination of this
Agreement.
8. Indemnity
8.1 eduverse.com shall indemnify and keep indemnified Star TV and its
employees, officers, directors and affiliates against all losses, actual
damages, costs and payments (other than a pure loss of profits or
consequential damages), including reasonable legal fees incurred as a
result of eduverse.com's breach, non-observance or non-performance of any
term of this Agreement.
8.2 Star TV shall indemnify and keep indemnified eduverse.com and its
employees, officers, directors and affiliates against all losses, actual
damages, costs and payments (other than a pure loss of profits or
consequential damages), including reasonable legal fees incurred as a
result of Star TV's breach, non-observance or non-performance of any term
of this Agreement.
8.3 If a third party claims or threatens to claim that the Games and/or Star
TV's use of the Games infringes any third party's intellectual property
rights, eduverse.com shall, at Star TV's request, assist in or be
responsible for any related legal proceedings and negotiations for
settlement, provided that in no event shall eduverse.com be empowered to
act as the agent of Star TV or to settle in a manner detrimental to Star TV
any such claim or threatened claim to which Star TV is or could be a party.
eduverse.com shall also indemnify Star TV for costs and damages including
reasonable legal fees in connection with any such claim or threatened
claim.
8.4 The indemnities contained in this Agreement shall survive the termination
of this Agreement.
4
<PAGE>
8.5 Notwithstanding anything else contained in this clause 8, neither party
shall be required to make any indemnification payment with respect to any
third party claim that is paid, settled or otherwise resolved without the
other party having consented in advance to the terms of such payment,
settlement or resolution.
9. Termination
9.1 Either party may terminate this Agreement:
a. where the other party is in breach of any term of this Agreement and
(if the breach is capable of remedy) fails to remedy such breach
within fourteen (14) days of receiving written notice thereof; or
b. upon the other party is being wound up, commencing the process of
liquidation or having a petition of winding-up presented against it;
or
c. after giving the other party thirty (30) days' written notice. 9.2
Star TV may terminate this Agreement in accordance with clause 3.3
above.
10. Intellectual Property Rights
10.1 eduverse.com shall own all rights, title and interest worldwide in the
Games, including their title, theme, format, genre, characteristics, source
code and object code.
10.2 eduverse.com further acknowledges that, unless otherwise agreed in writing
by the parties after the date of this Agreement, no future compensation or
payment (apart from the share of Net Revenue as set out in clause 5 above)
shall be due to eduverse.com or its employees or agents or third parties
related to eduverse.com, in respect of Star TV's use and exploitation of
the Games in accordance with this Agreement, regardless of the manner and
extent (consistent with the terms of this Agreement) to which Star TV
elects to exploit the Games.
11. Miscellaneous
11.1 This Agreement represents the entire agreement between the parties and
supersedes any prior agreement whether oral or written. No amendment or
variation to this Agreement, and no waiver of any term of this Agreement
shall take effect unless it is in writing and signed by both parties.
11.2 Each provision of this Agreement shall be severable. If any provision is
held invalid, such invalidity shall not impair the effect of the rest of
this Agreement.
11.3 No failure or delay on the part of either of the parties to exercise any
right or remedy under this Agreement shall be construed as a waiver
thereof.
11.4 Neither party shall assign this Agreement, in whole or in part, to any
third party without the prior written consent of the other party.
11.5 Both parties shall keep the terms of this Agreement confidential and shall
not issue any press releases or make any public announcements in relation
thereto without the prior written consent of the other. Notwithstanding the
foregoing, Star TV acknowledges that if this Agreement is deemed to
constitute a "material contract" of eduverse.com within the applicable
definition, this Agreement will be required to be filed as an exhibit to
eduverse.com's publicly available periodic filings with the United States
Securities and Exchange Commission.
5
<PAGE>
11.6 Any notice, request, instruction or other documents to be given under this
Agreement shall be in writing to the parties at their respective addresses
set forth below, or to such other address as a party may subsequently
specify and shall be deemed to have been received (i) upon delivery in
person, (ii) upon the passage of ninety-six (96) hours following post by
first class mail, (iii) upon the passage of twenty-four (24) hours
following post by overnight receipted courier service or (iv) upon
transmittal by confirmed telex, facsimile or email provided that if sent by
facsimile or email a copy of such notice shall be concurrently sent by
mail, postage prepaid, with an indication that the original was sent by
facsimile or email and the date of its transmittal.
Notices to Star TV:
Mr. CC Fong
8th Floor, One Habourfront
18 Tak Fung Street
Hunghom, Kowloon
Hong Kong Special Administrative Region
Fax No.: (852) 2621 8867
Email: [email protected]
Copy to General Counsel
Fax. No.: (852) 2621 8636
Email: [email protected]
Notices to eduverse.com
Mr. Mark E. Bruk
1135 Terminal Way, Suite 209
Reno, Nevada
U.S.A. 89502-2168
Fax No.: (775) 332 3326
Email: [email protected]
Copy to General Counsel
c/o Vaughn Barbon, eduverse dot com, Inc.
Fax No.: (604) 623 4828
Email: [email protected]
11.7 This Agreement shall be governed by and construed in accordance with the
laws of Hong Kong Special Administrative Region without regard to the
choice of law and conflicts of laws provisions thereof, and each party
hereby agrees to submit to the exclusive jurisdiction of the courts of Hong
Kong Special Administrative Region in connection with any disputes arising
hereunder.
6
<PAGE>
11.8 This Agreement may be signed in one or more counterparts, each of which may
be termed an original, but all of which together shall constitute one
Agreement. Delivery of an executed counterpart of a signature page of this
Agreement by facsimile will be effective as delivery of a manually executed
counterpart of this Agreement.
IN WITNESS WHEREOF the parties hereto have hereunto set their hands as of the
date first above written.
FOR AND ON BEHALF OF FOR AND ON BEHALF OF
Satellite Television Asian eduverse.com
Region Limited
Per: Per:
-------------------------------- --------------------------------
Name: Name:
------------------------------ --------------------------------
Title: Title:
------------------------------ --------------------------------
7
<PAGE>
<TABLE>
SCHEDULE 1
Name of Game Technical Specification Delivery Schedule
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUNNY DROP The objective of Bunny Drop is to guess the November 1, 1999
correct word before the bunny drops through the
hatch. You have six guesses to save the bunny.
Each level of play features a variety of
categories, such as names of people, sports,
music, and general knowledge. Bunny Drop will
test your knowledge in these categories and
improve your vocabulary and spelling while you
are having fun! *
- --------------------------------------------------------------------------------------------------------------------
SWAP GAME Form a sentence by unscrambling the words. You November 1, 1999
do this by swapping words and putting them in
correct order.
Each level of play features a variety of
categories, such as names of people, sports,
music and general knowledge. The Swap Game will
test your knowledge of these categories and
improve your grammar and vocabulary while you
are having fun! *
- --------------------------------------------------------------------------------------------------------------------
JUNGLE GUY Help The Jungle Guy escape from the vicious lion! November 1, 1999
Select the correct word that completes the
sentences and save Jungle Guy from the lion.
Every time a question is answered incorrectly
Jungle Guy becomes increasingly tired. *
- --------------------------------------------------------------------------------------------------------------------
SCRAMBLED SENTENCES Put each sentence in the correct order by November 1, 1999
clicking on the words one by one. Improve your
grammar while you are having fun! *
- --------------------------------------------------------------------------------------------------------------------
SOUND OFF Match all of the English words to win! When two November 1, 1999
English words are matched, the sound is
pronounced through the game.
Using Sound Off is a fun way to learn to
spell and pronounce commonly used English
words. *
- --------------------------------------------------------------------------------------------------------------------
SPELLING BEE After you hear each word, spell it correctly to November 15, 1999
make the teacher happy and go on to the next
word. *
- --------------------------------------------------------------------------------------------------------------------
T.B.A. by Nov 15, 1999 January 15, 2000
*
- --------------------------------------------------------------------------------------------------------------------
T.B.A. by Dec 15, 1999 February 15, 2000
*
- --------------------------------------------------------------------------------------------------------------------
T.B.A. by Jan 15, 2000 March 15, 2000
*
- --------------------------------------------------------------------------------------------------------------------
T.B.A. by Feb 15, 2000 April 15, 2000
*
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* All Games are single player games and are developed using a combination of
Macromedia Flash, HTML and Javascript, with the exception of Scrambled
Sentences which is developed using HTML and Javascript. Each of the Games
may be inserted into and played from within a single web page, which web
page may or may not contain other text and graphics.
8
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 43,584
<SECURITIES> 0
<RECEIVABLES> 8,826
<ALLOWANCES> (6,292)
<INVENTORY> 17,296
<CURRENT-ASSETS> 95,189
<PP&E> 0
<DEPRECIATION> 17,705
<TOTAL-ASSETS> 148,285
<CURRENT-LIABILITIES> 240,809
<BONDS> 0
0
0
<COMMON> 13,185
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 148,285
<SALES> 120,725
<TOTAL-REVENUES> 120,725
<CGS> 38,597
<TOTAL-COSTS> 1,339,666
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,127,327)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,127,327)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,127,327)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
