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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
Amendment No. 2
To
FORM 10
General Form For Registration of Securities
Pursuant to Section 12(b) or (g) of
the Securities Exchange Act of 1934
USA VIDEO INTERACTIVE CORP.
(Exact name of registrant as specified in its charter)
Wyoming 06-15763-91
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
70 Essex Street,
Mystic, Connecticut 06355
(Address, including postal code, of registrant's principal executive offices)
Registrant's telephone number, including area code: 1 (800) 625-2200
Securities to be registered under Section 12(b) of the Exchange Act: None
Securities to be registered under Section 12(g) of the Exchange Act:
Common Shares
- --------------------------------------------------------------------------------
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USA VIDEO INTERACTIVE CORP.
FORM 10
TABLE OF CONTENTS
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PART I Page
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Item 1. Business........................................................... 3
Item 2. Financial Information.............................................. 32
Item 3. Properties......................................................... 35
Item 4. Security Ownership of Certain Beneficial Owners and Management..... 35
Item 5. Directors and Executive Officers................................... 37
Item 6. Executive Compensation............................................. 39
Item 7. Certain Relationships and Related Transactions..................... 41
Item 8. Legal Proceedings.................................................. 42
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters........................................ 44
Item 10. Recent Sales of Unregistered Securities............................ 45
Item 11. Description of Registrant's Securities to be Registered............ 48
Item 12. Indemnification of Directors and Officers.......................... 50
Item 13. Financial Statements and Supplementary Data........................ 52
Item 14. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................... 82
Item 15. Financial Statements and Exhibits.................................. 82
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ITEM 1. Business
Description of Business
Introduction
------------
USA Video Interactive Corporation (hereinafter "USA Video") provides an
array of products and services that allow businesses and individuals to transmit
video data through the Internet and other local and wide area networks, while
maintaining superior video quality at the receiving end. USA Video's key areas
of market focus are education, training, and entertainment for institutions,
corporations, and consumers. The key technologies that create business
opportunity for USA Video are the following:
Video compression technology, which allows large video files to be
greatly reduced in size to optimize use of available bandwidth; and
Store and Forward Video-on-Demand ("VoD") technology, a patented
technique for transmitting video over switched (telephone-like)
networks and allowing the user to view the video using videocassette
recorder (VCR)-like controls (play, pause, stop, etc.).
The products and services made possible by these technologies and
which form the basis of USA Video's business operations are as follows:
. End-to-end systems for converting and delivering live or recorded video
from an analog source (e.g., camera, videotape, cable hookup) to the end
user's viewing device (computer or television) via a variety of network
options (e.g., Internet, Intranet, satellite, wireless). These systems are
total solutions, including hardware, software, assembly, training,
documentation, installation, and post-installation maintenance support;
. Content management and encoding services, which involve maintaining digital
video libraries and encoding (that is, digitizing and compressing) content
to populate these libraries on a video server, a significant undertaking
for many schools and corporate training departments;
. Content creation and editing services, which involve a variety of video
production services to develop content where none exists;
. Web site development to support video streaming systems, involving
programming and authoring services for web sites with a primary purpose of
delivering video;
. Hosting for web-based video delivery, which involves set up and ongoing
maintenance of a video service on USA Video-owned or leased equipment;
. Event support, which includes all labor, travel, equipment transport,
editing, encoding, and delivery associated with a live webcast or post-
event video broadcast.
USA Video's products and services generate revenues that can be
categorized as follows: (A near-term projected revenue breakdown is in
parentheses. However, the longer term
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revenue forecast will likely shift more toward recurring revenues from
technology and content licensing fees and advertising.)
. Sales of hardware, software, and peripheral system components (25%);
. Engineering services associated with system development, integration,
installation, training, and support (25%);
. Software development services (10%);
. Licensing fees for proprietary USA Video technologies (10%);
. Licensing and distribution of wholly owned content or on a shared revenue
basis with content providers (10%).
. Services and fees to host web-based video delivery services (10%);
. Services and fees to support events (5%)
. Revenues from advertising contained within content and associated with web
hosting and event support (5%).
Currently, USA Video is fully engaged in all of the above product and
service areas. It has agreements in place with Internet Service Providers (ISPs)
to offer hosting services to its clients. It owns the equipment and has the
personnel resources necessary to perform all of the listed services. The capital
necessary to develop and test its prototype end-to-end video system was expended
early in 2000, then this prototype was subsequently sold to a customer, negating
the capital outlay. Details on the individual components of this system,
including its video encoders and servers, are described in the section entitled
"USA Video's Technology." All of its future capital expenditures for such
systems will be customer driven.
Evolution of USA Video
----------------------
. April 18, 1986, USA Video was incorporated as First Commercial
Financial Group Inc. in the Province of Alberta, Canada.
. September 1, 1989, USA Video changed its name to Micron Metals Canada
Corp. and forward split its common shares on a two for one basis.
. November 1991, USA Video acquired 100% of the outstanding shares of
USA Video Inc., which was incorporated in Texas in 1990, pursuant to a
purchase agreement dated November 21, 1991 and amended March 6, 1992,
July 28, 1992 and September 15, 1992.
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. December 24, 1991, USA Video incorporated a wholly-owned subsidiary,
USA Video Corp., in the State of Nevada.
. April 6, 1992, USA Video changed its name to USA Video
Corporation.
. May 4, 1993, USA Video Corp, a subsidiary of USA Video changed its
name to USA Video (California) Corporation.
. July 28, 1993, USA Video Inc, a subsidiary of USA Video changed its
name to USA Video Corporation.
. January 3, 1995, USA Video changed its name to USA Video Interactive
Corp.
. February 16, 1995 USA Video continued its corporate jurisdiction
from the Province of Alberta to the State of Wyoming.
. February 23, 1995, USA Video consolidated its common shares on a one
for five basis.
. In July, 1998, USA Video created the USA Video Interactive Programming
division.
. In June 14, 1999, USA Video incorporated another wholly-owned
subsidiary, Merging Rivers Media Corporation, Inc., in the State of
Wyoming.
During 1999, USA Video formed several new operational divisions of the
company:
. A Media Services division to create and/or digitize video content for
Internet advertisers, advertising agencies, theater studios, and
others.
. An Engineering Services division to handle sales and service of its
servers, switches and telecommunications equipment.
. A West Coast subsidiary, Merging Rivers Media, an Internet-television
advertising agency, to focus on entertainment-related activities.
. A Programming Division, for the express purpose of negotiating and
finalizing contracts related to content services.
USA Video is a public company emerging from the development stage listed on
the Canadian Venture Exchange under the trading symbol "US" and the NASD OTC
Bulletin Board under the trading symbol "USVO".
A development stage company is one where substantial efforts are devoted to
establishing a new business but the planned principal business has not commenced
or has commenced but has not generated significant revenues. This describes USA
Video through 1999. However, a shift has occurred and USA Video is now focused
on marketing and selling its products and services and as such expects revenues
to significantly increase in 2000. USA Video is essentially "emerging" from its
development stage by fully implementing its principal business.
USA Video's executive offices are located at 70 Essex Street, Mystic,
Connecticut 06355, telephone: (800) 625-2200 and its corporate offices are
located at #507, 837 West Hastings Street, Vancouver, B.C., V6C 3N6 , telephone:
(604) 685-1017, (800) 321-8564, Fax: (604) 685-5777.
USA Video's Technology
----------------------
USA Video's technology falls into two major categories:
. Proprietary technologies that facilitate efficient video transmission (also
called streaming) through various fixed or switched networks. These
technologies include the company's Wavelet compression techniques and its
Store and Forward Video-on-Demand technology. (Wavelet options include those
developed by USA Video engineers or licensed from third parties and modified
and improved by USA Video engineers.)
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. Engineering and scientific expertise to integrate and employ these
proprietary technologies for various system and service related applications,
as defined in the "Introduction" section.
Licensing of proprietary technology is part of USA Video's business model.
When we deliver a video distribution system, the system incorporates this
technology and the customer pays a license fee. On the other hand, if the
technology is integrated into the equipment of a third party (e.g. another
manufacturer's video server), USA Video still collects a licensing fee.
USA Video's team of engineers and scientists can customize tailored
solutions to meet client needs. The following table indicates the application
of these technology areas to the products and services defined in the
"Introduction" section:
Product or Service Proprietary Technology Engineering Expertise
- ------------------ ---------------------- ---------------------
End-to-end video distribution Yes Yes
systems
Content management and Yes Yes
encoding
Content creation and editing No Yes
Web site development No Yes
Hosting for web-based video Yes Yes
delivery
Event support Yes Yes
The application of these two technology areas to these products and services are
discussed further in the following two subsections. A third subsection, End-to-
End Video Distribution Systems, is included because of the significant
percentage of near-term revenue that this area of business is expected to
generate.
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Proprietary Technologies. USA Video's proprietary technologies include 1)
------------------------
Wavelet compression and 2) Store and Forward Video-on-Demand. These technologies
are incorporated into the company's products, such as its end-to-end video
distribution systems. In addition, it uses these technologies in performing
services such as encoding content or providing event support. Whether these
technologies are included in systems or used to provide services, revenues are
generated for the licensing of the intellectual property. A brief discussion of
each of these technologies follows.
Wavelet Compression. Although USA Video's business is not constrained
to a particular compression technique, advanced Wavelet compression
technology is an integral part of the solution for the marketing of its
product and services. Since Wavelet compression significantly reduces the
amount of data used to represent video images without reducing the image
quality, this technique provides more efficient streaming of video,
regardless of network bandwidth, than do competing technologies.
Furthermore, unlike compression using the Discrete Cosine Transform (e.g.,
MPEG), which segments the original image and can create a visually
unpleasant blockiness, Wavelet processing is applied across the entire
image, allowing higher compression ratios without blockiness. For these
reasons, USA Video integrates Wavelet coders-decoders (codecs) into its
products and continues to pursue advanced research and development in order
to further improve the technique.
Store and Forward Video-on-Demand. USA Video has designed and
patented this technology for the delivery of video programs on an
"on-demand" basis. This capability allows a user located remotely from a
video source to control the viewing of selected video over the Internet (or
other network) using VCR-like controls. Unlike the pay-per-view model where
the video is run to completion without the possibility of pausing once it
is started, this technology provides a two-way connection, allowing the
user to manage the content delivery.
Engineering and Scientific Expertise. USA Video has a team of highly
------------------------------------
educated and experienced engineers, scientists, software developers, and system
architects. The team's extensive experience in providing tailored solutions to
customer needs is currently being applied to development of USA Video's end-to-
end video streaming systems and to solving difficult architecture and
infrastructure problems encountered while implementing these systems at
different customer sites. For example, this team pioneered innovative methods of
delivering a video broadcast over a satellite network in order to meet one
client's requirements. As implied above, USA Video continues to work on
advancing the Wavelet compression technology and is developing a Unix version of
Wavelet.
End-to-End Video Distribution Systems. As implied by the term "end-to-end,"
-------------------------------------
USA Video's system process begins with an analog video content source, such as a
camera or videotape, and finishes with the source video being viewed on a user's
computer that can be located across the room or across the country. There is no
requirement for any of these components to reside side-by-side. System
components contributing to this total process are as follows:
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Encoder - Digitizes and compresses the video signal to allow its
transmission across a network. When video is compressed using USA Video's
Wavelet technology, there is sufficient data reduction to allow the video
to be forwarded to its destination as a live broadcast. Alternatively, the
data can be stored to disk for future start-to-finish viewing or VoD.
During the encoding process, parameters such as image size, frames per
second, and compression method, are adjusted to make use of available
delivery bandwidth. For high bandwidths, higher streaming rates are
targeted to produce higher fidelity video at the user end. However, setting
parameters to increase video fidelity results in a larger video file size,
thus requiring more disk storage space.
Server - Stores the digitized and compressed video and manages the delivery
of video to users (either live or after the fact). The number of
simultaneous users supported can be determined by dividing the total
delivery capacity of the server by the available streaming rate. For
example, for a server that will support a total of 80 Mbit/second, a
streaming rate of 56 Kbit/second will allow almost 1500 users, while a
streaming rate of 1 Mbit/second will support only 80 users. Up to the
specified maximum number of users, video quality is not impacted by number
of users. Exceeding this maximum is prevented by preventing hookup once the
maximum has been reached.
Distribution Network - The connectivity for distribution of the video data.
This is not part of the system; however, USA Video customizes system
components to optimize the use of the existing network, no matter what the
method (e.g., Internet, satellite, fiber-optic cable, phone line) or
available bandwidth. For example, because quality degradation and latency
are issues in networks with many signal routing nodes, USA Video pioneered
satellite delivery methods specifically to minimize this impact.
Client - A computer or television equipped to process encoded video. For a
computer, this equipment could be a web browser, a standard Windows Media
Player, and a Wavelet decoder plug-in provided by USA Video. To access the
video, the computer user would simply click on a web page link.
The video distribution system is flexible and scalable, meaning that it can
be configured and sized to meet individual client requirements. For example, a
small school wanting to eliminate its space consuming videotape library may
require a single encoder and server (with peripheral components), while an
Internet broadcast company desiring 500 live broadcast streams over a satellite
link would require a much more complex system. Whatever the requirement, two USA
Video functional components are at the core of each video distribution system.
For each of these components, USA Video begins with mature off-the-shelf
hardware obtained from companies with which it has business relationships, then
it customizes and packages this hardware to meet the specific video distribution
needs of its clients. The two components are:
WebCaster Live (TM) Encoder - This component receives analog video inputs,
encodes (i.e., digitizes and compresses) the input data, and forwards the
encoded output stream to the video server. There can be multiple encoders
in a single system. The Wavelet compression algorithm is normally embedded
within the encoder software.
Hurricane Mediacaster (TM) Video Server - This component stores the video
received from the encoder and manages its delivery. Two general categories
of delivery are provided: multicast and unicast. A multicast delivers a
start-to-finish stream to which multiple users can tune in and is analogous
to broadcast TV. A unicast delivers a stream to a single user over a
dedicated connection, allowing this user to view the video start-to-finish
or using VoD controls. The Hurricane Mediacaster can perform "uplink" and
"downlink" roles in an end-to-end system where the video has to be
transmitted over a distance. In one implementation, the uplink server sends
a multicast via the connecting network (e.g., the satellite link) to a
downlink server. The downlink server then delivers either a multicast or
unicast to users via a separate network (Internet, Intranet, wireless,
etc.) for viewing.
Within the next year, USA Video anticipates generating $12,500,000 in
revenues from sales of its end-to-end video distribution systems, as well as
associated technology licensing and customer support.
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Research & Development
----------------------
Prior to 1999, USA Video conducted seven years of research and
development of its compression VoD technology. In 1999, USA Video's focus
shifted to promoting and marketing its products and services, with research and
development directed primarily at supporting sales. The costs of research and
development have been absorbed by USA Video and will not be borne by its
customers. USA Video has begun to build a sales force and is pursuing
alliances and contracts necessary to generate interest in the technology and
sell its products and services within targeted industries.
The Company spent the following amounts in the past three years on research
and development:
-----------------------------------------------
1997 1998 1999
-----------------------------------------------
$2,668 $24,000 $93,337
-----------------------------------------------
The Patents
-----------
USA Video controls multiple jurisdictional patents important for protecting
Video-on-Demand technology and developing Video-on-Demand systems. Ownership of
these patents is believed to bring value to USA Video, both through potential
future licensing income and as an aid in developing future marketing
opportunities. However, the patents are not critical to the current development
of business.
USA Video applied for an exclusive U.S. patent for its Store and Forward
VoD technology on February 1, 1990. Corresponding overseas applications were
filed in 1992. USA Video was granted U.S. Patent # 5,130,792 on July 14, 1992.
The market for this technology has since expanded and USA Video is investigating
the applicability of its patent to the multiple deployments now under way using
any kind of switched connection, such as telephone lines, in video transmission
to educational institutions, corporations, government entities, and home end-
users.
In 1999, the U.S. Patent Office declined a request to reinstate this
patent, which had expired because of an administrative oversight that led to
late payment of fees due in 1995. USA Video has further investigated reasons
for this administrative oversight and determined that additional factors beyond
its control were present. USA Video has appealed the denial of the patent
reinstatement. A final determination regarding reinstatement should occur in
2000, according to statements by Patent Office representatives.
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In 1999, USA Video received approval of its Store and Forward VoD patent
applications in five European countries: England, France, Germany, Italy and
Spain. The technological characteristics of the European Patents are based on
the U.S. Patent, covering systems for transmitting video programs to remote
locations over a switched telephone network, and are similar in scope to the US
patent claims. USA Video believes that these patents may cover technology for
transmitting video on the Internet. If so, infringing video transmissions that
either originate or are received in any of these five countries may be covered
by the European patents. Identical patents are pending in Canada and Japan. USA
Video is in the process of arranging to enforce its patents. These patents can
be valuable both as a source of licensing revenue, and by providing a market
advantage for expansion into Europe.
USA Video's Video-on-Demand patent has been extensively searched by USA
Video's patent attorneys to determine its strength. It is believed that the
patent will be difficult for infringers to challenge the validity of the
patent, and that the claims of USA Video's patent are broad enough to possibly
be of significant value in the market. However, it is not possible at the
present time to quantify the potential value of the patent.
The scope of the market for licensing of USA Video's Video-on-Demand patent
will be determined by how expansive the market for encoded video products
becomes, how many major industry players develop profitable VoD markets, and the
technology used to implement the products. USA Video intends to vigorously
defend its existing patents from infringement and continue to apply for
additional patents in the global market place.
Evolution of the Industry
- -------------------------
Until recently, Video-on-Demand was marketed as a service that was to be
provided by cable operators to the average consumer's home television using set-
top boxes and digital video systems. However, there were several hurdles to
successful deployment of VoD to homes, including:
. Lack of sufficient bandwidth to support the expected two-way data transfer
requirements;
. Slow digital upgrades to cable systems and therefore a limited clientele for
the service;
. Insufficient numbers of set-top boxes and the high cost of these units;
. Dissimilar interfacing requirements; and
. No appealing features of the service other than user control over video
delivery.
Considering the cost of a set-top box, $250 and up, minimal available content,
and the lack of sufficient features to make the system attractive, consumers
were content to continue renting tapes for their VCRs and subscribing to a cable
service.
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The advent of the Internet and all of its interactive features refocused
attention on interactive video using computers and television, of which VoD is
one of many parts. However, most Internet interactions involve transfer of
relatively small files such as data requests, text, and small uncomplicated
images. On the other hand, uncompressed video files are massive, and
bottlenecks can result from the inadequate availability of bandwidth used to
relay content to end users. Now, with more and more bandwidth being installed
and the price per unit of bandwidth dropping, the potential for market
acceptance of digital video distribution is closer to reality.
USA Video's experience in the industry leads it to believe that the cost of
bandwidth and supporting equipment, such as cable modems, will continue to
decrease even more dramatically over the next two years, bringing expanded use
of high bandwidth applications to the general market. Until then, however,
improved compression techniques allow the use of existing bandwidth, even
telephone lines, to achieve some of the same features. In short, the market
conditions are ripe for mainstream VoD acceptance, as validated by experts in
the field:
. According to Nathan G. Muller of Strategic Information Resources, average
sales of VoD are more than 12 times greater than sales of pay-per-view
services.
. According to Veronis, Suhler & Associates, communications industry analysts,
total U.S. spending on media will reach $663.3 billion by 2003. The 7.5%
combined annual growth rate will make communications the second fastest-
growing industry (behind telecommunications) among the top 12 U.S.
industries.
(Note: Neither of the above reports was prepared for USA Video, nor were
the preparing parties compensated by USA Video.)
According to Veronis, Suhler & Associates, in terms of growing end-user
markets, in 1998, households spent $6.1 billion accessing the Internet, up 33.7%
over 1997, and an additional $8.5 billion purchasing products over the Internet,
more than seven times the 1997 total. Business-to-business electronic commerce
was nearly five times higher than consumer purchases in 1998, totaling an
estimated $40 billion.
According to Veronis, Suhler & Associates, revenues of publicly reporting
subscription video services ("SVS") companies rose 17.7% to $34.4 billion in
1997, the third consecutive year of double-digit growth. SVS operators accounted
for $27.9 billion of the total, while cable and pay-per-view networks accounted
for $6.4 billion. Total SVS spending, including advertising, subscriber and pay-
per-view, is forecasted to rise to $66.4 billion in 2002 from $38.5 billion in
1997, an 11.6% compound annual growth rate.
This is the current market upon which USA Video is focusing its attention.
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Competitive Conditions
----------------------
USA Video competes in the Video-on-Demand, streaming video, video systems,
and Internet services markets involving transmission of data by wired and
wireless methods, including satellite, radio and other signals, telephone lines,
cable, etc.
Where once the market was relatively limited, video via the Internet is
now very widespread. Many large companies (i.e., Microsoft, IBM, and others),
which had been relatively small players in the field are now entering in a very
significant way. Although technically, USA Video probably ranks in the top 25,
its market share would rank it much lower, because it is only beginning to
receive broad market awareness. However, USA Video believes it has an advantage
over its competitors in three primary areas:
. Wavelet compression technology, which is quickly becoming an established
alternative to the MPEG method.
. Its patented video streaming technology, which provides high fidelity digital
video to modem users (28.8k and 56k) as well as high-bandwidth users (cable
modems, DSL, etc.); and
. Its ability to tailor and scale system solutions to meet the various needs of
a diverse client base in education, corporate, and consumer markets.
Efficient compression is a significant advantage in both low and high
bandwidth applications. For low bandwidth, Wavelet delivers high fidelity video
when others methods cannot. For high bandwidth, greater frame rates and picture
sizes can be achieved for comparable file sizes.
USA Video believes there are a handful of dominant players in the Internet
video field, including Real Networks, Microsoft (via its Windows Media Player),
Broadcast.com, Akamai (formerly Intervu), and several others. Because of the
extreme interest in the field, many mergers are underway and major players
change fairly regularly. USA Video believes that the fluid nature of the
industry will allow newcomers to thrive and emerge in leadership positions if
they have technically superior, cost effective, properly marketed products and
services.
USA Video's goal is to exploit a market opportunity, and this opportunity
is customized system solutions. Although there are many companies developing
system components, such as video servers, compression methods, and delivery
infrastructure, USA Video's engineers and system architects design and develop
video streaming systems to meet the needs of its clients and integrate these
systems into the clients' business models and infrastructures. There is a very
large market for this expertise, as many diverse customers convert to digital
content formats. USA Video currently has more than 20 outstanding proposals and
over 100 active leads for such systems.
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General Development of the Business
Development Plan
- ----------------
An integral part of USA Video's strategy is to develop as a market leader
to take advantage of the demand for its products and services. USA Video's
business development approach includes the following key elements with the goal
of focusing on specific markets while creating a broad market awareness of its
unique technology:
. Complete building the sales and marketing teams and equip them with the
tools and information they need to be successful;
. Expand current sales contracts and other income-generating licensing
agreements;
. Identify and penetrate niche markets and increase Internet applications;
. Continue developing a significant content library that includes
educational, entertainment, and other content with the objective of
providing total packaged systems;
. Use the technology itself, as well as more traditional advertising and
marketing, to create an industry-wide awareness of USA Video's unique and
patented VoD technology;
. Based on a solid licensing program, identify potential patent infringements
and aggressively enforce technology ownership rights;
. Pursue grants and other non-traditional sources of revenue as well as
service contracts;
. Establish strategic and synergistic alliances and partnerships for:
* Multiplying marketing efforts,
* Developing and exploiting complementary technology,
* Performing specific project work,
* Seeking opportunities for licensing of patent and content rights;
. Continue with research and development in order to maintain leading-edge
VoD technology; and
. Develop feedback mechanisms to drive market-driven product development.
Currently, maximum emphasis is being placed on raising public, industry,
and market awareness of the capabilities of USA Video's technology. The major
industry markets targeted are education, entertainment (including movies, music
and music videos, and sports), training and e-commerce.
. Education - includes colleges, universities, and elementary and high schools
where video can be delivered to classrooms or offices and viewed on desktop
computers or television. With instant digital access to enormous libraries,
instructors will be able to create specialized video programs and students
will be able to access material at their convenience. The current inefficient
method of copying, mailing and logging videotapes can be eliminated.
. Entertainment - includes residential access to movies, sports and other
entertainment resources at the user's convenience, eliminating the time
restrictions and limited choices of cable television and pay-per-view
television. Additionally, people will have instant access to
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regional information services such as weather, traffic conditions, sightseeing
destinations, and similar choices.
. Training - includes corporate and motivational training procedures and other
instructions needed by workers in any profession from medical and surgical, to
architecture and design and factory and construction workers.
. E-Commerce - will be greatly enhanced by true, high quality VoD technology as
research has shown that interactive video is far more effective than static
banners or other advertising currently deployed on the Internet. The targeted
markets are vast and include books, music, videos, travel and hospitality,
clothing, and many others.
The transmission vehicles targeted for the VoD technology are the Internet,
intranet systems, cable television, wireless, and satellite. Although optimally
designed for fiber optic cable, which is currently being installed worldwide and
which provides almost unlimited bandwidth for video and data transmission, the
VoD technology provides fast, high quality, full screen, full motion video and
audio using even existing twisted pair technology and a common home modem.
USA Video has fully operational systems in the following two markets:
. Education - Client is Project Learn (www.learn.K12.ct.us).
. Entertainment - Client is Inetcable.com (www.inetcable.com).
In addition, USA Video is targeting the following markets: airport security;
sports; college; public education; home entertainment; and advertising markets.
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Marketing Plan
- --------------
USA Video's focus is to expand market awareness of the products and
services identified in the "Introduction" and "USA Video's Technology" sections
of this document. USA Video intends to demonstrate the value of its technology
and technical expertise to the industry by:
. Selling and deploying initial end-to-end video distribution systems in
education, corporate, and entertainment markets;
. Validating the robustness, versatility, and reliability of these systems
through close post-delivery relationships with clients; and
. Leveraging these deployment successes into additional sales of systems and
USA Video's other products and services.
USA Video believes the initial appeal of its system will be based on the
following:
. The ability to provide on-demand access to a client's specialized content, be
it educational video resources, corporate records and training resources,
government archive retrieval and legislative activities, or other specialized
areas.
. The ease with which users can view digital video information whenever
desired, eliminating the need for videocassettes and other analog formats.
. The adaptability of each solution to available budgets in the public and
corporate sectors.
USA Video is using a number of market models to gain market entry with
sales of video systems, content, and services. One successful model is to work
with education or entertainment content providers and to convert the videos from
tape directly to encoded digital media. This gives USA Video the ability to sell
complete turnkey solutions that include content, which should generate a
distinct stream of licensing revenue.
A sales model for clients not interested in owning and maintaining their
own systems is for USA Video to host the video application on its system and
offer this as a service. This model dramatically reduces the upfront costs to
companies interested in the technology but not able to afford a total system.
These companies would make small periodic payments rather than a one-time large
payment, which may be a more economical entree into digital video technology. In
addition, these companies do not have to train employees on new hardware and
software, and no new management or maintenance of hardware and networks is
required. The downside of this model is that the company has less control of the
overall content development and delivery process.
USA Video believes the majority of near-term sales will come from video
distribution systems. However, these sales provide a one-time revenue source,
excluding content and technology licensing. Therefore, as greater market
awareness of USA Video's capabilities is achieved, USA Video will pursue
recurring revenue generating opportunities, including:
. Technology licensing;
. Content licensing; and
. Advertising associated with content and site hosting.
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<PAGE>
Diversification of USA Video's products and services will prevent the loss of
any one revenue stream from impacting the overall business.
Another marketing direction will be to develop a complete line of off-the-
shelf systems and services, to be advertised on USA Video's website. While
product customization is currently a corporate strength, it also hinders volume
sales and quick turn-around. USA Video's website will feature a questionnaire
that allows potential customers to define system or service requirements, then
submit these requirements for staff evaluation. A timely response to the
customer will identify the system or service best suited to their needs. As USA
Video identifier common system demand it will be possible to have these
configurations prepared and ready for delivery.
In terms of target markets, USA Video will focus its efforts on those
markets it believes will not only benefit greatly from its technology, but which
are likely to be the most receptive to its products and services, notably the:
. Educational sector;
. Corporate sector;
. Government sector; and
. Entertainment sector.
USA Video believes market share will be achieved through:
. Direct competition in the marketplace;
. Affiliations with other companies with dominant positions in their fields;
and
. High-profile, capital-intensive marketing and advertising campaigns.
16
<PAGE>
Plan of Operation Over the Next Twelve Months
Corporate Agreements
- --------------------
During 1999, USA Video expanded its management team, obtained European
patents, added Wavelet compression technologies to standard MPEG offerings,
founded Merging Rivers Media Corporation, a full-service ad subsidiary on the
West Coast focusing on entertainment-related applications, and began generating
sales and revenues. The Merging Rivers Media consultants retained to manage
this subsidiary did not produce the agreed-upon results, and their contracts
were terminated in October and November of 1999. USA Video has brought legal
action against one of the consultants for violations of contract. Currently,
this subsidiary is inactive.
USA Video is in active negotiations with a number of companies to establish
business relationships of mutual benefit. USA Video believes that agreements
with the following companies will help facilitate its success in the
marketplace:
VIANET: USA Video has an agreement with Vianet Technologies, which is a
------
research company that has developed a Wavelet technology that USA Video uses.
As part of this agreement, USA Video will develop a Unix-compliant Wavelet
codec, allowing for expansion of the market to include Unix-based operating
systems.
The following are main terms of the agreement:
Objective: The parties agreed to work together to develop a Unix
Wavelet product.
Licensing: The end resulting decoding codecs will be licensed to USA
Video at an exclusive level for marketing to Unix-based educational and
corporate training market applications.
Payment: USA Video agreed to a 50/50 revenue split or per unit cost,
whichever is greater, for all Unix-based decoding applications sold with
the Vianet Unix decoding codec included.
Ownership of the Source Code: Ownership of the source code and
resultant decoding codec remains solely that of Vianet.
Technical Support: Both parties will contract with the other when
necessary for technical support and assistance at competitive technical
support rates.
Development Costs: USA Video committed to paying 50% of the
development costs of the ported unix decoding codec.
17
<PAGE>
Liability: Neither party shall be liable to the other party for any
indirect, special, incidental or consequential damages.
Duration: Unless terminated earlier by either party on 30 days prior
written notice to the other party (subject to the terminating party
fulfilling all outstanding commitments and obligations), the term of the
agreement commenced on February 7, 2000 and will continue in effect for
twelve consecutive months. Thereafter, the agreement will be renewed
annually by mutual agreement.
Default: In the event either party defaults in its performance, the
other party must provide written notification to the defaulting party of
the default. If the defaulting party fails to correct the default within
30 days, the other party, upon written notice to the defaulting party, may
terminate the agreement and recover whatever damages may be recoverable by
operation of law.
UUNET - Client Referral Agreement: USA Video has signed an agreement with
---------------------------------
UUNET to receive compensation for client referrals to UUNET. The following are
main terms of the agreement:
Compensation: Compensation for referrals is based on the compensation
rate in effect on the date UUNET receives the referral form from USA Video.
UUNET reserved the right to change the rates. Payments are made thirty
days from the end of the month in which service provided by UUNET is
operational and billable. UUNET reserved the right to charge back to USA
Video any compensation paid in connection with a referred client that
cancels service within the first six months after service is operational
and billable.
Pricing and Products: UUNET reserved the right to change its prices
and to discontinue any service offering with no advance notice.
Termination: USA Video's participation in the client referral program
may be terminated with or without cause at any time either by USA Video or
UUNET upon 30 days' written notice. If terminated without cause, UUNET
will pay USA Video all amounts due as of the effective date of termination
and will pay compensation for any qualifying revenue received by UUNET
within a 120 day period from the effective date of termination.
Liability: Neither party shall have any liability whatsoever for any
incidental, consequential or special damages suffered by the other or by
any assignee or other transferee of the other, even if informed in advance
of the possibility of such damages.
UUNET Co-Location Services Agreement: USA Video has signed an agreement to
------------------------------------
co-locate its servers in the UUNET data center in Vienna, Virginia, and to
collaborate in providing an overall package of Internet services as part of USA
Video's turnkey solution.
18
<PAGE>
The following are the main terms of the agreement:
Payment: USA Video must pay the following for use of UUNET's
equipment and services:
1. Equipment Space - a monthly fee for use of one half-cabinet;
2. On-Site Support and Installation - no charge for the first
two hours, but an hourly charge for any additional time billed in 15
minute increments, with a minimum call of 15 minutes.
3. Internet Connectivity - one time start-up fee and a monthly
fee thereafter based on USA Video's sustained usage of the connection.
UUNET reserved the right to change the rates for services and
space provided under the agreement by providing written notice to USA
Video at least 60 days in advance of the effective date of the change.
If USA Video cancels during the term commitment, USA Video will be
required to pay 75% of the monthly fee for the space and the then-
current bandwidth tier for each month remaining in the term.
Indemnity: USA Video agreed to indemnify UUNET against actions by any
person claiming an ownership or possessory interest, lien, trust, pledge,
or security interest in any equipment.
Insurance: USA Video agreed to maintain, during the term of the
agreement for each space, the following insurance:
1. commercial general liability insurance - $2 million or more per
occurrence for bodily injury, personal injury and property damage;
2. employer's liability insurance - $1 million or more per
occurrence;
3. workers' compensation insurance
4. commercial automobile liability insurance - applicable to bodily
injury and property damage in an amount of $1 million or more per
occurrence; and
5. umbrella or excess liability insurance - $1 million or more to
apply over commercial general liability, employee's liability and
automobile liability insurance.
Consequential Damage Waiver and Limitation of Liability: Neither
party is liable for any indirect, incident, punitive or consequential
damages that result from customer's or customer's users' use of the UUNET
network and the service including any damages for loss of data resulting
from delays, non-deliveries, misdeliveries or service interruptions.
No Warranty: UUNET provides the space and service as is and assumes no
liability for the for the content of USA Video's information residing on
its equipment or transmitted through its facilities.
Publicity: Neither party may use the other party's name, trademarks,
tradenames other proprietary identifying symbols without the prior written
approval of the other party.
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<PAGE>
Confidentiality: Each party's confidential or proprietary information
disclosed is held confidential by the receiving party. UUNET's performance
under the agreement, the quality of UUNET network performance, and any data
provided by UUNET to USA Video regarding the performance of the UUNET
Network is deemed UUNET Confidential Information. Neither party may
disclose the other's confidential information to third parties without the
other party's written consent. Each party may disseminate the other
party's confidential information among its employees only on a need-to-know
basis and may use the confidential information only for the purpose of
performing its obligations under the agreement. To the extent a party is
required by applicable law, regulation or by a government agency or court
order, subpoena, or investigative demand, to disclose the existence or
terms of the agreement, or the other party's confidential information, the
party may use its reasonable efforts to minimize the disclosure and obtain
an assurance that the recipient will accord confidential treatment to the
confidential information, and must notify the other party contemporaneously
of the disclosure. UUNET, in its discretion, may terminate the agreement
for cause upon 10 days' notice and without penalty in the event of any
breach by USA Video of this confidentiality terms of the agreement.
Duration: The term of the agreement was 3 months beginning in June
1999 and ending in September 1999. The contract is now on-going and does
not have a specific term or expiration date. USA Video must maintain a
minimum rate of use of the services and make timely payments for the UUNET
equipment and services being utilized in order to avoid termination of the
agreement.
EXODUS COMMUNICATIONS: USA Video has a similar agreement with Exodus
---------------------
Communications for bandwidth and other services as well as access to Exodus
Communications marketing organization and services. Exodus Communications hosts
some 40 percent of the US corporate websites.
The following are main terms of the agreement:
Authority: Exodus has authorized USA Video to demonstrate and market
the Exodus Services and solicit orders for the Exodus services, which
include monthly recurring facilities, bandwidth and managed services listed
on Exodus' price lists.
USA Video's Obligations: The following are USA Video's obligations:
1. Marketing and Solicitation - USA Video will use its commercially
reasonable efforts to market and solicit orders for Exodus services to USA
Video customers, using only current forms of written Exodus sales and
promotional materials.
2. Use of Exodus Trademarks - USA Video may use certain Exodus
trademarks as authorized in writing by Exodus from time to time.
20
<PAGE>
3. Relationship with Exodus - USA Video acknowledged and agreed that
the relationship between it and Exodus is that of independent contractors.
USA Video may represent itself as an authorized Exodus Alliance Partner and
solicitation agent for Exodus services.
4. Reporting - USA Video must provide monthly written reports to
Exodus listing the names of all potential customers that USA Video has
solicited on behalf of Exodus and indicating the status of each
solicitation.
5. Competitive Activities - USA Video agrees to notify Exodus prior
to entering into any agreements with any third parties to provide services
similar to those in the agreement for third parties or to assist any third
party in activities that are competitive with Exodus' business.
Exodus Obligations: The following are USA Video's obligations:
1. Marketing and Solicitation - Exodus must make available to USA
Video all pertinent sales and marketing information and assistance,
including current price and data information, sales aids, counseling and
assistance, including periodic visits by Exodus sales and marketing
personnel.
2. Use of Alliance Partner Trademarks - In connection with the
performance of its obligations under the agreement, Exodus may use the USA
Video name and certain other USA Video trademarks on its Web site to
identify USA Video as an authorized partner and as otherwise authorized in
writing by USA Video from time to time.
3. Training - Exodus will conduct, at its expense, initial training
for USA Video and periodic training as necessary.
4. Solicitation Fees - Exodus will pay to USA Video an amount equal
to 10% of all Exodus services fees received by Exodus form a qualified
Exodus customer.
5. No Obligation to Provide Services - Nothing in the agreement
requires Exodus to provide services to any potential customer, whether or
not solicited by USA Video pursuant to the agreement.
Duration: The initial term of the agreement is for a period of 1 year
from the Effective Date (November 11, 1999) and will renew automatically
for an additional 1 year term unless either party provides the other party
written notice at least 30 days prior to the end of the term that the party
does not want to renew the agreement.
Termination: Either party may terminate the agreement for convenience
at any time providing 30 days' prior written notice to the other party.
Either party has the right to terminate the agreement if (i) the other
party breaches the agreement and fails to cure the breach within 10 days
after written notice of the breach, (ii) the other party becomes
21
<PAGE>
the subject of a voluntary petition in bankruptcy or any involuntary
proceeding relating to insolvency, receivership, liquidation or composition
for the benefit of creditors.
Confidential Information: Each party acknowledged that it will have
access to certain confidential information of the other party concerning
the other party's business, plans, customers, technology and products,
including each party's proprietary software and customer information. Each
party agreed that it will not use in any way except as expressly permitted
by the agreement any of the other party's confidential information and will
take reasonable precautions to protect the confidentiality of the
information.
No Warranties: Exodus does not make any and all express and/or
implied warranties regarding the Exodus services or any materials provided
by Exodus to USA Video pursuant to the agreement.
Limitation of Liability: In no event will Exodus be liable to USA
Video or others for any lost revenue, lost profits, replacement goods, loss
of technology, rights or services, incidental, punitive, indirect or
consequential damages arising from or related to the agreement.
Plan of Operation Over the Next Twelve Months
---------------------------------------------
USA Video has approximately $500,000 in cash and liquid assets available to
fund its business plan. However, it will also be necessary for USA Video to
sell additional common stock in order for it to put its business plan into
operation. Specifically, USA Video must raise the funds necessary to market and
sell its products and services and continue research and development. There can
be no guarantee that USA Video will be able to raise funds on acceptable terms,
or at all. If USA Video succeeds in raising additional funds through the sale
of common stock, the ownership interest of holders of existing shares of USA
Video's common stock will be diluted. The principal aspects of the business
plan for the next 12 months include the following:
USA Video has budgeted $4 million of cash expenditures for the current
year. This level of expenditure is consistent with supporting full execution of
USA Video's business plan. There may be unforeseeable circumstances that could
result in expenditures below budget. To the extent actual costs associated with
sales are lower than anticipated, for example, or to the extent that R&D efforts
result in much more rapid technical progress than anticipated, budgets for R&D,
service infrastructure and other expenses may not be fully expended. To
summarize:
. Sales & marketing $1.6 million *
. Research & development 0.9 million
. Service infrastructure** 0.5 million
. Working capital / other 1.0 million
-----------
. Total $4.0 million
===========
* Includes $250,000 of infrastructure expenses associated with sales
and marketing.
** In literal terms, "product support."
22
<PAGE>
Principal aspects of the business plan for the next 12 months include the
following:
. Organizational Expenses $0.22 million
. Marketing and Sales Expenses 1.6 million
. Product Support Expenses (referred to in 0.5 million
the USA Video budget as "Service
Infrastructure")
. Administrative Expense 0.18 million
. Product Development and Acquisition * ---
. Research and Development (includes 0.9 million
$250,000 of associated infrastructure
expenses)
. Employees 0.6 million
------------
Total $4.0 million
=============
* It is no longer part of USA Video's plan to have third-party
development of our products, but instead to develop products in-house,
through joint ventures or through licensing agreements the cost of which
would pass through to customers.
USA Video's products and services are primarily PC-based; however our
business plan includes expansion into other hardware/operating system markets,
such as Apple and Unix. Development and demonstration of capabilities on these
systems, which is prerequisite to successful marketing, will require purchase of
related servers.
Organizational Expenses: The Company has incurred and will continue to
incur organizational expenses, including legal and accounting fees, in
connection with corporate matters, and raising the capital necessary to carry
out its business plan.
Marketing and Sales Expenses: In order to market and sell its services and
products, USA Video will incur expenses for salaries for marketing and sales
personnel and for Internet access, travel and advertising. USA Video will also
incur expenses to expand its corporate website in order to support its
marketing, sales and customer support activities. These expenses will include
the cost of fees for consulting services and for purchasing additional server
hardware.
Infrastructure Expenses: USA Video will incur expenses for renting and
furnishing office space, for acquiring computers and software, for telephone and
cable lines, and satellite related equipment. Infrastructure expenditures will
need correspond to the growth in the business operations and the commensurate
increase in the number of employees.
Product Support Expense: The Company will incur expenses to hire personnel
to provide technical support for customers who purchase its VoD product.
Administrative Expense: The Company will also incur expenses for hiring
personnel and acquiring equipment for processing sales orders, and for routine
administrative support of its operations.
Product Development/Acquisition: The Company will incur expenses
principally for fees paid to third parties for development of its products, or
for the acquisition of the rights to other products.
23
<PAGE>
Research & Development: The Company has carried out some preliminary
investigation into the development of an advanced Wavelet algorithm to adapt
the existing Wavelet algorithm to other operating platforms such as Unix.
Additional staff has been identified to commence development and integration of
these algorithms into initial Wavelet properties. The program commenced during
the first quarter of 2000.
Employees: The Company currently has a total of 25 employees, consisting
of 13 full-time employees. The Company anticipates that the number of employees
will grow to 33 over the next year, including 3 in the sales division, 2 in the
engineering division, 2 in the operations division, and 1 administrative person.
Outlook: Issues and Uncertainties
----------------------------------
Business Risks
The Company operates in a highly competitive business, which has a number
of inherent risks. These may be summarized as follows:
1. USA Video has Not Proven That It Can Produce or Sustain a Profit. USA
----------------------------------------------------------------
Video may never become profitable and if it does achieve profitability, the
company cannot be certain that it will remain profitable nor that profits will
increase in the future. USA Video's auditors have expressed doubt about the
company's ability to continue as a going concern. At this time, USA Video has
not achieved profitability and, in fact, expects to incur net losses for the
foreseeable future. USA Video's net losses for the years ended December 31,
1999, 1998 and 1997 were $1,657,078, $981,598 and $678,156, respectively. As a
percentage of revenues, net losses were approximately 800% in 1999. No revenue
was generated in 1998 or 1997. USA Video's limited operating history contributes
to the difficulty of predicting the company's potential to generate a profit.
USA Video expects to continue to increase its marketing and sales expenses from
$420,000 in 1999 to $1.6 million in 2000 (including $250,000 of infrastructure
expenses associated with sales and marketing) and $4.1 million in 2001; product
development expenses from approximately $100,000 in 1999 to $900,000 in 2000 and
$1.3 million in 2001; and general and administrative expenses from approximately
$1.1 million in 1999 to $1.5 million in 2000 and $4.6 million in 2001. As a
result of these increased expenditures, USA Video will need to generate
significant additional revenue and/or raise funds to achieve profitability.
2. USA Video Faces Intense Competition from a Multitude of Competitors.
-------------------------------------------------------------------
USA Video may not be able to compete effectively against its major competitors.
USA Video's products and services compete against several hundred competitors,
including many large companies such as Microsoft and IBM. Although technically,
USA Video probably ranks in the top 25, its market share would rank it much
lower, because it is only beginning to receive broad market awareness. Some of
USA Video's competitors have greater financial, marketing and other resources
than those of USA Video. With few barriers to entering the marketplace,
existing and future competitors may be able to institute and sustain lower
prices and imitate features of USA Video's products or services, resulting in a
reduction of USA Video's share of the market.
24
<PAGE>
3. USA Video Relies on New Products and Services Which Are Expensive to
--------------------------------------------------------------------
Maintain But Have Not Proven to Generate Revenue. Given that USA Video's
- ------------------------------------------------
business and financial plans focus on products and services which are relatively
new, there can be no assurance that existing sales levels can be maintained or
that increased sales levels can be achieved. Actual sales thus far for calendar
year 2000 are $240,000. Internal cash generated by operations may not permit the
level of research and development spending required to maintain the stream of
new service improvements that may become necessary and outside financing may not
be available. USA Video is using certain relatively new software products and
the developers of this software are, in some cases, still working to improve
certain essential features of the software including a feature to allow the
transfer of data to be done on a secure and confidential basis.
4. USA Video's Technologies May Become Obsolete If Not Continually
---------------------------------------------------------------
Improved. USA Video may not be competitive and maintain a level of demand for
- --------
its products and services sufficient to support its business operations if it is
unable to continue to advance its technologies, such as its Wavelet and Store
and Forward Video technologies. USA Video may incur significant expenses in
developing new technologies. USA Video's technologies could be surpassed by a
competing technology. USA Video will have to continue to make significant
investments in research and development to ensure its products and services
remain competitive.
5. USA Video May Not Be Able to Maintain a Competitive Position Due to
-------------------------------------------------------------------
the Pace at Which the Marketplace is Changing. The demand for USA Video's
- ---------------------------------------------
products and services may rapidly decline if the marketplace for its products
and services changes. USA Video's success is dependent on its ability to adjust
to change and meet new demands. Since the marketplace for USA Video's products
and services is relatively new, USA Video may not be able to predict the changes
that will occur and may not be able to modify or update its products and
services in time to prevent a decline in its share of the market.
6. The Instability of the Internet May Impact a USA Video Customer's
-----------------------------------------------------------------
Ability to Utilize USA Video's Products and Services. The Internet may not be
- ----------------------------------------------------
able to support the demands placed on it by continued growth. USA Video is
highly dependent on the Internet to provide its products and services to the
marketplace. Clients that employ the Internet for transfer of video data could
experience service degradation or latency because of overworked search engines.
In this case, the tendency of a dissatisfied customer might be to blame the
video system provider rather than the ISP. Shortages of Internet addresses are
more an inconvenience in setting up a web site than a factor that could impact
operations.
25
<PAGE>
7. USA Video Depends Upon a Small Number of Key Persons to Implement Its
---------------------------------------------------------------------
Business Plan. USA Video is dependent on a relatively small number of key
- -------------
employees to implement its business plan, the loss of any of whom may affect its
ability to provide the required quality of service and technical support
necessary to achieve and maintain a competitive market position. USA Video does
not have an employment agreement with any of its employees, and, as a result,
there is no assurance that the key employees will continue to manage USA Video's
affairs in the future. USA Video has not obtained key man insurance with
respect to such employees. The key employees are as follows:
Edwin Molina, President and Chief Executive Officer
Anton J. Drescher, Chief Financial Officer and Secretary
Anthony J. Castagno, Chief Operating Officer
Ronald L. Patton, Chief Technical Officer
Daniel J. Sciro, Vice President of Sales
8. USA Video's Marketing Plan is Based Upon a Number of Assumptions Which
----------------------------------------------------------------------
May Not Prove Valid. USA Video's internal marketing plan may not meet its
- -------------------
objectives if the assumptions upon which it is based prove to be invalid or
incorrect. In general, the assumptions of the marketing plan are as follows:
. The appeal of USA Video's end-to-end video distribution systems will
continue to generate client interest;
. Market size estimates cited in the "Evolution of the Industry" section
are valid;
. Competition is not suppressed by an overwhelming technical
breakthrough by one of the major players in the field; and
. USA Video's technology continues to keep pace with industry standards
and with the products of its competitors.
Marketing expenditures are to be funded partly from the proceeds of equity
private placements, the exercise of stock options and warrants and cash flow
from operations. Poor market acceptance of USA Video's products and services or
other unanticipated events may result in lower revenues than anticipated, making
the planned expenditures on marketing and promotion unachievable.
9. USA Video May Not Be Able to Retain Key Personnel If It Is Unable to
--------------------------------------------------------------------
Adequately Compensate Them Which Could Affect Its Competitive Position. USA
- ----------------------------------------------------------------------
Video may not generate sufficient revenue to compensate its highly skilled
employees and thereby may not be able to maintain its competitive position. USA
Video has attracted experienced engineers and scientists in their respective
fields, as well as experts in marketing, sales, and production management. The
corporation's ability to retain this caliber of personnel will depend upon its
ability to provide adequate compensation for this talent, which in turn depends
on generation and maintenance of sales volume.
26
<PAGE>
10. USA Video May Be Unable to Control the Quality or Reliability of the
--------------------------------------------------------------------
Products and Services It Receives from Third Parties. USA Video utilizes the
- ----------------------------------------------------
services of third party contractors to provide certain technical services,
telecommunications hardware, computers, software and communication lines and is
directly affected by the quality of the goods and services provided by, and the
reputations of, those third parties. USA Video utilizes the following third
party vendors:
. SeaChange Systems - Baseline Video Servers
. Cyberstorage Systems - Baseline Video Servers
. PVI Systems, Inc. - Systems engineering consulting
. Vianet Technologies - Baseline Wavelet algorithms
Additionally, there can be no assurance that USA Video will successfully
maintain relationships and affiliations with third parties on terms satisfactory
to USA Video. An unanticipated termination of a relationship with a third party
could adversely affect USA Video's results of operations.
11. USA Video Has Not Acquired Liability Insurance Which Places the Burden
----------------------------------------------------------------------
of Paying Damages for Liability Claims Solely on USA Video. USA Video has not
- ----------------------------------------------------------
acquired liability insurance with respect to the provision of its products and
services. Without insurance to cover damages resulting from liability claims
stemming from its products or services, USA Video must shoulder any award of
damages against it which could significantly affect its business operations if
the award is substantial.
12. Government Regulation of the Internet May Negatively Impact USA
---------------------------------------------------------------
Video's Ability to Provide the Marketplace With Its Products and Services. The
- -------------------------------------------------------------------------
laws and regulations applicable to the Internet directly impact USA Video
because its products and services are heavily dependent on the Internet as a
communications and commercial medium. These laws and regulations are still
evolving and unclear and have the potential of damaging its business. No
specific laws are pending that will have a negative impact on the Internet.
However, any of the following laws pertaining to the Internet, if enacted, could
potentially have a negative impact on the marketplace for USA Video's products
and services due to either an impact on an Internet audience or an impact on the
clients who use USA Video's products and services to convey their video images
through the Internet to an audience:
. regulating the price of accessing the Internet;
. taxing transactions that occur over the Internet could;
. regulation of content on the Internet;
. privacy on the Internet; and
. intellectual property ownership.
A number of proposals have been made at the federal, state and local levels that
would impose additional taxes on the sale of goods and services through the
Internet. Such proposals, if adopted, could substantially impair the growth of
electronic commerce and could adversely affect USA Video's operations.
27
<PAGE>
13. USA Video Requires New Capital to Sustain Its Operations. USA Video
--------------------------------------------------------
typically needs more capital than it has available to it or can expect to
generate through the sale of its products and services. At this time, USA Video
does not have sufficient cash resources to continue its operations for the next
twelve months. USA Video has had to raise and will continue to need to raise,
by way of debt and equity financing, considerable funds to meet its needs.
There is no guarantee that USA Video will be able to continue to raise the funds
needed for its business. Failure to raise the necessary funds in a timely
fashion will limit USA Video's ability to sustain its business.
14. Year 2000 Issues May Have a Material Adverse Effect on USA Video. USA
----------------------------------------------------------------
Video's products did not require any significant modifications for the Year
2000. However, USA Video may face Year 2000 issues as its seeks to coordinate
with other entities with which it interacts electronically, including suppliers,
customers and distribution partners. If USA Video discovers that certain of its
services need modification, or certain of its hardware and software is not year
2000 compliant, it will attempt to make modifications to its services and
systems on a timely basis. USA Video cannot provide assurance that it will be
able to modify these products, services and systems in a timely, cost-effective
and successful manner, and the failure to do so could have a material adverse
effect on USA Video's business operating results.
15. USA Video May Be Unable to Protect Its Intellectual Property, Trade
-------------------------------------------------------------------
Secrets and Know-How. Although USA Video employs various methods, including
- --------------------
trademarks, patents, copyrights and confidentiality agreements with employees,
consultants and third party businesses, to protect its intellectual property and
trade secrets, there can be no assurance that USA Video will be able to maintain
the confidentiality of any of its proprietary technology, know-how or trade
secrets, or that others will not independently develop substantially equivalent
technology. The failure or inability to protect these rights could have a
material adverse effect on USA Video's operations. Additionally, USA Video may
not receive a favorable ruling on the reinstatement of its lapsed patent for its
Store and Forward VoD.
16. USA Video May Be Found Liable for Infringement. USA Video's business
----------------------------------------------
activities may infringe upon the proprietary rights of others and those parties
may assert infringement claims against USA Video. Should that occur, the claims
and any resultant litigation could subject USA Video to significant liability
for damages and could result in invalidation of its proprietary rights. Even if
not meritorious, these potential claims could be time-consuming and expensive to
defend or prosecute, and could result in the diversion of management's time and
attention from USA Video's business.
28
<PAGE>
Risks Related to USA Video's Securities
1. Issuance of Additional Shares by USA Video May Have the Effect of
-----------------------------------------------------------------
Diluting the Interest of Shareholders. Any additional issuances by USA Video
- -------------------------------------
from its authorized but unissued shares may have the effect of diluting the
percentage interest of existing shareholders. Out of the 250,000,000 authorized
common shares of USA Video, 175,487,911, or 70%, remain unissued. The Board of
Directors has the power to issue such shares without shareholder approval. None
of the 250,000,000 authorized preferred shares of USA Video are issued. There
are outstanding warrants and options whose holders may acquire additional common
shares. USA Video fully intends to issue additional common shares or preferred
shares in order to raise capital to fund its business operations and growth
objectives.
2. Board of Directors Authority to Set Rights and Preferences of
-------------------------------------------------------------
Preferred Stock May Prevent a Change in Control by Shareholders of Common Stock.
- -------------------------------------------------------------------------------
Preferred shares may be issued in series from time to time with such
designation, rights, preferences and limitations as the Board of Directors of
USA Video determines by resolution and without shareholder approval. This is an
anti-takeover measure. The Board of Directors has exclusive discretion to issue
preferred stock with rights that may trump those of common stock. The Board of
Directors could use an issuance of Preferred Stock with dilutive or voting
preferences to delay, defer or prevent common stockholders from initiating a
change in control of the company or reduce the rights of common stockholders to
the net assets upon dissolution. Preferred stock issuances may also discourage
takeover attempts that may offer premiums to holders of USA Video's common
stock.
3. Concentration of Ownership of Management and Directors May Reduce the
---------------------------------------------------------------------
Control by Other Shareholders Over USA Video. The executive officers and
- --------------------------------------------
directors of USA Video own or exercise full or partial control over more than
20% of USA Video's outstanding common stock. As a result, other investors in
USA Video's common stock may not have as much influence on corporate decision
making. In addition, the concentration of control over USA Video's common stock
in the executive officers and directors could prevent a change in control of USA
Video.
4. Stockholders Do Not Have the Authority to Call a Special Meeting
----------------------------------------------------------------
Thereby Discouraging Takeover Attempts. Pursuant to USA Video's by-laws, By-law
- --------------------------------------
10.03, only the Board of Directors, the Chairman of the Board or the President
of USA Video have the power to call a special meeting of the stockholders
thereby limiting the ability of stockholders to effect a change in control of
USA Video.
5. USA Video Does Not Anticipate Paying Dividends to Common Stockholders
---------------------------------------------------------------------
in the Foreseeable Future Which Makes Investment in USA Video's Stock
- ---------------------------------------------------------------------
Speculative or Risky. USA Video has not paid dividends on its common stock and
- --------------------
does not anticipate paying dividends on its common stock in the foreseeable
future. The Board of Directors has sole authority to declare dividends payable
to USA Video's stockholders. The fact that USA Video has not and does not plan
to pay dividends indicates that the company must use all of its funds generated
by operations for reinvestment in its operating activities and also emphasizes,
as noted elsewhere in the Form 10, that the company may not continue as a going
concern. Investors also must evaluate an investment in USA Video solely on the
basis of anticipated capital gains.
29
<PAGE>
6. USA Video's Common Stock May Be Ineligible to Trade on the OTC
--------------------------------------------------------------
Bulletin Board Which May Have a Negative Impact on the Price of the Stock. USA
- -------------------------------------------------------------------------
Video has received extensive comments from the Securities and Exchange
Commission (the "SEC") on its Form 10 registration statement filed with the SEC.
Although USA Video intends to use its utmost efforts to resolve all of the SEC's
comments prior to being ineligible to trade on the OTC Bulletin Board, a
significant probability exists that it will not be able to resolve all comments
to the SEC's satisfaction in time. The price of USA Video's common stock will
more than likely decline if its common stock is not able to trade on the OTC
Bulletin Board. If USA Video's stock becomes ineligible to trade on the OTC
Bulletin Board, its stock will remain ineligible until such time as it resolves
all comments to the SEC's satisfaction and reapplies for inclusion on the OTC
Bulletin Board.
7. Requirements of SEC With Regard to Low-Priced "Penny Stock"
----------------------------------------------------------
Securities. "Penny stocks" are low-priced, and usually highly speculative,
- ----------
stock selling at less than $5.00 per share. USA Video's securities are subject
to Rule 15g-9 under the 1934 Act, which imposes additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and "accredited investors" (generally, an individual with
a net worth in excess of $1,000,000 or an annual income exceeding $200,000, or
$300,000 together with his or her spouse). For transactions covered by this
rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, the rule may adversely affect the ability of
broker-dealers to sell USA Video's securities and may adversely affect the
ability of stockholders to sell their stock in the secondary market.
8. Limited Liability of Executive Officers and Directors. USA Video's
-----------------------------------------------------
by-laws contain provisions that limit the liability of directors for monetary
damages and provide for indemnification of officers and directors. These
provisions may discourage stockholders from bringing a lawsuit against officers
and directors for breaches of fiduciary duty and may also reduce the likelihood
of derivative litigation against officers and directors even though such action,
if successful, might otherwise have benefited the stockholders. In addition, a
stockholder's investment in USA Video may be adversely affected to the extent
that costs of settlement and damage awards against officers or directors are
paid by USA Video pursuant to the indemnification provisions of the articles of
incorporation and by-laws. The impact on a stockholder's investment in terms of
the cost of defending a lawsuit may deter the stockholder form bringing suit
against one of USA Video's officers or directors.
30
<PAGE>
Financial Information About Industry Segments
The information in the financial statements provided with this registration
statement are incorporated by reference as though set forth here.
31
<PAGE>
ITEM 2. Financial Information
Selected Financial Data
As discussed in the section of this Form 10 entitled Evolution of the
Company, USA Video was in its development stage through 1999. However, a shift
has occurred and USA Video is now focused on marketing and selling its products
and services and as such expects revenues to significantly increase in 2000.
USA Video is essentially "emerging" from its development stage by fully
implementing its principal business.
The following selected financial data reflects the fact that USA Video was
in its development stage through 1999 and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition", "Plan of
Operations Over the Next Twelve Months" and the financial statements appearing
elsewhere in this registration statement.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
January 1, 1992
(Date of Inception
of Development
Stage) to
Item 1999 1998 1997 1996 1995 December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 20,500 $ 0 $ 0 $ 0 $ 0 $ 20,500
- ------------------------------------------------------------------------------------------------------------------------------------
Income / Loss ($1,684,468) ($ 981,598) ($ 678,156) ($ 658,983) ($ 3,168,518) ($ 18,786,880)
- ------------------------------------------------------------------------------------------------------------------------------------
Income / Loss
per share ($ 0.03) ($ 0.02) ($ 0.02) ($ 0.03) ($ 0.22)
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 995,351 $ 435,232 $ 418,354 $ 470,553 $ 303,260
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term
obligations $ 0 $ 0 $ 0 $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends
per share $ 0 $ 0 $ 0 $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
This Form 10 contains forward-looking statements. The words, "anticipate",
"believe", expect", "plan", "intend", "estimate", "project", "could", "may",
"foresee", and similar expressions are intended to identify forward-looking
statements. The following discussion and analysis should be read in conjunction
with the Company's Financial Statements and Notes thereto and other financial
information included elsewhere in this Form 10. This Form 10 contains, in
addition to historical information, forward-looking statements that involve
risks and uncertainties. USA Video's actual results could differ materially
from the results discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include those discussed below, as
well as those discussed elsewhere in this Form 10.
Status of Joint Venture and Subsidiary
USA Video owns a 50% interest in a joint venture named Adnet USA LLC, which
was incorporated as a California limited liability company. Formed in 1997, the
purpose of Adnet USA LLC was to provide internet advertising and web page
facilities to corporate customers. USA Video's joint venture partner is a
related company by virtue of common directors. USA Video's expenses related to
the joint venture were $174,144. USA Video and its joint venture partner agreed
to abandon the joint venture and consequently Adnet USA LLC is inactive.
Last year, Merging Rivers Media was formed as a subsidiary, but the
consultants retained to manage the subsidiary did not produce the agreed-upon
results, and their contracts were terminated in October and November of 1999.
USA Video has brought legal action against one of the consultants for violations
of contract. Currently this subsidiary is inactive.
32
<PAGE>
Revenues
No revenues were generated in 1997 or 1998. In 1999, revenues of $20,500
were generated from a sale to Enersphere, of which 50% is attributable to the
sale of media server hardware, software and peripheral system components
("hardware / software") and 50% is attributable to engineering services
associated with system development, integration, installation, training and
support ("engineering services").
The following revenue has been booked for contracts signed in year 2000:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Client Item(s) Revenue % %
hardware / engineering
software services
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Inetcable Technology (hardware / software $165,000 50 50
& services) for video
compression, streaming,
decompression, software
management and system
integration.
- -------------------------------------------------------------------------------------------------------
Polomania Media server system, services 15,000 50 50
- -------------------------------------------------------------------------------------------------------
(Proprietary Media server system, three 60,000 50 50
client) * encoding suites, services
- -------------------------------------------------------------------------------------------------------
-----------
- -------------------------------------------------------------------------------------------------------
Total $240,000 50 50
- -------------------------------------------------------------------------------------------------------
</TABLE>
* Client considers its identity with respect to the purchase, deployment
and use of this technology to be competitive and proprietary, and USA Video
has agreed not to disclose it. This agreement is not material to USA
Video's continuation as a going concern.
The following revenue is anticipated to be booked during the second quarter
for contracts signed in year 2000:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Client Item(s) Revenue % hardware % engineering
/ software services
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LearningStation.com Video server system $ 45,000 50 50
with satellite
downlink capability
- -------------------------------------------------------------------------------------------------------
ApplicationStation.com Three video server 135,000 50 50
systems with
satellite downlink
capability
- -------------------------------------------------------------------------------------------------------
----------
- -------------------------------------------------------------------------------------------------------
Total $180,000 50 50
- -------------------------------------------------------------------------------------------------------
</TABLE>
Net Losses
At this time, USA Video has not achieved profitability and, in fact,
expects to incur net losses for the foreseeable future. USA Video's net losses
for the years ended December 31, 1999, 1998 and 1997 were $1,657,078, $981,598
and $678,156, respectively. As a percentage of revenues, net losses were
approximately 800% in 1999. No revenue was generated in 1998 or 1997.
Expenses
During the period 1997 to 1999, USA Video incurred significantly increased
General and Administrative, Product Marketing, and Research and Development
costs associated with its progressively increasing focus on developing products
to compete in specific identified market segments and bringing those products to
market.
As follows, Table A identifies General/Administrative, Product Marketing,
Research and Development, and Management Fee expenses incurred during 1999, 1998
and 1997 by USA Video. Table B identifies and discusses those year-to-year
changes which management believes are of material benefit to understanding the
conduct of business. In Table B, Related Parties and Other categories have been
combined, where applicable, to reflect year-to-year total dollar and percentage
increase for a given item.
Table A
-------
<TABLE>
<CAPTION>
Expenses 1999 1998 1997
- -------- ---- ---- ----
<S> <C> <C> <C>
General / Administrative
Amortization of Capital Assets $ 108,869 $ 38,473 $ 1,362
Consulting Fees
Related Parties 156,000 82,111 63,982
Other 26,713
License Fees & Penalty 58,937 -- --
Office & General - Other 135,894 32,919 15,661
Office Assistance
Related Parties 66,000 21,739 10,916
Other 21,926 19,142 --
Printing 111,410 21,786 --
Professional Fees
Related Parties 6,980 5,270 5,508
Other 50,631 43,341 59,639
Rent - Other 41,212 33,214 14,302
Telephone & Utilities 66,681 34,322 9,026
Travel & Entertainment 91,384 26,072 6,038
Web Site Costs 65,116 11,891 5,539
Other * 67,415 38,537 47,085
---------- -------- --------
1,048,455 408,817 265,771
Product Marketing
Related Parties 214,500 82,000
Other 207,643 127,553 85,865
Research & Development
Related Parties 82,500 24,000
Other 10,837 2,668
Management Fees - Related Parties 24,000 27,000 174,025
---------- -------- --------
Total $1,587,935 $669,370 $528,329
========== ======== ========
</TABLE>
* Includes amortization of patents, automobile expenses, filing fees,
insurance, membership fees, public relations, repairs and maintenance, and
transfer agent fees.
Table B
-------
1998 to 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
ITEM $ INCREASE PERCENTAGE INCREASE DISCUSSION
(DECREASE) (DECREASE)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amortization of 70,396 190 Increase in fixed assets attributable to focus on growing
Capital Assets principal aspects of the business.
- -------------------------------------------------------------------------------------------------------------------------------
Consulting Fees 73,889 90 Increased due to regulatory filings and administrative
charges.
- -------------------------------------------------------------------------------------------------------------------------------
License Fees & 58,937 N/A Principally a one-time penalty for default on an exclusive
Penalty sales agreement. Balance for software licensing fee.
- -------------------------------------------------------------------------------------------------------------------------------
Office & General 102,975 313 Associated with increased office and administrative
activities supporting business growth efforts.
- -------------------------------------------------------------------------------------------------------------------------------
Telephone & Utilities 32,359 94 Increased manpower and general growth in business
activities.
- -------------------------------------------------------------------------------------------------------------------------------
Travel & 65,312 251 Primarily travel to technical and general contractual
Entertainment business meetings with clients, potential clients, vendors,
equipment and software manufacturers, investor groups.
- -------------------------------------------------------------------------------------------------------------------------------
Web Site Costs 53,225 448 Design and maintenance of the usvo.com website to support
investor relations and to promote USA Video presence and
image.
- -------------------------------------------------------------------------------------------------------------------------------
Printing 89,624 411 Cost of annual report and proxy preparation for annual
meeting of shareholders, as well as production of
literature for ongoing shareholder and client
communications.
- -------------------------------------------------------------------------------------------------------------------------------
Product Marketing 212,590 101 Increased demand for marketing talent and associated
marketing activities to identify and analyze appropriate
market segments and move product.
- -------------------------------------------------------------------------------------------------------------------------------
Research & 69,337 289 Necessity of continuing to develop, refine and enhance
Development product offerings to ensure competitiveness in the market
and support overall business plan.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 to 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
ITEM $ INCREASE PERCENTAGE INCREASE DISCUSSION
(DECREASE) (DECREASE)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amortization of 37,111 2725 Increase in fixed assets attributable to focus on
Capital Assets growing principal aspects of the business.
- ---------------------------------------------------------------------------------------------------------------------------
Travel & 20,034 332 Technical staff to meet with sources of new
Entertainment technologies and management staff to meet with equity
investors and potential equity investors.
- ---------------------------------------------------------------------------------------------------------------------------
Printing 21,786 N/A Primarily related to preparation of materials for
shareholders for equity investors.
- ---------------------------------------------------------------------------------------------------------------------------
Rent 18,912 132 Expansion of facilities to accommodate business growth.
- ---------------------------------------------------------------------------------------------------------------------------
Product Marketing 123,688 49 Support of efforts to move initial products to market.
- ---------------------------------------------------------------------------------------------------------------------------
Research & 21,332 800 Development, deployment and assessment of baseline
Development technology.
- ---------------------------------------------------------------------------------------------------------------------------
Management Fees (147,025) (544) Substantial reduction due to the fact that the previous
president is no longer associated with USA Video and to
the fact that USA Video has elected to allocate fees
according to specific areas of activity in which
individuals perform services.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Compensation Expenses for Stock Options Granted to Management
During the period 1997 to 1999, USA Video incurred expenses associated with
the granting of stock options to Directors, Executive Officers, Employees and
Consultants as follows:
. 1999 -- $3,735,665
. 1998 -- $212,054
. 1997 -- $138,028
These represent the total fair value of all options granted.
33
<PAGE>
Liquidity and Capital Resources
The independent accountants have expressed the opinion that USA Video may
not be capable of continuing its existence as a going concern. Management
understands and acknowledges that it will likely be necessary to raise a certain
amount of working capital in order to continue in business as a going concern.
USA Video has historically satisfied its capital needs primarily by issuing
equity securities. Its operating activities used $1,600,900, $698,224 and
$651,072 for the years ended December 31, 1999, 1998 and 1997, respectively. To
fund its operations, USA Video generated $2,227,186, $977,630 and $937,126 in
1999, 1998 and 1997, respectively, through sales of its common stock.
USA Video has approximately $500,000 in cash and liquid assets on hand and
believes this is sufficient to fund current operations for three to four months.
Subsequently, management currently anticipates raising an additional $3.5
million to $4 million through private offerings, which will be sufficient
finance operations for the next 12 months, as specifically set forth in the
following:
. Organizational Expenses $0.22 million
. Marketing and Sales Expenses 1.6 million
. Product Support Expenses (referred to in 0.5 million
the USA Video budget as "Service
Infrastructure")
. Administrative Expense 0.18 million
. Research and Development (includes 0.9 million
$250,000 of associated infrastructure
expenses)
. Employees 0.6 million
-------------
Total $4.0 million
=============
Management's current expectation is that, assuming it can raise the
aforementioned $3.5 million to $4 million through private offerings, continuing
operations for the longer-term will be supported either through growth in
revenues from sales of products and services, or through a return to the equity
markets for additional funding, the level of which management cannot accurately
anticipate at this time due to the unpredictability of longer-term sales
performance. However, management would expect such additional funding
requirements to exceed $4 million.
There is no guarantee that management will be able to raise equity funds on
terms acceptable to USA Video, if at all.
There is a contingent liability in respect to a default judgment entered
against USA Video's subsidiary, USA Video Corporation, in Texas, with regard to
USA Video's lease of premises in the amount of $505,169. A claim was made to
USA Video for the total amount payable under the terms of the lease through the
term of the lease, which commenced in 1995 and will end in 2002. Any settlement
resulting from the resolution of this contingency will be accounted for during
the year of the settlement.
Exposure to Market Risk
-----------------------
USA Video believes its exposure to overall foreign currency risk is
immaterial. USA Video does not manage or maintain market risk sensitive
instruments for trading or other purposes and is, therefore, not subject to
multiple foreign exchange rate exposures.
USA Video reports its operations in US dollars and its currency exposure,
although considered by USA Video as immaterial, is primarily between the US and
Canadian dollars. Exposure to the currencies of other countries is also
immaterial as international transactions are settled in US dollars. Any future
financing undertaken by USA Video will be denominated in US dollars. As USA
Video increases its marketing efforts, the related expenses are basically in US
dollars except for the marketing efforts in Canada. If these advertisements are
coordinated through a US agency, then the expenses are in US dollars. USA Video
is not exposed to the effects of interest rate fluctuations as it does not carry
any long-term debt.
From a quantitative point of view, USA Video has had a foreign exchange
gain of $15,308, $70,328 and $5,074 in 1999, 1998 and 1997, respectively. In
addition, there is no material foreign exchange market risk exposure because
$350,000 of a total of approximately $500,000 in cash is held in U.S. bank
accounts.
34
<PAGE>
ITEM 3. Properties
In aggregate, USA Video spends approximately $59,868.00 on leases of office
space per year.
USA Video headquarters and executive offices are located at 70 Essex
Street, Unit 1C, Mystic, Connecticut 06355 and the telephone number is (800)
625-2200. USA Video leases 1,547 square feet on an annual basis from Wharf
Building Associates at a monthly rent fee of $1,509.00, or $18,108.00 for the
year.
USA Video also has additional office space at 100 Essex Street, Unit 1A,
Mystic, Connecticut 06355. USA Video leases 1,116 square feet on an annual basis
from Mystic Shipyard, LLC at a monthly rent fee of $1,700.00, or $20,400.00 for
the year.
USA Video also has corporate offices located at Suite 507, 837 West
Hastings Street, Vancouver, British Columbia, V6C 3N6 and the telephone number
is (604) 685-1017. USA Video leases 800 square feet on a month-to-month basis
from Graystone Property Management Ltd. at a monthly rent fee of U.S. $1,780.00,
or $21,360.00 for the year. The Company paid a security deposit of U.S.
$20,500.00 upon leasing the property.
USA Video believes that its present facilities will be suitable for the
operation of its business for the foreseeable future. The facilities are
adequately insured against perils commonly covered by business insurance
policies. These locations could be replaced without significant disruption to
USA Video.
ITEM 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of January 31, 2000, the outstanding
common shares of USA Video owned of record or beneficially by each Executive
Officer and Director and by each person who owned of record, or was known by USA
Video to own beneficially, more than 5% of USA Video common shares, and the
shareholdings of all Executive Officers and Directors as a group.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Name Shares Owned Percentage of
Shares Owned
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Edwin Molina (1) 5,117,924 6.61%
President, Chief Executive Officer and member of the
Board of Directors
- ---------------------------------------------------------------------------------------------------------
Anton J. Drescher (2) 5,387,885 7.08%
Chief Financial Officer, Secretary and member of the
Board of Directors
- ---------------------------------------------------------------------------------------------------------
Ronald L. Patton (3) 852,000 1.14%
Chief Technical Officer
- ---------------------------------------------------------------------------------------------------------
Anthony J. Castagno (4) 1,792,700 2.38%
Executive Vice President
- ---------------------------------------------------------------------------------------------------------
Gerhard J. Drescher (5) 267,598 0.36%
Director
- ---------------------------------------------------------------------------------------------------------
Norman Bonin (6) 62,000 0.08%
Director
- ---------------------------------------------------------------------------------------------------------
ALL EXECUTIVE OFFICERS & DIRECTORS AS A 15,848,707 20.93%
GROUP (7 Persons) (7)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
Except as noted below, all shares are held of record and each record
shareholder has sole voting and investment power.
1) Includes 1,200,000 options and 1,735,000 warrants that are currently
exercisable. Mr. Molina's address is the same as USA Video executive
offices in Mystic, Connecticut.
2) Includes 1,000,000 options and 550,000 warrants that are currently
exercisable. Mr. Drescher's address is the same as USA Video corporate
office in Vancouver, British Columbia.
3) Includes 300,000 options and 80,000 warrants. Mr. Patton's address is the
same as USA Video's executive offices in Mystic, Connecticut.
4) Includes 300,000 options and 470,000 warrants. Mr. Castagno's address is
the same as USA Video's executive offices in Mystic, Connecticut.
5) Includes 50,000 options that are currently exercisable. Mr Drescher's
address is the same as USA Video's corporate office in Vancouver, British
Columbia.
6) Includes 50,000 options that are currently exercisable. Mr Bonin's address
is the same as USA Video corporate office in Vancouver, British
Columbia.
7) Includes 2,450,000 options and 3,275,000 warrants that are currently
exercisable.
USA Video's executive offices are located at 70 Essex Street, Mystic,
Connecticut, 06355. USA Video's corporate offices are located at #507, 837 West
Hastings Street, Vancouver, B.C., V6C 3N6.
There are no arrangements known to USA Video the operation of which may
result in a change of control of USA Video.
36
<PAGE>
ITEM 5. Directors and Executive Officers
The following table sets forth the name, age and position of each director and
executive officer of USA Video:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NAME AGE POSITION PERIOD SERVED
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Edwin Molina 44 Director, Chief Executive Officer and President since 1998
- -------------------------------------------------------------------------------------------------------
Anton J. Drescher 43 Director, Chief Financial Officer and Secretary since 1994
- -------------------------------------------------------------------------------------------------------
Gerhard J. Drescher 39 Director since 1992
- -------------------------------------------------------------------------------------------------------
Norman J. Bonin 47 Director since 1998
- -------------------------------------------------------------------------------------------------------
Anthony J. Castagno 50 Executive Vice President since 1998
- -------------------------------------------------------------------------------------------------------
Ronald L. Patton 45 Chief Technical Officer since 1999
- -------------------------------------------------------------------------------------------------------
Daniel L. Sciro 34 Vice-President, Sales since 1998
- -------------------------------------------------------------------------------------------------------
William Meyer 46 Chief Operating Officer since 2000
- -------------------------------------------------------------------------------------------------------
</TABLE>
Gerhard Drescher, Anton Drescher, Edwin Molina and Norman Bonin were
elected directors of USA Video in June 1999. Each director will serve until
the next annual meeting of shareholders and their respective successors are
elected and qualified.
Executive Officers, Directors and Other Significant Employees of the Company:
Edwin Molina - President, Chief Executive Officer and Director
- --------------------------------------------------------------
Mr. Molina served as a Senior Administrator with USA Video from June 1992 to
June 30, 1998, when he was appointed as President, Principal Executive Officer
and a member of the Board of Directors. Prior to joining USA Video he was a
Senior Administrator with Adnet USA LLC, a private California company involved
in Internet advertising, from May 1996 to June 1998. Mr. Molina was also a
Senior Administrator with Future Link Systems Inc., a Vancouver Stock Exchange
listed company involved in development of compression technology, from January
1988 to June 1992. Mr. Molina works a minimum of 60 hours per week on USA Video
activities. His duties include overseeing all activities of the Company
including providing strategic direction, managing and directing personnel and
budgets, overseeing the activities of other corporate officers and staff, and
directly overseeing all investor-related activities of USA Video.
Anton J. Drescher - Chief Financial Officer, Secretary and Director
- -------------------------------------------------------------------
Mr. Drescher has been Chief Financial Officer of USA Video since December 1994.
His duties include overseeing all financial activities of the company including
direct oversight of budgets, accounts receivable and accounts payable,
interactions with regulatory authorities in the United States and Canada, and
consultation on strategic direction. He has been a Certified Management
Accountant since 1981. He has been a director and Secretary/ Treasurer of Future
Link Systems Inc. which is involved in the development of compression technology
since 1997; Director and Secretary/Treasurer of Interlink Systems Inc., a public
company listed on The Canadian Dealing Network involved in waste disposal and
mineral exploration, since 1996; President of Westpoint Management Consultants
Limited, a private British Columbia company involved in taxation and public
markets, since 1979; President of Harbour Pacific Capital Corp., a private
British Columbia company involved in regulatory filings for businesses in
Canada, since 1998; and director and President of International Tower Hill Mines
Limited, a private British Columbia company involved in mineral exploration.
Mr. Drescher works between 40 and 60 hours per week on USA Video activities. He
spends significantly less time supervising professionals working on the accounts
of his clients at his other businesses. Gerhard Drescher and Anton Drescher are
brothers.
37
<PAGE>
Gerhard J. Drescher - Director
- ------------------------------
Mr. Drescher has been a director of USA Video since February 1992. Mr.
Drescher is the President and sole shareholder of Python Technologies Ltd., of
Vancouver, British Columbia, an electronics consulting firm, since 1989. He has
been a director of Future Link Systems Inc. since 1994.
Norman J. Bonin - Director
- --------------------------
Mr. Bonin has been a director of USA Video since June 1998. Mr. Bonin is
President and a director of Direct Disposal Corp., a private British Columbia
company engaged in waste management, since 1993. He has been a director of
Future Link Systems Inc. since 1998.
Anthony J. Castagno - Executive Vice President
- ----------------------------------------------
Mr. Castagno joined USA Video in 1999 as a Vice President. In April, 2000, he
transitioned from Chief Operating Officer to Executive Vice President. Mr.
Castagno provided business development, investment and marketing strategy in his
role as Chief Operating Officer of USA Video. His duties included directing and
overseeing all technology activities of USA Video, including developing and
modifying products and services to support sales and marketing, developing new
products and services to introduce to market and directing a team of technology
professionals. He also serves as President of The Rowe Group, an independent
consulting firm specializing in marketing, investor and media relations. Prior
to starting The Rowe Group in 1997, he headed a three-state public relations and
marketing organization for approximately 17 years for Northeast Utilities, a
large public utility in the northeastern U.S. Mr. Castagno teaches a course on
mass media and communications at the University of Connecticut and has authored
numerous articles and reference materials. Mr. Castagno works between 40 and 60
hours per week on USA Video activities. He spends significantly less time
supervising professionals working on the accounts of his clients at The Rowe
Group.
Ronald L. Patton - Chief Technical Officer
- ------------------------------------------
Mr. Patton joined USA Video in January 1999 as a Vice President. Prior to
joining USA Video, Mr. Patton was a Vice President of Analysis and Technology
from 1998 to 1999. Prior to that he was Senior Vice President of Sonalysts,
Inc. for approximately 20 years. Both companies are involved in high-tech video
and audio services. Mr. Patton works a minimum of 60 hours per week on USA
Video business. His duties include directing and overseeing all technology
activities of USA Video, including developing and modifying products and
services to support sales and marketing; developing new products and services to
introduce to market, and directing a team of technology professionals.
Daniel J. Sciro - Vice-President, Sales
- ---------------------------------------
Mr. Sciro has joined USA Video in June 1998 as Vice President. Mr. Sciro was
President of PC Telecom Corp., Global Telecommunications Systems Corp., and
Digital Numeric Systems Corp. for more than 5 years before joining USA Video.
The three companies were involved in telecommunications. As President, Mr.
Sciro was involved with the development and deployment of global
telecommunication technologies for clients. Mr. Sciro works a minimum of 60
hours per week on USA Video business. His duties include developing and
implementing sales and sales strategies, establishing new clients and designing
systems to meet the requirements of clients, negotiating contracts and directing
a team of sales professionals.
William Meyer - Chief Operating Officer
- ---------------------------------------
Mr. Meyer joined USA Video in April 2000 as its Chief Operating Officer. As
Chief Operating Officer, Mr. Meyer will direct and oversee all technology
activities of USA Video, including developing and modifying products and
services to support sales and marketing, developing new products and services to
introduce to market and directing a team of technology professionals. He has
specialized knowledge of motivational techniques, strategic planning, digital
audio/video systems, high capacity data storage, television production
facilities, computer networks, satellite transmission systems and the Internet.
Mr. Meyer has over 20 years of experience in the following areas: operations
management; engineering; and marketing and consulting for television and digital
information systems. He is skilled in planning, budgeting and managing multiple
projects for growth using proven methods and effective communications. He has
held the following positions over the past six years: Director of Network
Operations and Engineering for Paxson Communications Corporation, a company
involved in supporting television networks; Operations Manager of Corporate
Engineering for Paxson Communications Corporation. Mr. Meyer has a BA from
Central Michigan University.
38
<PAGE>
ITEM 6. Executive Compensation
Compensation of "Named Executive Officers"
The following table sets forth compensation awarded to, earned by or paid
to Named Executives for the designated fiscal years. Other than set forth below,
no employee of USA Video earned salary and bonus of $100,000 or more in fiscal
year 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------------
Annual Compensation Awards Payouts
- ------------------------------------------------------------------------------------------------------------
Name Other Securities
and Annual Restricted Underlying
Principal Compen- Stock Options/ LTIP All Other
Position Year Salary ($) Bonus ($) sation ($) Award(s) ($) SARs (#) Payouts ($) Compensation ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Molina, 1999 $120,000(1) $200,665 1,200,000
Edwin (5)
(CEO)
1998 $ 60,500 $ 3,172 1,300,000
(6)
1997 250,000
- ---------------------------------------------------------------------------------------------------------------------------
Drescher, 1999 $120,000(2) $159,025 1,000,000
Anton (7)
(CFO)
1998 $ 77,270 $ 34,429 1,000,000
(8)
1997 $ 65,517 $ 27,782 500,000
(9)
- ---------------------------------------------------------------------------------------------------------------------------
Patton, 1999 $120,000(3) $ 49,580 500,000
Ronald (10)
(CTO)
- ---------------------------------------------------------------------------------------------------------------------------
Castagno, 1999 $120,000(4) $194,300 250,000
Anthony (11)
(COO)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Of the $120,000 paid to Mr. Molina in 1999, $24,000 consisted of management
fees and $96,000 consisted of product marketing fees.
(2) The entire $120,000 paid to Mr. Drescher in 1999 consisted of consulting
fees.
(3) Of the $120,000 paid to Mr. Patton in 1999, $60,000 consisted of product
marketing fees and $60,000 consisted of product development fees.
(4) Of the $120,000 paid to Mr. Castagno in 1999, $36,000 consisted of
consulting fees, $36,000 consisted of office assistance fees, $12,000
consisted of public relations fees and $36,000 consisted of product
marketing fees.
(5) On February 23, 1999, Mr. Molina exercised 100,000 stock options at an
exercise price of $0.067 per option, resulting in compensation of
$2,680.00. On March 9, 1999, Mr. Molina exercised 200,000 stock options at
an exercise price of $0.067 per option, resulting in compensation of
$4,020.00. On March 22, 1999, Mr. Molina exercised 100,000 stock options
at an exercise price of $0.067 per option, resulting in compensation of
$2,010. On April 7, 1999, Mr. Molina exercised 50,000 stock options at an
exercise price of $0.067 per option, resulting in compensation of
$10,050.00. On May 3, 1999, Mr. Molina exercised 100,000 stock options at
an exercise price of $0.067 per option, resulting in compensation of
$32,830.00. On June 18, 1999, Mr. Molina exercised 250,000 stock options
at an exercise price of $0.067 per option, resulting in compensation of
$149,075.00.
(6) On May 6, 1998, Mr. Molina exercised 250,000 stock options at an exercise
price of $0.067 per option, resulting in compensation of $3,350.00. On
November 3, 1998, Mr. Molina exercised 100,000 options at an exercise price
of $0.067 per option, resulting in compensation of $0.00. On November 10,
1998, Mr. Molina exercised 150,000 stock options at an exercise price of
$0.067 per option, resulting in a realized value of ($1,005.00). On
December 17, 1998, Mr. Molina exercised 250,000 stock options at an
exercise price of $0.067 per option, resulting in compensation of $827.00.
(7) On February 2, 1999, Mr. Drescher exercised 200,000 stock options at an
exercise price of $0.067 per option, resulting in a realized value of
($2,010.00). On February 17, 1999, Mr. Drescher exercised 300,000 stock
options at an exercise price of $0.067 per option, resulting in
compensation of $15,075.00. On March 9, 1999, Mr. Drescher exercised
100,000 stock options at an exercise price of $0.067 per option, resulting
in compensation of $2,010.00. On April 28, 1999, Mr. Drescher exercised
250,000 stock options at an exercise price of $0.067 per option, resulting
in compensation of $55,275.00. On May 26, 1999, Mr. Drescher exercised
100,000 stock options at an exercise price of $0.067 per option, resulting
in compensation of $36,850.00. On June 10, 1999, Mr. Drescher exercised
50,000 stock options at an exercise price of $0.067 per option, resulting
in compensation of $38,860.00. In 1999, Mr. Drescher received interest on
loans to USA Video in the amount of $12,965.00
(8) On January 28, 1998, Mr. Drescher exercised 500,000 stock options at an
exercise price of $0.067 per option, resulting in compensation of
$10,050.00. In 1998, Mr. Drescher received interest on loans to USA Video
in the amount of $24,379.00.
(9) On June 20, 1997, Mr. Drescher exercised 500,000 stock options at an
exercise price of $0.072 per option, resulting in a realized value of
($1,800.00). In 1997, Mr. Drescher received interest on loans to USA Video
in the amount of $29,582.00.
(10) On May 12, 1999, Mr. Patton exercised 100,000 stock options at an exercise
price of $0.067 per option, resulting in compensation of $49,580.00.
(11) On July 6, 1999, Mr. Castagno exercised 250,000 stock options at an
exercise price of $0.067 per option, resulting in compensation of
$194,300.00.
39
<PAGE>
The following table sets forth certain information concerning grants of
stock options pursuant to stock option plans to the Named Executive Officer
during the year ended December 31, 1999.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
- -----------------------------------------------------------------------------------------------------------------------
% of Total
Options /
Number of SARs Market
Securities Granted to Price
Underlying Employees on
Options/SARs in Fiscal Exercise Date of Expira-
Granted Year (1) Price Grant tion
($/Sh) ($/Sh) Date 0% ($) 5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Molina, 1,200,000 23.53% $ 1.00 $ 1.04 7/16/01 $48,000 $110,400 $172,800
Edwin
- -----------------------------------------------------------------------------------------------------------------------
Drescher, 1,000,000 23.53% $ 1.00 $ 1.04 7/16/01 $40,000 $ 92,000 $144,000
Anton
- -----------------------------------------------------------------------------------------------------------------------
Patton, 500,000 11.76% $0.067 $0.065 1/31/01 $ 625 $ 2,250
Ronald
- -----------------------------------------------------------------------------------------------------------------------
Castagno, 250,000 5.88% $0.067 $0.060 1/12/01 N/A N/A
Anthony
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A total of 4,250,000 stock options were granted to employees in 1999.
The following table sets forth certain information concerning exercises of
stock options pursuant to stock option plans by the Named Executive Officer
during the year ended December 31, 1999 and stock options held at year end.
Aggregated Option / SAR Exercises in Last Fiscal Year
and FY-End Option / SAR Values
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options / SARs Options / SARs
at FY-End (#) at FY-End ($)
Shares Acquired Exercisable / Exercisable /
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Molina, Edwin 800,000 $200,665 1,200,000 / 0 N/A (2) / $0
- --------------------------------------------------------------------------------------------------------------------
Drescher, Anton 1,000,000 $146,060 1,000,000 / 0 N/A (3) / $0
- --------------------------------------------------------------------------------------------------------------------
Patton, Ronald 100,000 $ 49,580 400,000 / 0 $ 365,200 / $0
- --------------------------------------------------------------------------------------------------------------------
Castagno, Anthony 250,000 $194,300 0 / 0 $ 0 / $0
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On December 31, 1999, the average of the high and low price of the stock
trading on the OTC BB was $0.98.
(2) Mr. Molina's 1,200,000 options, with an exercise price of $1.00, were not
in-the-money based on the December 31, 1999 closing price of $0.98 per share for
USA Video's common stock.
(3) Mr. Drescher's 1,000,000 options, with an exercise price of $1.00, were not
in-the-money based on the December 31, 1999 closing price of $0.98 per share for
USA Video's common stock.
40
<PAGE>
Compensation of Directors
Directors receive no compensation for their service as such, although they
do receive reimbursement for consulting services provided to USA Video. In
addition to Mr. Molina, Mr. Anton Drescher, Mr. Gerhard Drescher and Mr. Bonin
each were granted options to purchase an aggregate of 2,300,000 common shares of
USA Video, due in part to their service as directors. All of the options are
fully vested, have an exercise price of $1.00 per share and must be exercised by
July 16, 2001. USA Video has no obligation or policy to grant stock options to
directors.
Employment Contracts
USA Video does not have an employment contract with Mr. Molina and it has
no obligation to provide compensation to him in the event of his resignation,
retirement or termination, or a change in control.
USA Video may in the future create retirement, pension, profit sharing,
insurance and medical reimbursement plans covering its Executive Officers and
Directors. At the present time no such plans exist. No advances have been made
or are contemplated by USA Video to any of its Executive Officers or
Directors.
ITEM 7. Certain Relationships and Related Transactions
Transactions with Management and Others
---------------------------------------
No director, executive officer or nominee for election as a director of USA
Video, and no owner of five percent or more of USA Video's outstanding shares or
any member of their immediate family has entered into or proposed any
transaction in which the amount involved exceeds $60,000.
In 1999, each of the following executive officers received $120,000 in fees
for services rendered as specified:
Edwin Molina - $24,000 in management fees; $96,000 in product marketing
fees.
Anton Drescher - $120,000 in consulting fees.
Ronald Patton - $60,000 in product marketing fees; $60,000 in product
development fees.
Anthony Castagno - $36,000 in consulting fees; $36,000 in office assistance
fees; $12,000 in public relations fees; $36,000 in product marketing fees.
Certain Business Relationships
------------------------------
No directors or nominee for director is or has been during USA Video's
last fiscal year an executive officer or beneficial owner of more than 10% of
any other entity that has engaged in a transaction with USA Video in excess of
5% of either company's revenues or assets.
USA Video owns a 50% interest in a joint venture named Adnet USA LLC, which
was incorporated as a California limited liability company. Formed in 1997, the
purpose of Adnet USA LLC was to provide internet advertising and web page
facilities to corporate customers. USA Video's joint venture partner is a
related company by virtue of common directors. USA Video's expenses related to
the joint venture were $174,144. USA Video and its joint venture partner agreed
to abandon the joint venture and consequently Adnet USA LLC is inactive.
41
<PAGE>
Indebtedness of Management
--------------------------
There are no persons who are directors, executive officers of USA Video,
nominees for election as a director, immediate family members of the foregoing,
corporations or organizations (wherein the foregoing are executive officers or
partners, or 10% of the shares of which are directly or beneficially owned by
the foregoing), trusts or estates (wherein the foregoing have a substantial
beneficial interest or as to which the foregoing serve as a trustee or in a
similar capacity) are indebted to USA Video in an amount in excess of
$60,000.
ITEM 8. Legal Proceedings
The following are pending legal proceedings in which USA Video is a
party:
1. USA Video Interactive Corp. v. Wegener Communications, Inc.
-----------------------------------------------------------
This case was commenced by USA Video against Wegener Communications,
Inc., a Georgia corporation, on January 7, 2000 in the U.S. District Court for
the District of Connecticut.
The facts of the case follow. In early February, 1999, the defendant agreed
to pay USA Video five percent of the value of any orders from customers
referred to it by USA Video. In reliance on this agreement, USA Video
expended efforts to find the defendant compatible clients and introduced the
defendant to Autotote Communications. The defendant secured a contract with
Autotote Communications worth $4 million. The defendant failed to pay USA Video
the agreed upon commission of five percent and this suit was ultimately
commenced to seek relief in the form of compensatory damages, punitive damages,
and attorney fees in excess of $75,000.00 and in an amount deemed equitable and
appropriate by the court.
2. USA Video Interactive Corp. and Merging Rivers Media Corp. v. Rafael
--------------------------------------------------------------------
O. Quezada
- ----------
This case was commenced by USA Video and its subsidiary, Merging Rivers
Media Corp., against Rafael O. Quezada, former president of Merging Rivers, on
January 10, 2000 in the U.S. District Court for the District of Connecticut.
The facts of the case follow. In mid-April, 1999, USA Video entered into
a Confidentiality and Non-Disclosure Agreement with the defendant, prohibiting
him from disclosing and using USA Video confidential information without prior
written consent of USA Video. The Agreement also provided that USA Video
would retain all publication and ownership rights to all intellectual property.
In mid-June, 1999, USA Video and Merging Rivers entered into a Consulting
Agreement with the defendant which provided that the defendant was to represent
Merging Rivers and USA Video to clients and prospective clients for purposes
of selling video and other multimedia advertising. At the end of July, 1999,
USA Video provided a laptop computer to the defendant containing proprietary
information.
42
<PAGE>
The defendant later registered domain names and trademarks in his own name,
charging the expenses to USA Video. While a consultant to USA Video and
president of Merging Rivers, the defendant sought employment with a competitor
to work on an identical project for which he was doing work for USA Video.
Following termination of his consulting agreement with USA Video and his
employment with Merging Rivers, the defendant interfered with a business
relationship between USA Video and one of its customers.
The plaintiffs are seeking full compensatory and consequential damages, an
award of treble damages, and other equitable relief in an amount in excess of
$75,000.00 and deemed equitable and appropriate by the court.
3. DCC Building #4 Limited Partnership v. USA Video Corporation
------------------------------------------------------------
This case was commenced by DCC Building #4 Limited Partnership against USA
Video Corporation, a subsidiary of USA Video, on September 7, 1995 in the
District Court of Dallas County, Texas. A default judgment was entered by the
court on November 10, 1995.
There is a contingent liability in the amount of $505,169 ($25,399 included
in accounts payable December 31, 1998) in respect to the default judgment
entered against USA Video Corporation. This suit was in regard to a lease of
premises by USA Video Corporation in Dallas, Texas. USA Video Corporation
vacated the premises in Dallas, Texas during the year ended December 31, 1995
and a claim was made to the company for the total amount payable under the terms
of the lease through the term of the lease, ending in 2002. Management of USA
Video is of the opinion that the amount payable under the terms of this
judgment is not determinable at this time as the damages may be substantially
mitigated by the landlords renting the property to another party. Settlement
talks are underway. Any settlement resulting from the resolution of this
contingency will be accounted for during the year of the settlement.
To the knowledge of USA Video's Executive Officers and Directors, USA Video
is not a party to any other legal proceeding or litigation and none of its
property is the subject of a pending legal proceeding. Further, the Officers and
Directors know of no other threatened or contemplated legal proceedings or
litigation.
43
<PAGE>
ITEM 9. Market Price of and Dividends on the Company's Common Equity and
Related Stockholder Matters
There is a limited public market for the common shares of the Company which
currently trades on the Canadian Venture Exchange under the symbol "US" where it
has been traded since February 23, 1995 and on the NASD OTC Bulletin Board under
the symbol "USVO" where it has been traded since February 22, 1995. The
following quotations reflect inter-dealer prices, without retail mark-up, mark-
down or commission and may not represent actual transactions:
Canadian Venture Exchange
(Symbol "US")
Quarter High * Low *
------- ---- ---
(Cdn $) (Cdn $)
First Quarter 1998 .245 .105
Second Quarter 1998 .18 .075
Third Quarter 1998 .18 .07
Fourth Quarter 1998 .115 .06
First Quarter 1999 .80 .07
Second Quarter 1999 1.83 .25
Third Quarter 1999 1.69 1.02
Fourth Quarter 1999 1.65 .90
* The prices are high and low sale prices. This information was provided by
Bloomberg Professional.
OTC Bulletin Board
(Symbol "USVO")
Quarter High * Low *
------- ---- ---
($US) ($US)
First Quarter 1998 0.13 0.08
Second Quarter 1998 0.01 0.03
Third Quarter 1998 0.12 0.04
Fourth Quarter 1998 .063 0.035
First Quarter 1999 0.75 0.045
Second Quarter 1999 1.95 0.16
Third Quarter 1999 1.17 0.66
Fourth Quarter 1999 1.39 0.62
* The prices are high and low bid prices. This information was provided by
NASDAQ, Trading & Marketing Services.
As of January 31, 2000, there were 74,322,089 common shares outstanding,
held by 1,118 shareholders of record and by various broker/dealers on behalf of
an indeterminate number of street name shareholders.
To date the Company has not paid any dividends on its common shares and
does not expect to declare or pay any dividends on such common shares in the
foreseeable future. Payment of any dividends will depend upon future earnings,
if any, the financial condition of the Company, and other factors as deemed
relevant by the Company's Board of Directors.
44
<PAGE>
ITEM 10. Recent Sales of Unregistered Securities
Set forth below is information regarding the issuance and sales of
securities of the Company without registration for the past three (3) years. No
such sales involved the use of an underwriter and no commissions were paid in
connection with the sale of any securities.
a) In January, 2000, the Company concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
$1.10 per share by January 26, 2002. On completion of the offering, a total
of 250,000 units were issued at $4.00 per unit for total proceeds of
$1,000,000.00. The offer and sale of the units were exempt from registration
under Rule 506 of Regulation D and under Section 4(2) of the Securities Act of
1933. The Company limited the manner of the offering and there were no non-
accredited investors. If the foregoing exemptions are not available, the Company
believes that $200,000.00 of these sales were also exempt under Regulation S
under the Securities Act of 1933, as amended, due to the foreign nationality of
the relevant purchasers.
b) During the period ended February, 2000, the Company issued 825,000 shares
pursuant to warrants exercised at $0.068 per share for total proceeds of
$55,997.00. The shares acquired were exempt from registration under Rule 504 and
Rule 506 of Regulation D under Sections 3(b) and 4(2), respectively, of the
Securities Act of 1933. The Company has made publicly available financial and
disclosure information with its filings to the Canadian Venture Exchange. The
Company limited the manner of the offering and there were less than five (5)
non-accredited investors. The Company believes that a portion of these sales
were also exempt under Regulation S under the Securities Act of 1933, as
amended, due to the foreign nationality of the relevant purchasers.
c) In July 1999, the Company concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
$1.10 per share by July 15, 2001. On completion of the offering, a total of
750,000 units were issued at $1.00 per unit for total proceeds of $750,000.00.
The offer and sale of the units were exempt from registration under Rule 504 and
Rule 506 of Regulation D under Sections 3(b) and 4(2), respectively, of the
Securities Act of 1933. The Company limited the manner of the offering and the
number of non-accredited investors to five (5) investors. If the foregoing
exemptions are not available, the Company believes that $150,000.00 of these
sales were also exempt under Regulation S under the Securities Act of 1933, as
amended, due to the foreign nationality of the relevant purchasers.
d) In May 1999, the Company concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
$0.49 per share by May 19, 2001. On completion of the offering, a total of
500,000 units were issued at $0.395 per unit for total proceeds of $197,400.00.
The offer and sale of the units were exempt from registration under Rule 504 and
Rule 506 of Regulation D under Sections 3(b) and 4(2), respectively, of the
Securities Act of 1933. The Company limited the manner of the offering and the
number of non-accredited investors to four (4) investors. If the foregoing
exemptions are not available, the Company believes that $38,493.00 of these
sales were also exempt under Regulation S under the Securities Act of 1933, as
amended, due to the foreign nationality of the relevant purchasers.
e) In March 1999, the Company concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
$0.13 per share by March 23,
45
<PAGE>
2001. On completion of the offering, a total of 1,000,000 units were issued at
$0.114 per unit for total proceeds of $114,293.00. The offer and sale of the
units were exempt from registration under Rule 504 and Rule 506 of Regulation D
under Sections 3(b) and 4(2), respectively, of the Securities Act of 1933. The
Company limited the manner of the offering and the number of non-accredited
investors to two (2) investors. If the foregoing exemptions are not available,
the Company believes that $40,003.00 of these sales were also exempt under
Regulation S under the Securities Act of 1933, as amended, due to the foreign
nationality of the relevant purchasers.
f) In January 1999, the Company concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
$0.67 per share by March 23, 2001. On completion of the offering, a total of
2,000,000 units were issued at $0.067 per unit for total proceeds of
$133,574.00. The offer and sale of the units were exempt from registration under
Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2),
respectively, of the Securities Act of 1933. The Company limited the manner of
the offering and the number of non-accredited investors to two (2) investors. If
the foregoing exemptions are not available, the Company believes that $48,421.00
of these sales were also exempt under Regulation S under the Securities Act of
1933, as amended, due to the foreign nationality of the relevant purchasers.
g) During the year ended December 31, 1999, the Company issued 4,881,000
shares pursuant to options exercised at between $0.067 and $1.00 per share for
total proceeds of $405,895.00. The sale of the shares was exempt from
registration under Rule 701 under the Securities Act of 1933. The sales were
made on exercise of grants under the Company's written share option plan, a copy
of which the Company has provided to its participants.
h) During the year ended December 31, 1999, the Company issued 5,095,000
shares pursuant to warrants exercised at between $0.067 and $0.294 per
share for total proceeds of $626,024.00. The shares acquired were exempt from
registration under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and
4(c), respectively, of the Securities Act of 1933. The Company has made publicly
available financial and disclosure information with its filings to the Canadian
Venture Exchange. The Company limited the manner of the offerings and there were
less than ten (10) non-accredited investors in each offering. The Company
believes that a portion of these sales were also exempt under Regulation S under
the Securities Act of 1933, as amended, due to the foreign nationality of the
relevant purchasers.
i) In September 1998, the Company concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
$0.067 per share by September 30, 2000. On completion of the offering, a total
of 6,000,000 units were issued at $0.067 per unit for total proceeds of
$404,449.00. The offer and sale of the units were exempt from registration under
Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2),
respectively, of the Securities Act of 1933. The Company limited the manner of
the offering and the number of non-accredited investors to four (4) investors.
If the foregoing exemptions are not available, the Company believes that
$175,261.00 of these sales were also exempt under Regulation S under the
Securities Act of 1933, as amended, due to the foreign nationality of the
relevant purchasers.
46
<PAGE>
j) During the year ended December 31, 1998, the Company issued 5,505,000
shares pursuant to warrants exercised at between $0.067 and $0.108 per
share for total proceeds of $454,331.00. The shares acquired were exempt
from registration under Rule 504 and Rule 506 of Regulation D under Sections
3(b) and 4(c), respectively, of the Securities Act of 1933. The Company has made
publicly available financial and disclosure information with its filings to the
Canadian Venture Exchange. The Company limited the manner of the offerings and
there were less than five (5) non-accredited investors in each offering. The
Company believes that a portion of these sales were also exempt under Regulation
S under the Securities Act of 1933, as amended, due to the foreign nationality
of the relevant purchasers.
k) During the year ended December 31, 1998, the Company issued 3,450,000
shares pursuant to options exercised at $0.067 per share for total proceeds of
$232,558.00. The sale of the shares was exempt from registration under Rule
701 under the Securities Act of 1933. The sales were made on exercise of grants
under the Company's written share option plan, a copy of which the Company has
provided to its participants.
l) In October 1997, the Company concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
$0.067 per share by October 3, 1999. On completion of the offering, a total
of 1,250,000 units were issued at $0.235 per unit for total proceeds of
$293,448.00. The offer and sale of the units were exempt from registration
under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(2),
respectively, of the Securities Act of 1933. The Company limited the manner of
the offering and there were no non-accredited investors. If the foregoing
exemptions are not available, the Company believes that $13,400.00 of these
sales were also exempt under Regulation S under the Securities Act of 1933, as
amended, due to the foreign nationality of the relevant purchasers.
m) In June 1997, the Company concluded an offering of units. Each unit
consisted of one warrant to acquire an additional share at $0.67 per share
by June 27,1999. On completion of the offering, a total of 4,000,000 units were
issued at $0.072 per unit for total proceeds of $288,933.00. The offer
and sale of the units were exempt from registration under Rule 504 and Rule 506
of Regulation D under Sections 3(b) and 4(2), respectively, of the Securities
Act of 1933. The Company limited the manner of the offering and there were no
non-accredited investors. If the foregoing exemptions are not available, the
Company believes that $100,500.00 of these sales were also exempt under
Regulation S under the Securities Act of 1933, as amended, due to the foreign
nationality of the relevant purchasers.
n) In February 1997, USA Video concluded an offering of units. Each unit
consisted of one warrant to acquire an additional share at $0.067 per share by
June 21, 1999. On completion of the offering, a total of 1,500,000 units were
issued at $0.072 per unit for a total proceeds of $108,350.00. The offer and
sale of the units were exempt from registration under Rule 504 and Rule 506 of
Regulation D under Sections 3(b) and 4(2), respectively, of the Securities Act
of 1933. USA Video limited the manner of the offering. The investors included
five (5) directors/executive officers, two (2) employees, one (1) accredited
individual investor and (2) sophisticated individual investors. If the foregoing
exemptions are not available, USA Video believes
47
<PAGE>
that $100,500.00 of these sales were also exempt under Regulation S under the
Securities Act of 1933, as amended, due to the foreign nationality of the
relevant purchasers.
o) During the year ended December 31, 1997, the Company issued 650,000 shares
pursuant to options exercised at $0.072 per share for total proceeds of
$46,952.00. The sale of the shares was exempt from registration under Rule 701
under the Securities Act of 1933. The sales were made on exercise of grants
under the Company's written share option plan, a copy of which the Company has
provided to its participants.
p) During the year ended December 31, 1997, the Company issued 4,019,000
shares pursuant to warrants exercised at between $0.079 and $0.116 per share for
total proceeds of $415,769.00. The shares acquired were exempt from registration
under Rule 504 and Rule 506 of Regulation D under Sections 3(b) and 4(c),
respectively, of the Securities Act of 1933. The Company has made publicly
available financial and disclosure information with its filings to the Canadian
Venture Exchange. The Company limited the manner of the offerings and there were
no non-accredited investors. The Company believes that a portion of these sales
were also exempt under Regulation S under the Securities Act of 1933, as
amended, due to the foreign nationality of the relevant purchasers.
ITEM 11. Description of Securities to Be Registered
The following description of the Company's capital stock does not purport
to be complete and is subject to and qualified in its entirety by the Company's
articles of incorporation and bylaws, which are included as exhibits to the
registration statement and by the applicable provisions of Wyoming law.
The authorized capital stock of the Company consists of 250,000,000 common
shares without nominal or par value and 250,000,000 preferred shares without
nominal or par value.
Common Stock
------------
Dividends: The holders of common shares are entitled to dividends, out of
funds legally available therefore, when and as declared by the Board of
Directors. The Board of Directors have never declared a dividend and do not
anticipate declaring a dividend in the future.
Voting Rights: Each outstanding common share entitles the holder thereof to
one vote per share on all matters. Cumulative voting is not provided for in
connection with the election of the Board of Directors, which means that the
holders of more than 50% of such outstanding shares, voting for the election of
directors, can elect all of the directors to be elected, if they so choose, and,
in such event, the holders of the remaining shares will not be able to elect any
of the Company's directors.
Preemption Rights: The holders of the common shares have no preemptive or
subscription rights.
Liquidation Rights: Upon liquidation, each outstanding common share
entitles the holder thereof to receive such assets of USA Video as are remaining
and distributable.
Limitations on Shareholders Effecting a Change in Control: Pursuant to USA
Video's by-laws, By-law 10.03, only the Board of Directors, the Chairman of the
Board or the President of USA Video have the power to call a special meeting of
the stockholders thereby limiting the ability of stockholders to effect a change
in control of USA Video.
48
<PAGE>
Preferred Stock
---------------
The Board of Directors will determine, in whole or in part, the
preferences, limitations and relative rights, within the limits set forth by the
laws of the state of incorporation, or any successor statute, of any class of
its preferred shares before the issuance of any shares of that class or one or
more series within that class before the issuance of any shares of that
series.
This is an anti-takeover measure. The Board of Directors has exclusive
discretion to issue preferred stock with rights that may trump those of common
stock. The Board of Directors could use an issuance of Preferred Stock with
dilutive or voting preferences to delay, defer or prevent common stockholders
from initiating a change in control of the company or reduce the rights of
common stockholders to the net assets upon dissolution. Preferred stock
issuances may also discourage takeover attempts that may offer premiums to
holders of USA Video's common stock.
Stock Options
-------------
A total of 6,718,000 stock options, convertible on a one for one basis,
were outstanding as at February 17, 2000:
Exercise Price
No. of Options Date of Grant Expiry Date Per Option
- -------------- ------------- ----------- ----------
80,000 October 20, 1998 October 20, 2000 $0.067
875,000 January 31, 1999 January 31, 2000 $0.067
500,000 March 9, 1999 March 9, 2001 $0.095
2,944,000 July 16, 1999 July 16, 2001 $ 1.00
669,000 November 25, 1999 November 25, 2001 $ 1.00
750,000 December 22, 1999 December 22, 2001 $ 1.00
900,000 (1) February 17, 2000 February 17, 2002 $ 5.00
(1) These options are subject to Regulatory Acceptance.
For further information on the Company's stock options, please see the
Company's Share Option Plan attached as an exhibit to the registration
statement.
Warrants
--------
A total of 5,675,000 warrants, convertible on a one for one basis, were
outstanding as a January 31, 2000:
No. of Warrants Expiry Date Exercise Price
- --------------- ----------- --------------
2,275,000 September 30, 2000 $0.067
925,000 January 31, 2001 $0.067
975,000 March 23, 2001 $0.129
500,000 May 19, 2001 $0.495
750,000 July 15, 2001 $ 1.10
250,000 (1) January 26, 2002 $ 4.00
(1) These warrants are subject to Regulatory Acceptance.
49
<PAGE>
The Board of Directors may determine and from time to time the conditions
upon which share warrants are issued. The bearer of a share warrant shall be
entitled to attend and vote at general meetings. A share warrant may be
surrendered and the name of the holder of the shares may be entered in the
register. The bearer of a share warrant is considered a shareholder of the
Company. The holder of the share warrant is subject to the conditions in force
with respect to share warrants whether made before or after the issue of the
warrant.
ITEM 12. Indemnification of Directors and Officers
Pursuant to Title 17, Section 17-16-851 of the Wyoming Statutes, a
corporation may indemnify an individual who is a party to a proceeding if:
1. He or she is a director against liability incurred in the proceeding if
he or she conducted himself or herself in good faith;
2. He or she reasonably believed that his or her conduct was in or at
least not opposed to the corporation's best interests; and
3. In the case of any criminal proceeding, he or she had no reasonable
cause to believe his or her conduct was unlawful; or
4. He or she engaged in conduct for which broader indemnification has been
made permissible under a provision of the articles of incorporation.
A corporation may not indemnify a director under this section, absent a court
order, in connection with a proceeding by or in the right of the corporation or
in connection with any proceeding with respect to conduct for which he or she
was adjudged liable on the basis that he or she received a financial benefit to
which he or she was not entitled.
Pursuant to Title 17, Section 17-16-852 of the Wyoming Statutes, a
corporation must indemnify a director who was wholly successful in the defense
of any proceeding to which he or she was a party in his or her capacity as
director of the corporation against reasonable expenses incurred by him or her
in connection with the proceeding. As provided in Section 17-16-853 of the
Wyoming Statutes, a corporation may advance funds to pay for or reimburse the
reasonable expenses incurred by a director who is a party to a proceeding
because he or she is a director.
Pursuant to Title 17, Section 17-16-855 of the Wyoming Statutes, a
corporation may not indemnify a director under Section 17-16851 unless
authorized for a specific proceeding after a determination has been made that
indemnification of the director is permissible.
Pursuant to Title 17, Section 17-16-856 of the Wyoming Statutes, a
corporation may indemnify and advance expenses to an officer of the corporation
who is a party to a proceeding because he is an officer of the corporation to
the same extent as a director and if eh or she is not a director, to such
further extent as may be provided by the articles of incorporation, the bylaws,
a resolution of the board of directors or contract. An officer may not be
indemnified for liability in connection with a proceeding by or in the right of
the corporation other than for reasonable expenses incurred in connection with
the proceeding. Nor may an officer be indemnified for liability arising out of
conduct that constitutes receipt by him or her of a financial benefit to which
he or she it not entitled, an intentional infliction of harm on the corporation
or the shareholders, or an intentional violation of criminal law.
50
<PAGE>
USA Video's bylaws limit the liability of directors and officers for any
loss, damage or expense to USA Video in their capacity as directors and officers
and provide for the indemnification of directors and officers. The effect of
these provisions is potentially to indemnify USA Video directors and officers
from all costs and expenses of liability incurred by them in connection with
any action, suit or proceeding in which they are involved by reason of their
affiliation with USa Video.
These provisions in the bylaws do no eliminate a director's or officer's
duty of care, and in appropriate circumstances equitable remedies such as an
injunction or other forms of non-monetary relief would remain available. Each
director and officer will continue to be subject to liability for breach of the
his or her duty of loyalty to USA Video, for acts or omissions not in good faith
or involving intentional misconduct or knowing violations of law, for acts or
omissions that the director or officer believes to be contrary to the best
interests of USA Video or USA Video stockholders, for any transaction from which
the director or officer derived an improper personal benefit, for improper
transactions between the director or officer and USa Video and for improper
loans to stockholders and loans to directors or officers. This provision also
does not affect a director's or officer's responsibilities under any other laws,
such as the federal securities laws or state or federal environmental laws.
USA Video has signed an employment agreement with William Meyer, its new
Chief Operating Officer. The employment agreement contains in indemnification
provision which includes the following:
. USA Video will indemnify the Executive against any and all judgments, fines,
amounts paid in settlement and reasonable expenses, including attorney fees,
incurred in connection with any action or proceeding by reason of the fact
that the Executive is or was a director, officer, employee, representative or
agent of USA video; provided, however, that no indemnification shall be made
to the Executive if an adverse judgment or other final adjudication
establishes that the acts of the Executive were committed in bad faith or
were the result of active and deliberate dishonesty or gross negligence and,
in either case, were material to the cause of action.
. In addition, the Executive shall be entitled to indemnification by USA Video
against any liability or damage, including attorney's fees and liabilities
under federal and state securities laws, arising from any act or omission by
the Executive provided that the act or omission was reasonably believed to
be within the scope of the Executive's authority or was taken upon advice of
the accountants or legal counsel for the Company.
. The indemnification of the Executive shall continue after the Executive has
ceased to be a director, officer, employee, representative or agent of USA
Video and shall inure to the benefit of the Executive's heirs, executors,
administrators and legal representatives.
There is no pending litigation or proceeding involving USA Video directors
or officers as to which indemnification is being sought, nor is USA Video aware
of any pending or threatened litigation that may result in claims for
indemnification by an director or officer.
51
<PAGE>
- --------------------------------------------------------------------------------
TERRY AMISANO LTD. AMISANO HANSON
- --------------------------------------------------------------------------------
KEVIN HANSON, C.A. CHARTERED ACCOUNTANTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Stockholders,
USA Video Interactive Corp.
We have audited the accompanying consolidated balance sheets of USA Video
Interactive Corp. (A Development Stage Enterprise) as at December 31, 1999 and
1998 and the consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
1999 and for the period from inception of the development stage, January 1, 1992
to December 31, 1999. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the consolidated financial position of USA Video Interactive
Corp. as at December 31, 1999 and 1998 and the consolidated results of its
operations and cash flows for each of the years in the three year period ended
December 31, 1999 and for the period from inception of the development stage,
January 1, 1992 to December 31, 1998, in accordance with generally accepted
accounting principles in the United States.
The accompanying consolidated financial statements referred to above have been
prepared assuming that the company will continue as a going concern. As
discussed in Note 1 to the financial statements, the company is in the
development stage, and has no established source of revenue and is dependent on
its ability to raise capital from shareholders or other sources to sustain
operations. These factors, along with other matters as set forth in Note 1,
raise substantial doubt that the company will be able to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Vancouver, Canada "AMISANO HANSON"
March 13, 2000 Chartered Accountants
Suite 604 - 750 West Pender Street, Vancouver B.C., Canada, V6C 2T7
TELEPHONE: (604) 689-0188
FACSIMILE: (604) 689-9773
EMAIL: [email protected]
-52-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
ASSETS
------
1999 1998
-------------- --------------
<S> <C> <C>
Current
Cash and cash equivalents $ 417,666 $ 2,618
Marketable securities - related party - Note 3 20,700 73,920
Accounts receivable - related parties - Note 8 - 12,590
- other 17,661 8,459
Prepaid expenses - Note 5 43,841 70,862
------------- -------------
499,868 168,449
Capital assets - Note 6 436,417 236,961
Patents - Note 7 59,066 29,822
------------- -------------
$ 995,351 $ 435,232
------------- -------------
LIABILITIES
-----------
Current
Accounts payable - related parties - Note 8 $ 11,592 $ 19,372
- other 485,571 475,228
Due to related parties - Note 8 188,866 174,028
------------- -------------
686,029 668,628
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
---------------------------------
Common stock - Notes 9 and 13 20,950,152 18,722,966
Deficit accumulated during the development stages (20,640,830) (18,956,362)
------------- -------------
309,322 (233,396)
------------- -------------
$ 995,351 $ 435,232
============= =============
</TABLE>
Nature and Continuance of Operations - Note 1
Commitments - Notes 9 and 13
Subsequent Events - Note 13
Contingent Liability - Note 15
APPROVED BY THE DIRECTORS:
/s/ Tony Drescher, Director /s/ Edwin Molina, Director
- ------------------- -----------------
Anton J. Drescher Edwin Molina
SEE ACCOMPANYING NOTES
-53-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1999, 1998 and 1997
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1999
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
January 1, 1992
(Date of Incep-
tion of Develop-
ment Stage) to
Years ended December 31, December 31,
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 20,500 $ - $ - $ 20,500
Cost of goods sold (19,199) - - (19,199)
--------- --------- --------- -----------
1,301 - - 1,301
--------- --------- --------- -----------
General and Administrative Expenses
Amortization of capital assets 108,869 38,473 1,362 232,764
Amortization of goodwill - - - 228,023
Amortization of patents 4,493 2,508 2,170 17,329
Automobile expenses - 5,127 - 51,974
Consulting fees - related parties
- Note 8 156,000 82,111 63,982 1,218,044
- other - - 26,713 701,233
Delivery costs - - - 56,042
Equipment rental - - - 95,136
Filing fees 13,897 8,326 6,581 87,996
Insurance 3,309 928 - 56,041
License fees and penalty 58,937 - - 58,937
Management fees
- related parties
- Note 8 24,000 27,000 174,025 1,940,845
Membership fee 6,250 - - 6,250
Office assistance
- related parties
- Note 8 66,000 21,739 10,916 102,067
- other 21,926 19,142 - 36,906
Office and general
- related parties
- Note 8 - - - 236,989
- other 135,894 32,919 15,661 625,241
Printing 111,410 21,786 - 273,823
Product marketing costs
- related parties
- Note 8 214,500 82,000 - 296,500
- other 207,643 127,553 85,865 492,048
</TABLE>
SEE ACCOMPANYING NOTES
-54-
<PAGE>
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1999, 1998, and 1997
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1999
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
January 1, 1992
(Date of Incep-
tion of Develop-
ment Stage) to
Years ended December 31, December 31,
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Professional fees
-related parties
- Note 8 6,980 5,270 5,508 105,252
- other 50,631 43,341 59,639 642,223
Public relations - related parties
- Note 8 2,000 - 31,118 12,000
- other 24,934 13,050 - 363,213
Rent - related parties
- Note 8 - - - 12,950
- other 41,212 33,214 14,302 466,776
Repairs and maintenance - 2,638 - 20,817
Research and development costs
- related parties
- Note 8 82,500 24,000 - 525,698
- other 10,837 - 2,668 3,206,559
Salaries and benefits
- related parties
- Note 8 - - - 219,177
- other - - - 1,579,578
Telephone and utilities 66,681 34,322 9,026 519,632
Transfer agent fees 12,532 5,960 7,216 58,083
Travel and entertainment 91,384 26,072 6,038 795,401
Web site costs 65,116 11,891 5,539 82,546
---------- -------- -------- -----------
(1,587,935) (669,370) (528,329) (15,424,093)
---------- -------- -------- -----------
Provision for Doubtful Accounts
Write-down of advances
- related parties - Note 8 (14,375) (113,779) - (135,481)
- other (7,000) (16,852) - (23,852)
---------- -------- -------- -----------
(21,375) (130,631) - (159,333)
---------- -------- -------- -----------
</TABLE>
SEE ACCOMPANYING NOTES
-55-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1999, 1998, and 1997
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1999
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
January 1, 1992
(Date of Incep-
tion of Develop-
ment Stage) to
Years ended December 31, December 31,
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other General Expense
Severance pay - related party
- Note 8 - (90,000) - (90,000)
------- ------- ------- ---------
Non-operating Income (Loss)
Interest income 11,715 - - 16,735
Foreign exchange gain 15,308 70,328 5,074 266,967
Gain (loss) on sale of marketable
securities - related parties - Note 8 (35,788) (688) 64,213 393,090
Gain on disposal of capital assets
- related parties - Note 8 - - - 48,133
- other - 77 - 18,989
Gain on settlement of accounts
payable - - - 197,228
Gain on write-off of accounts
payable 73,926 - 26,760 142,428
------- ------- ------- ---------
65,161 69,717 96,047 1,083,570
------- ------- ------- ---------
Interest Expense
General - related parties - Note 8 (12,965) (24,379) (44,342) (331,024)
- other - (286) (1,822) (212,314)
Interest on convertible debentures
- related parties - Note 8 - - - (133,144)
- other - - - (27,497)
------- ------- ------- ---------
(12,695) (24,665) (46,164) (703,979)
------- ------- ------- ---------
</TABLE>
SEE ACCOMPANYING NOTES
-56-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1999, 1998, and 1997
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1999
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
January 1, 1992
(Date of Incep-
tion of Develop-
ment Stage) to
Years ended December 31, December 31,
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Non-operating Expenses
Oil well closure costs - - (3,092) (79,702)
Write-down of capital assets - (1,408) - (745,520)
Write-off of resource properties - - - (717,789)
Write-off of goodwill - - - (640,639)
----------- --------- --------- ------------
- (1,408) (3,092) (2,183,650)
----------- --------- --------- ------------
Loss before Other Items (1,558,813) (846,357) (481,538) (17,476,184)
Cumulative effect on prior years of
changing to a different amortization
method - Note 6 (27,390) - - (27,390)
Other Comprehensive Loss
Write-down of marketable securities
- related party - Note 8 (101,265) (118,807) (86,680) (1,109,162)
Loss on Equity Accounted Investment
- Note 4 - (16,434) (109,938) (174,144)
----------- --------- --------- ------------
Net loss $(1,684,468) $(981,598) $(678,156) $(18,786,880)
=========== ========= ========= ============
Basic loss per share $ (0.03) $ (0.02) $ (0.02)
=========== ========= =========
Weighted average shares outstanding 66,766,504 50,457,546 37,878,380
=========== ========= =========
</TABLE>
SEE ACCOMPANYING NOTES
-57-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
for the years ended December 31, 1986 to December 31, 1999
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1999
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Number Common Stock Common Share Development
of Shares Price Amount Subscriptions Stages Total
--------- ----- ------ ------------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Issued on incorporation 500,000 $0.038 $ 18,855 $ - $ - $ 18,855
Issued for prospectus 1987 2,000,000 $0.038 75,421 75,421
Exercise of share purchase options 1987 237,500 $0.298 70,660 70,660
Exercise of share purchase options 1988 152,500 $0.800 122,044 122,044
Issued for private placement 1989 237,280 $0.667 158,149 158,149
Issued for resource property finders
fee 1989 20,000 $0.422 8,445
Stock split 1989 3,147,280
Exercise of share purchase options 1989 133,000 $0.416 55,314 55,314
Issued for resource property finders
fee 1989 29,000 $0.416 12,060
Issued for settlement of debt 1989 20,000 $0.422 8,445 8,445
Issued for loan repayment 1989 200,000 $0.422 84,445 84,445
Exercise of share purchase options 1990 304,500 $0.429 130,490 130,490
Issued for private placement 1990 795,500 $0.370 294,086 294,086
Issued on conversion of debenture 1990 1,000,000 $0.129 128,536 128,536
Exercise of share purchase options 1991 425,000 $0.044 18,546 18,546
Exercise of share purchase warrants 1991 300,000 $0.175 52,365 52,365
Net loss from inception to
December 31, 1991
Share subscriptions at
December 31, 1991 6,923
--------- ---------- ------------- ----------- --------
Balance December 31, 1991 9,501,560 1,237,861 6,923 (906,750) 338,034
</TABLE>
SEE ACCOMPANYING NOTES
-58-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
for the years ended December 31, 1986 to December 31, 1999
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1999
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Date of Number Common Stock Common Share Development
Issuance of Shares Price Amount Subscriptions Stages Total
-------- --------- ----- ------ ------------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Issued for cash:
Private placement May 1, 1992 3,000,000 $0.141 422,081 422,081
Private placements Various 1,625,669 $0.629 1,022,518 1,022,518
Share purchase options Various 450,000 $0.041 18,621 (6,923) 11,698
Share purchase options Various 371,000 $0.414 153,521 153,521
Share purchase warrants Various 700,000 $0.166 115,865 115,865
Share purchase warrants Various 283,250 $0.414 117,210 117,210
Convertible debenture warrants Various 8,297,320 $0.041 343,347 343,347
Issued for conversion of debenture Various 8,297,320 $0.031 257,511 257,511
Issued for settlement of debt Apr. 14, 1992 1,031,332 $0.093 96,023 96,023
Issued for settlement of debt Various 134,800 $0.414 55,781 55,781
Net loss for year (2,721,567) (2,721,567)
Share subscriptions at
December 31, 1992 154,181 154,181
---------- --------- ------- ---------- ----------
Balance December 31, 1992 33,692,251 3,840,339 154,181 (3,628,317) 366,203
</TABLE>
SEE ACCOMPANYING NOTES
-59-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
for the years ended December 31, 1986 to December 31, 1999
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1999
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Date of Number Common Stock Common Share Development
Issuance of Shares Price Amount Subscriptions Stages Total
-------- --------- ----- ------ ------------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Issued for cash:
Private placement Mar. 4, 1993 500,000 $0.395 197,705 197,705
Private placement Mar. 4, 1993 1,000,000 $0.465 465,188 465,188
Private placement May 5, 1993 2,328,615 $0.636 1,480,436 (154,181) 1,326,255
Issue costs (18,938) (18,938)
Private placement Jul 13, 1993 50,000 $1.287 64,351 64,351
Share purchase options Various 2,521,320 $0.388 977,407 977,407
Share purchase options Various 150,000 $0.465 69,778 69,778
Share purchase warrants Various 50,000 $0.644 32,175 32,175
Convertible debenture warrants Various 1,146,485 $0.039 44,444 44,444
Issued for conversion of debenture Various 666,666 $0.029 19,383 19,383
Issued for conversion of debenture Various 781,250 $0.821 641,098 641,098
Issued in payment of debenture
interest Various 479,819 $0.029 13,950
Issued for settlement of debt Jan. 7, 1993 473,273 $0.594 281,321 281,321
Net loss for year (3,526,607) (3,526,607)
Share subscriptions at
December 31, 1993 485,900 485,900
---------- --------- ------- ---------- ----------
Balance December 31, 1993 43,839,679 8,108,637 485,900 (7,154,924) 1,439,613
</TABLE>
SEE ACCOMPANYING NOTES
-60-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
for the years ended December 31, 1986 to December 31, 1999
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1999
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
Date of Number Common Stock Common Share
Issuance of Shares Price Amount Subscriptions
-------- --------- ----- ------ -------------
<S> <C> <C> <C> <C> <C>
Issued for cash:
Private placements Various 3,000,000 $0.732 2,196,354 (485,900)
Private placements Various 22,261,000 $0.183 4,074,420
Share purchase options Various 52,180 $0.366 19,101
Share purchase options Various 87,900 $0.439 38,612
Share purchase warrants Feb. 2, 1994 100,000 $0.549 54,909
Share purchase warrants Mar. 21, 1994 300,000 $0.498 149,352
Issued for conversion of debenture Jul. 5, 1994 78,125 $0.813 63,552
Reserved earnout shares acquired
and cancelled
Net loss for year
---------- ---------- -------------
Balance December 31, 1994 69,718,884 14,704,937 -
Issued for settlement of debt Jan. 12, 1995 150,000 $0.255 38,249
Issued for settlement of debt Jan. 12, 1995 10,720 $0.182 1,952
Share consolidation - 1 share for
5 shares Feb. 23, 1995 (55,903,643)
Issued for cash:
Private placements Various 510,000 $0.219 111,467
Issued for settlement of debt Feb. 5. 1995 7,574 $0.546 4,138
<CAPTION>
Deficit
Accumulated
During the
Development
Stages Total
------ -----
<S> <C> <C>
Issued for cash:
Private placements 1,710,454
Private placements 4,074,420
Share purchase options 19,101
Share purchase options 38,612
Share purchase warrants 54,909
Share purchase warrants 149,352
Issued for conversion of debenture 63,552
Reserved earnout shares acquired
and cancelled (947,200) (947,200)
Net loss for year (5,367,073) (5,367,073)
----------- ----------
Balance December 31, 1994 (13,469,197) 1,235,740
Issued for settlement of debt 38,249
Issued for settlement of debt 1,952
Share consolidation - 1 share for
5 shares
Issued for cash:
Private placements 111,467
Issued for settlement of debt 4,138
</TABLE>
-61-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
for the years ended December 31, 1986 to December 31, 1999
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1999
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
Date of Number Common Stock Common Share
Issuance of Shares Price Amount Subscriptions
-------- --------- ----- ------ -------------
<S> <C> <C> <C> <C> <C>
Net loss for year
Share subscriptions
at December 31, 1995 394,791
---------- ---------- ----------
Balance December 31, 1995 14,493,535 14,860,743 394,791
Issued for cash:
Private placements Various 9,950,000 $0.088 875,623 (394,791)
Share purchase options Various 205,000 $0.183 37,585
Issued for settlement of debt Jun. 14, 1996 9,233,553 $0.088 812,575
Net loss for year
Share subscriptions at
December 31, 1996 106,827
---------- ---------- ----------
Balance December 31, 1996 33,882,088 16,586,526 106,827
Issued for cash:
Private placements Various 4,000,000 $0.072 288,933 (106,827)
Private placement Dec. 17, 1997 1,250,000 $0.235 293,448
Share purchase warrants Various 749,000 $0.079 59,513
Share purchase warrants Various 3,000,000 $0.108 325,051
Share purchase warrants Various 270,000 $0.116 31,205
Share purchase options Various 650,000 $0.072 46,952
<CAPTION>
Deficit
Accumulated
During the
Development
Stages Total
-------------- -------------
<S> <C> <C>
Net loss for year (3,168,518) (3,168,518)
Share subscriptions
at December 31, 1995 394,791
----------- ----------
Balance December 31, 1995 (16,637,715) (1,382,181)
Issued for cash:
Private placements 480,832
Share purchase options 37,585
Issued for settlement of debt 812,575
Net loss for year (658,893) (658,893)
Share subscriptions at
December 31, 1996 106,827
----------- --------
Balance December 31, 1996 (17,296,608) (603,255)
Issued for cash:
Private placements 182,106
Private placement 293,448
Share purchase warrants 59,513
Share purchase warrants 325,051
Share purchase warrants 31,205
Share purchase options 46,952
</TABLE>
-62-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
for the years ended December 31, 1986 to December 31, 1999
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1999
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
Date of Number Common Stock Common Share
Issuance of Shares Price Amount Subscriptions
-------- --------- ----- ------ -------------
<S> <C> <C> <C> <C> <C>
Net loss for year
Share subscriptions at
December 31, 1997 113,708
---------- ---------- -------
Balance December 31, 1997 43,801,088 17,631,628 113,708
Issued for cash:
Private placements Various 6,000,000 $0.067 404,449
Share purchase warrants Various 2,000,000 $0.101 202,224 (75,835)
Share purchase warrants Various 550,000 $0.074 40,782
Share purchase warrants Apr. 24, 1998 300,000 $0.108 32,356
Share purchase warrants Various 2,655,000 $0.067 178,969
Share purchase options Various 3,450,000 $0.067 232,558 (37,873)
Net loss for year
---------- ---------- -------
Balance December 31, 1998 58,756,088 18,722,966 -
<CAPTION>
Deficit
Accumulated
During the
Development
Stages Total
------ -----
<S> <C> <C>
Net loss for year (678,156) (678,156)
Share subscriptions at
December 31, 1997 113,708
----------- -------
Balance December 31, 1997 (17,974,764) (229,428)
Issued for cash:
Private placements 404,449
Share purchase warrants 126,389
Share purchase warrants 40,782
Share purchase warrants 32,356
Share purchase warrants 178,969
Share purchase options 194,685
Net loss for year (981,598) (981,598)
----------- --------
Balance December 31, 1998 (18,956,362) (233,396)
</TABLE>
-63-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
for the years ended December 31, 1986 to December 31, 1999
and January 1, 1992 (Date of Inception of Development Stage) to December 31,
1999
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
Date of Number Common Stock Common Share
Issuance of Shares Price Amount Subscriptions
-------- --------- ----- ------ -------------
<S> <C> <C> <C> <C> <C>
Issued for cash:
Private placement Feb. 24, 1999 2,000,000 $0.067 133,574
Private placement Apr. 17, 1999 1,000,000 $0.114 114,293
Private placement Jun. 28, 1999 500,000 $0.395 197,400
Private placement Sept. 1, 1999 750,000 $ 1.00 750,000
Share purchase warrants Various 3,820,000 $0.067 255,940
Share purchase warrants Jul. 12, 1999 25,000 $0.128 3,190
Share purchase warrants Various 1,250,000 $0.294 366,894
Share purchase options Various 4,265,000 $0.067 287,755
Share purchase options Various 550,000 $0.095 52,140
Share purchase options Various 66,000 $ 1.00 66,000
Net loss for the year
---------- ----------- -------------
Balance, December 31, 1999 72,982,088 $20,950,152 $ -
========== =========== =============
<CAPTION>
Deficit
Accumulated
During the
Development
Stages Total
------ -----
<S> <C> <C>
Issued for cash:
Private placement 133,574
Private placement 114,293
Private placement 197,400
Private placement 750,000
Share purchase warrants 255,940
Share purchase warrants 3,190
Share purchase warrants 366,894
Share purchase options 287,755
Share purchase options 52,140
Share purchase options 66,000
Net loss for the year (1,684,468) (1,684,468)
----------- ----------
Balance, December 31, 1999 $ (20,640,830) $ 309,322
=========== ==========
</TABLE>
-64-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997 and
January 1, 1992 (Date of Inception of Development Stage) to December 31, 1999
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
January 1, 1992
(Date of Incep-
tion of Develop
ment Stage) to
Years ended December 31, December 31,
-----------------------
1999 1998 1997 1999
---- ---- ---- -----
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net loss $ (1,684,468) $ (981,598) $(678,156) $(18,786,880)
Adjustments to reconcile net loss to net cash used in operations:
Amortization of capital assets 108,869 38,473 4,605 238,424
Amortization of goodwill - - - 228,023
Amortization of patents 4,493 2,508 2,170 17,329
Foreign exchange 1,657 (38,773) (5,074) (86,078)
Loss (gain) on sale of marketable securities - related parties 35,788 688 (64,213) (393,090)
Gain on disposal of capital assets - related parties - - - (48,133)
- other - (77) - (18,989)
Gain on settlement of accounts payable - - - (197,228)
Gain on write-off of accounts payable (73,926) - (26,760) (142,428)
Write-down of marketable securities - related parties 102,465 128,312 86,680 1,134,983
Loss on equity assessment investment - 16,434 109,938 174,144
Write-down of advances - related parties 14,375 113,779 - 135,481
- other 7,000 16,852 - 23,492
Write-down of capital assets - 13,653 33,359 791,124
Write-off of resource properties - - - 717,789
Write-off of goodwill - - - 640,639
Cumulative effect on prior years amortization of changing to a different
amortization method 27,390 - -
Accounts receivable - related parties 12,590 (4,604) 204,951 3,482
- other (9,202) 7,681 - (1,521)
Prepaid expenses 28,065 (30,084) 1,087 (35,026)
Accounts payable - related parties (7,780) 3,703 - (4,077)
- other 80,368 32,095 202,100 1,214,320
</TABLE>
SEE ACCOMPANYING NOTES Cont'd.
-65-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997 and
January 1, 1992 (Date of Inception of Development Stage) to December 31, 1999
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
January 1, 1992
(Date of Incep-
tion of Develop
ment Stage) to
December 31,
Years ended December 31,
-------------------------
1999 1998 1997 1999
----- ---- --- ----
<S> <C> <C> <C> <C>
Due to related parties 14,838 (15,182) (192,247) (246,065)
------------ ---------- ---------- ------------
Net cash used in operating activities (1,337,478) (696,140) (725,760) (14,612,895)
------------ ---------- ---------- ------------
Cash flow provided by (used in) investing activities:
Proceeds on sale of marketable securities - related parties 4,867 26,045 123,415 1,309,195
Purchase of marketable securities - related parties (88,700) (58,520) (139,948) (2,045,967)
Advances - related parties (14,375) (113,779) (52,481) (151,973)
- other (7,000) - - (7,000)
Investment - - - 246,571
Goodwill - - - (868,662)
Proceeds on sale of capital assets - related parties - - - 48,133
- other - 674 - 231,395
Purchases of capital assets (335,715) (151,284) (127,632) (1,705,761)
Patent fees (33,737) (5,759) (5,599) (76,395)
Resource properties - - - 19,213
------------ ---------- ---------- ------------
Net cash used in investing activities (474,660) (302,623) (202,245) (3,001,251)
------------ ---------- ---------- ------------
Cash flow provided by (used in) financing activities:
Note payable - - (114,857) -
Convertible debenture - related parties - - - 1,558,438
Common shares issued for cash 2,227,186 977,630 938,275 17,419,835
Common share subscriptions - - 113,708 -
Reserved earnout shares acquired and cancelled - - - (947,200)
------------ ---------- ---------- ------------
Net cash provided by financing activities 2,227,186 977,630 937,126 18,031,073
------------ ---------- ---------- ------------
</TABLE>
SEE ACCOMPANYING NOTES Continued
-66-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997 and
January 1, 1992 (Date of Inception of Development Stage) to December 31, 1999
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
January 1, 1992
(Date of Incep-
tion of Develop
ment Stage) to
Year ended December 31, December 31,
-----------------------
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net increase (decrease) in cash 415,048 (21,133) 9,121 416,927
Cash, beginning of the period 2,618 23,751 14,630 739
---------- --------- --------- ----------
Cash and cash equivalents, end of the period $ 417,666 $ 2,618 $ 23,751 $ 417,666
========== ========= ========= ==========
</TABLE>
Supplementary Information - Note 10
SEE ACCOMPANYING NOTES
-67-
<PAGE>
USA VIDEO INTERACTIVE CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Stated in U.S. Dollars)
----------------------
Note 1 Nature and Continuance of Operations
------------------------------------
USA Video Interactive Corp. is a public company in the development
stage listed on the Canadian Venture Exchange and NASD Bulletin Board
and is a designer of high-tech internet streaming video and video-on-
demand systems, services and solutions.
These consolidated financial statements have been prepared on a going
concern basis. The company has a working capital deficiency of
$186,181 as at December 31, 1999 and has accumulated a deficit of
$20,640,830 since inception. Its ability to continue as a going
concern is dependent upon the ability of the company to generate
profitable operations in the future and/or to obtain the necessary
financing to meet its obligations and repay its liabilities arising
from normal business operations when they come due. The outcome of
these matters cannot be predicted, with any certainty, at this time.
These consolidated financial statements do not include any adjustments
to the amounts and classification of assets and liabilities that may
be necessary should the company be unable to continue as a going
concern.
Note 2 Summary of Significant Accounting Principles
--------------------------------------------
The consolidated financial statements of the company have been
prepared in accordance with generally accepted accounting principles
in the United States. Because a precise determination of many assets
and liabilities is dependent upon future events, the preparation of
financial statements for a period necessarily involved the use of
estimates, which have been made using careful judgement. Actual
results may differ from these estimates.
The financial statements, in management's opinion, have been properly
prepared within reasonable limits of materiality and within the
framework of the significant accounting policies summarized below:
Organization
------------
USA Video Interactive Corp.'s corporate jurisdiction is the State of
Wyoming and it is extra-provincially registered in British Columbia,
Canada and Alberta, Canada. The company was incorporated in Alberta,
Canada on April 18, 1986 as First Commercial Financial Group Inc. On
September 1, 1989 the company changed its name to Micron Metals Canada
Corp. and forward split its common shares on a one old for two new
basis.
By a purchase agreement dated November 21, 1991 and amended March 6,
1992, July 28, 1992 and September 15, 1992, the company acquired 100%
of the outstanding shares of USA Video Inc., a corporation
incorporated on January 29, 1990 in the state of Texas. On July 28,
1993 USA Video Inc. changed its name to USA Video Corporation.
On December 24, 1991 the company incorporated a wholly owned
subsidiary USA Video Corp. in the state of Nevada. On May 4, 1993 USA
Video Corp. changed its name to USA Video (California) Corporation.
USA Video (California) Corporation was inactive during the year ended
December 31, 1999.
-68-
<PAGE>
USA Video Interactive Corp.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998 - Page 2
(Stated in U.S. Dollars)
----------------------
Note 2 Summary of Significant Accounting Principles - (cont'd)
--------------------------------------------
Organization - (cont'd)
------------
On April 6, 1992 the company changed its name to USA Video
Corporation. On January 3, 1995 the company changed its name to USA
Video Interactive Corp. and on February 16, 1995 the company continued
its corporate jurisdiction from Alberta, Canada to the State of
Wyoming. On February 23, 1995 the company consolidated its common
shares on a five old for one new basis.
On April 18, 1996, the company formed a joint venture partnership
Adnet USA, LLC. The joint venture was inactive during the year ended
December 31, 1999.
On June 15, 1999, the company incorporated a wholly owned subsidiary
Merging Rivers Media Corp ("Merging"). Merging was inactive during the
year ended December 31, 1999.
Development Stage Company
-------------------------
The company is a development stage company as defined in Statement of
Financial Accounting Standards No. 7. The company is devoting
substantially all of its present efforts to the business of developing
and testing a video-on-demand technology. For the purpose of providing
cumulative amounts for the statements of operations and cash flows,
these amounts consider only those losses for the period from January
1, 1992 to December 31, 1999, the period in which the company has
undertaken a new development stage activity.
Principles of Consolidation
---------------------------
These consolidated financial statements include the accounts of USA
Video Interactive Corp. and its wholly owned subsidiaries, USA Video
(California) Corporation (an inactive company) and USA Video
Corporation. All significant inter-company transactions and balances
have been eliminated on consolidation.
Investment in Joint Venture
---------------------------
The company accounts for its investment in corporate joint ventures by
the equity method of accounting where it is not able to exercise
control over the operations.
Cash Equivalents
----------------
The company considers all highly liquid debt instruments capable of
redemption within three months or less to be cash equivalents.
Marketable Securities
---------------------
All marketable securities held by the company are considered to be
trading securities, bought and held principally for the purpose of
selling them in the near term. Trading securities are included at fair
value and only unrealized gains and losses are included in earnings.
-69-
<PAGE>
USA Video Interactive Corp.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998 - Page 3
(Stated in U.S. Dollars)
----------------------
Note 2 Summary of Significant Accounting Principles - (cont'd)
--------------------------------------------
Allowance for Doubtful Accounts
-------------------------------
Allowance for doubtful accounts are determined based on management's
review of specific accounts receivable or advances receivable based on
the likelihood of collection. If collection is unlikely, then the
company will record a write-down of the receivable.
Capital Assets and Amortization
-------------------------------
Capital assets are recorded at historical cost. Amortization is
calculated at the following rates:
Office equipment - 5 years on a straight line basis
Computer and Testing equipment - 3 years on a straight line basis
Video server prototypes - 3 years on a straight line basis
Leasehold improvements - 5 years on a straight-line basis
Capital assets not put into use during the year are not amortized.
Cost of computer software obtained for internal use is capitalized
with computer and testing equipment. Website development costs are
expensed as incurred.
Amortization of capital assets acquired in prior years was previously
calculated using the graduated straight-line method over 7 years for
all classes of capital assets. The new method using straight-line
amortization over various periods for different classes was adopted to
recognize amortization over a shorter period in order to reflect the
rapid pace of technological change. This change has been applied
retroactively to capital asset acquisitions of prior years, and is
treated as a change in accounting principle due to the change in
method of amortization for previously recorded assets.
Patents
-------
The company owns patents and has patents pending for the Store and
Forward Video System. The patents and patents pending are recorded at
cost and are being amortized on a straight-line basis over 17 years.
In the event that patents pending are not granted, the company
expenses the remaining net carrying value in the year the grant
application is denied.
Research and Development Costs
------------------------------
Research and development costs are expensed as incurred.
Foreign Currency Translation
----------------------------
Foreign currency transactions are translated into U.S. dollars, the
functional and reporting currency, by the use of the exchange rate in
effect at the date of the transaction, in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation".
At each balance sheet date, recorded balances that are denominated in
a currency other than US dollars are adjusted to reflect the current
exchange rate.
Income Taxes
------------
The company uses the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes".
-70-
<PAGE>
USA Video Interactive Corp.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998 - Page 4
(Stated in U.S. Dollars)
----------------------
Note 2 Summary of Significant Accounting Principles - (cont'd)
--------------------------------------------
Basic Loss per Share
--------------------
The company reports basic loss per share in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share". Basic
loss per share is computed using the weighted average number of shares
outstanding during the years. Diluted loss per share has not been
provided as it would be antidilutive.
Fair Market Value of Financial Instruments
------------------------------------------
The carrying values of cash and cash equivalents, marketable
securities, accounts receivable, accounts payable and due to related
parties approximate fair value because of the short maturity of those
instruments.
Revenue Recognition
-------------------
Revenue from product sales is recognized when it is realized or
realizable and earned, upon shipment to customers.
Comprehensive Income
--------------------
The company reports comprehensive income in accordance with Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income". Other comprehensive losses are represented by the write-down
of marketable securities and are included in the Consolidated
Statement of Operations.
Impairment of Long-lived Assets
-------------------------------
The company reports the impairment of long-lived assets in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed Of". Certain long-lived assets held by the company are
reviewed for impairment whenever assets or changes in circumstances
indicate the carrying amount of an asset may not be recoverable.
Accordingly, an impairment loss is recognized in the period it is
determined.
Write-off of Accounts Payable
-----------------------------
Accounts payable are reviewed by management at each year end to
determine whether any payable set-up in a previous period are unlikely
to be paid based on a disagreement by management as to the amount of
product or services provided, if any, and whether such payables have
become legally unenforceable. Those payables that meet these criteria
are written-off.
Stock-based Compensation
------------------------
The company has elected to account for stock-based compensation
following APBO No. 25, "Accounting for Stock Issued to Employees", and
to provide the disclosures required under SFAS No. 123, "Accounting
for Stock Based Compensation" (Note 9).
-71-
<PAGE>
USA Video Interactive Corp.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998 - Page 5
(Stated in U.S. Dollars)
----------------------
Note 3 Marketable Securities - Note 8
------------------------------
<TABLE>
<CAPTION>
1999
Fair 1999 1998
Market Value Cost Cost
-------------- --------------- ---------------
<S> <C> <C> <C>
Glassmaster Industries Inc.
3,000,000 common shares
(1998: 2,850,000 common shares) $ 240,772 $ 192,727
Write-down to market value (220,072) (118,807)
-------------- --------------- ---------------
$ 20,700 $ 20,700 $ 73,920
============== =============== ===============
</TABLE>
Glassmaster Industries Inc. is related to the company by virtue of
common directors.
Note 4 Adnet USA LLC Joint Venture - Note 8
---------------------------
The company owns a 50% interest in a corporate joint venture, which
has incorporated a California limited liability company, Adnet USA
LLC. The purpose of the joint venture company was to provide internet
advertising and web page facilities to corporate customers. The
company's joint venture partner is a related company by virtue of
common directors.
Joint venture expenses consist of the following:
<TABLE>
<CAPTION>
January 1, 1992
(Date of Incep-
tion of Develop-
ment Stage) to
December 31,
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C>
Amortization of capital assets $ - $ - $ 3,243 $ 5,660
Market consulting - 2,500 17,502 42,502
Office administration - - 3,412 4,162
Professional fees - - - 862
Public relations and advertising - - 8,376 11,121
Rent - - 2,976 7,832
Telephone - 1,189 16,434 31,265
Web site - 500 12,533 13,033
Write-off of capital assets - 12,245 45,462 57,707
---------------- ------------ ----------- ------------
Company's share of joint venture
expenses $ - $ 16,434 $ 109,938 $ 174,144
---------------- ------------ ----------- ------------
Company's share of joint venture loss $ - $ 16,434 $ 109,938 $ 174,144
================ ============ =========== ============
</TABLE>
-72-
<PAGE>
USA Video Interactive Corp.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998 - Page 6
(Stated in U.S. Dollars)
----------------------
Note 4 Adnet USA LLC Joint Venture - Note 8
---------------------------
The company and its joint venture partner have agreed to abandon the
joint venture and consequently Adnet USA LLC inactive. The remaining
investment in Adnet is recorded at $Nil, as the company recorded its
equity share of the losses to date, totalling $174,144, the amount of
the investment in and advances to the joint venture
Note 5 Prepaid Expenses
----------------
The company had entered into negotiations to purchase a 50% interest
in a company for CDN$2,500,000 payable in stages. As at December 31,
1997, the company had advanced $52,481 (CDN$75,000) toward the
purchase price of which CDN$50,000 was refundable if the agreement was
not proceeded with and the balance of CDN$25,000 was non-refundable.
As at December 31, 1998 the company decided not to proceed with the
investment and consequently the non-refundable portion of $16,852,
(CDN$25,000) was written-off. The balance of $33,937, (CDN$50,000) was
included in prepaid expense at December 31, 1998 and is to be applied
under the terms of a license agreement.
By a license agreement dated April 14, 1998 and amended March 24,
1999, with the above-noted company, the company had the exclusive
right to sell a certain software application system until October 14,
1999. In consideration of this right, the company had agreed to order
a minimum of $150,000 of systems during the period of the agreement.
The minimum order amount was not met and the company was required to
pay a penalty of 30% of the unordered amount. The advance of $33,937,
(CDN$50,000) included in prepaid expenses at December 31, 1998 was
utilized during the year ended December 31, 1999 to pay a penalty for
not ordering a minimum amount.
Note 6 Capital Assets
--------------
<TABLE>
<CAPTION>
Accumulated Net Carrying Value
Cost Amortization 1999 1998
---- ------------ ---- ----
<S> <C> <C> <C> <C>
Office equipment $ 87,868 $ 19,842 $ 68,026 $ 63,029
Computer and testing equipment 336,676 40,864 295,812 26,252
Video server prototype 170,916 113,944 56,972 147,680
Leasehold improvements 15,607 - 15,607 -
------------ ----------- ----------- ----------
$ 611,067 $ 174,650 $ 436,417 $ 236,961
============ =========== =========== ==========
</TABLE>
The effect of the change in amortization policy described in the
summary of significant accounting principles was to decrease the
amortization expense and the loss for the year ended December 31, 1999
by $4,307. The adjustment of $27,390 to apply retroactively the new
method is included in the statement of operations for the year ended
December 31, 1999.
-73-
<PAGE>
USA Video Interactive Corp.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998 - Page 7
(Stated in U.S. Dollars)
----------------------
Note 7 Patents
-------
Net Carrying Value
1999 1998
---- ----
Cost $ 76,395 $ 42,658
Accumulated amortization (17,329) (12,836)
----------- ---------
$ 59,066 $ 29,822
=========== =========
The patents consist of a US patent (granted), European patent
(granted), Canadian patent (pending) and Japanese patent (pending).
The US patent has expired and the patent office has declined a request
to reinstate the patent. The company has appealed the denial of the
patent reinstatement and believes that the matter will be resolved in
its favour and has not recorded a charge to income for this contingent
loss at December 31, 1999. The amount of the contingent loss of the
net carrying amount of the US patent is $15,083 as at December 31,
1999.
Note 8 Related Party Transactions - Notes 3, 4 and 13
--------------------------
The company has incurred costs paid to directors, former directors,
officers, companies controlled by directors of the company, and
companies with directors in common with the company as follows:
<TABLE>
<CAPTION>
January 1, 1992
(Date of Incep-
tion of Develop-
ment Stage) to
December 31,
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consulting fees $ 156,000 $ 84,611 $ 63,982 $ 1,218,044
Interest expense 12,965 24,379 44,342 331,024
Interest on convertible debentures - - - 133,144
Management fees 24,000 27,000 174,025 1,940,845
Product marketing costs 214,500 82,000 - 296,500
Office and general - - - 236,989
Office assistance 66,000 21,739 14,328 102,067
Professional fees 6,980 5,270 5,508 105,252
Public relations 12,000 - - 12,000
Rent - - - 12,950
Research and development costs 82,500 24,000 - 525,698
Salaries and benefits - - - 219,177
Loss (gain) on sale of marketable
securities 35,788 688 (64,213) (393,090)
Gain on disposal of capital assets - - - (48,133)
Severance pay - 90,000 - 90,000
Write-down of marketable securities 101,265 118,807 86,680 1,109,162
Write-down of advances 14,375 113,779 - 135,481
---------- ---------- --------- -----------
$ 726,373 $ 592,273 $ 324,652 $ 6,027,110
========== ========== ========= ===========
</TABLE>
-74-
<PAGE>
USA Video Interactive Corp.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998 - Page 8
(Stated in U.S. dollars)
- ------------------------
Note 8 Related Party Transactions - Notes 3, 4 and 13 - (cont'd)
--------------------------
Included in accounts receivable at December 31, 1998 is $12,590 due
from companies related by virtue of having directors in common.
Included in accounts payable at December 31, 1999 is $11,592 (1998:
$19,372) in fees due to directors and companies controlled by
directors of the company.
Due to related parties at December 31, 1999 includes $43,301 (1998:
$130,961) due to a director in respect to advances to the company that
accrue interest at 1.25% per month, compound monthly, are unsecured
and are payable on thirty days notice of demand. The balance of
amounts due to related parties at December 31, 1999 in the amount of
$145,565 (1998: $43,067) are due to directors of the company for
unpaid fees for services. These amounts are non-interest bearing,
unsecured and payable on demand.
Note 9 Capital Stock - Note 13
-------------
Authorized:
250,000,000 common shares without nominal or par value
250,000,000 preferred shares without nominal or par value
Commitments:
Stock-Based Compensation
Effective January 2, 1990, the company established the Share Option
Plan. Under the terms of this plan, officers, directors and employees
may be granted options to purchase common shares of the company at the
closing price of the company's common stock on the date of the grant,
with no option being granted below CDN$0.10 per share. The options may
be granted with varying terms until expiry, with a maximum term of 5
years. There are no specific vesting requirements under the plan. The
aggregate number of securities reserved for issuance under the terms
of the plan may not exceed 10% of the outstanding listed securities of
the company (on a non-diluted basis) and the aggregate number of
securities reserved for issuance to any one party may not exceed 5% of
the outstanding listed securities of the company (on a non-diluted
basis).
-75-
<PAGE>
USA Video Interactive Corp.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998 - Page 9
(Stated in U.S. dollars)
- ------------------------
Note 9 Capital Stock - Note 13 - (cont'd)
-------------
Presented below is a summary of the stock option plan activity for the
years shown:
<TABLE>
<CAPTION>
Number of Weighted Average
Stock Options Exercise Price
------------- --------------
<S> <C> <C>
Balance, December 31, 1996 880,000 $0.17
Cancelled (880,000) $0.17
Granted 3,425,000 $0.07
Exercised (650,000) $0.07
--------- -----
Balance, December 31, 1997 2,775,000 $0.07
Granted 5,010,000 $0.07
Exercised (3,450,000) $0.07
Balance, December 31, 1998 --------- -----
Cancelled (500,000) $0.07
Granted 7,375,000 $0.64
Exercised (4,881,000) $0.08
--------- -----
Balance, December 31, 1999 6,329,000 $0.81
========= =====
</TABLE>
The number of stock options outstanding is equal to the number
exercisable as there are no vesting provisions.
The company grants stock options at exercise prices equal to the fair
market value of the company's stock at the date of the grant. Pursuant to
APBO No. 25, no compensation expense is recognized in this circumstance.
Under SFAS No. 123, if the company elects to follow APBO No. 25, it is
required to present pro-forma information as to the effect on income and
earnings per share as if the company had accounted for its employee stock
options under the fair value method of that statement. Had compensation
cost been determined based on the fair value at the grant dates for those
options issued to directors, employees, and consultants, the company's
net loss and loss per share would have been increased to the pro-forma
amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Loss As reported $1,684,468 $ 981,598 $678,156
Pro-forma $5,420,133 $1,193,652 $816,184
Loss per share As reported $ 0.03 $ 0.02 $ 0.02
Pro-forma $ 0.08 $ 0.02 $ 0.02
</TABLE>
Pro-forma diluted loss per share has not been presented because
assuming the conversion of stock options would have an anti-dilutive
effect.
-76-
<PAGE>
USA Video Interactive Corp.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998 - Page 10
(Stated in U.S. dollars)
- ------------------------
Note 9 Capital Stock - Note 13 - (cont'd)
-------------
The weighted average fair value at date of grant of the options
granted were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average fair value $ 0.51 $ 0.05 $ 0.04
Total options granted 7,375,000 5,010,000 3,425,000
Total fair value of all options granted $3,735,665 $ 212,054 $ 138,028
</TABLE>
The fair value of each option grant was estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility 250% 195% 155%
Risk-free interest rate 5.46% 5.36% 6.45%
Expected term in years 1 1 1
</TABLE>
The following common share purchase options were outstanding at
December 31, 1999 entitling the holders thereof the right to purchase
one common share for each option held:
<TABLE>
<CAPTION>
Exercise Price
Number of Options Per Share Expiry Date
----------------- --------- -----------
<S> <C> <C> <C>
Directors 2,300,000 USD$ 1.00 July 16, 2001
Employees 1,275,000 CDN$ 0.10 January 31, 2001
144,000 USD$ 1.00 July 16, 2001
225,000 USD$ 1.00 November 25, 2001
200,000 USD$ 1.00 December 22, 2001
Consultants 95,000 CDN$ 0.10 October 20, 2000
550,000 CDN$ 0.14 March 9, 2001
540,000 USD$ 1.00 July 16, 2001
450,000 USD$ 1.00 November 25, 2001
550,000 USD$ 1.00 December 22, 2001
---------
6,329,000
=========
</TABLE>
-77-
<PAGE>
USA Video Interactive Corp.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998 - Page 11
(Stated in U.S. dollars)
- ------------------------
Note 9 Capital Stock - Note 13 - (cont'd)
-------------
Share Purchase Warrants
The following share purchase warrants were outstanding at December 31,
1999 entitling the holders thereof the right to acquire one common
share for each warrant held:
<TABLE>
<CAPTION>
Number of Exercise Price
Warrants Per Share Expiry Date
-------- --------- -----------
<S> <C> <C>
3,100,000 CDN$ 0.10 September 30, 2000
925,000 CDN$ 0.10 January 31, 2001
975,000 CDN$ 0.19 March 23, 2001
500,000 CDN$ 0.73 May 19, 2001
750,000 USD$ 1.10 July 15, 2001
---------
6,250,000
=========
</TABLE>
Note 10 Supplementary Cash Flow Information
-----------------------------------
Investing and financing activities that do not have a direct impact on
current cash flows are excluded from the statement of cash flows. The
following transactions have been excluded:
<TABLE>
<CAPTION>
January 1, 1992
(Date of Incep-
tion of Develop-
ment Stage) to
Type of December 31,
Issuance 1999 1998 1997 1999
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
For settlement of debt $ - $ - $ - $1,290,039
For payment of interest - - - 13,950
Conversion of debentures - - - 981,544
----- ----- ------ ----------
$ - $ - $ - $2,285,533
===== ===== ====== ==========
</TABLE>
Note 11 Deferred Tax Assets
-------------------
The Financial Accounting Standards Board issued Statement Number 109
in Accounting for Income Taxes ("FAS 109") which is effective for
fiscal years beginning after December 15, 1992. FAS 109 requires the
use of the asset and liability method of accounting of income taxes.
Under the assets and liability method of FAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statements
carrying amounts of existing assets and liabilities and loss
carryforwards and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled.
-78-
<PAGE>
USA Video Interactive Corp.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998 - Page 12
(Stated in U.S. dollars)
- ------------------------
Note 11 Deferred Tax Assets - (cont'd)
-------------------
The following table summarizes the significant components of the
company's deferred tax assets:
<TABLE>
<CAPTION>
Total
-----
<S> <C>
Deferred Tax Assets
Net operating loss carryforward $ 14,500,000
Capital asset amortization 120,000
------------
$ 14,620,000
============
Gross deferred tax assets $ 7,310,000
Valuation allowance for deferred tax asset (7,310,000)
------------
$ -
============
</TABLE>
The amount taken into income as deferred tax assets must reflect that
portion of the income tax loss carryforwards, which is likely to be
realized from future operations. The company has chosen to provide an
allowance of 100% against all available income tax loss carryforwards,
regardless of their time of expiry.
Note 12 Income Taxes
------------
No provision for income taxes has been provided in these financial
statements due to the net loss. At December 31, 1999, the company has
net operating loss carryforwards, which expire commencing in 2005
totalling approximately $14,500,000. The potential tax benefit of
these losses, if any, has not been recorded in the financial
statements.
Note 13 Subsequent Events
-----------------
i) Subsequent to December 31, 1999, the company issued the following
common shares:
<TABLE>
<CAPTION>
Number Exercise Price Nature of Cash
of Shares Per Share Transaction Proceeds
--------- --------- ----------- --------
<S> <C> <C> <C>
415,000 $0.069 Share purchase options $ 28,635
825,000 $0.069 Share purchase warrants 56,925
50,000 $0.097 Share purchase options 4,850
50,000 $1.000 Share purchase options 50,000
--------- --------
1,340,000 $140,410
========= ========
</TABLE>
-79-
<PAGE>
USA Video Interactive Corp.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998 - Page 13
(Stated in U.S. dollars)
- ------------------------
Note 13 Subsequent Events - (cont'd)
-----------------
ii) On January 26, 2000, the company entered into private placement
agreements to sell 250,000 units at US$4.00 per unit. Each unit
consists of 1 common share and 1 share purchase warrant to
purchase 1 common share at US$4.00 per share, exercisable until
January 26, 2002. The total proceeds of US$4.00 per unit will
be applied to the common shares only.
iii) On February 17, 2000, the company granted officers and a
consultant share purchase options which entitle the holders
thereof the right to purchase up to 900,000 common shares of
the company at an exercise price US$5.00 per share. These
options expire February 17, 2002 and are subject to regulatory
approval.
iv) On March 3, 2000, the company reached a settlement with a
creditor of the company and paid $52,657 to this creditor. This
amount was included in accounts payable at December 31, 1999.
Note 14 New Accounting Standards
------------------------
In April 1998, the Accounting Standards Executive committee issued SOP
98-5, "Reporting on the cost of start-up activities". This statement
is effective for fiscal years beginning after December 15, 1998.
Adopting this standard will not have a material impact on the
company's financial position, results of operations or cash flows.
In June 1998, the Financial Accounting Standards board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
which standardized the accounting for derivative instruments. SFAS is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. Adopting this standard will not have a significant
impact on the company's financial positions, results of operations or
cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements". Adopting this Bulletin does not have a significant impact
on the company's financial position, results of operations or cash
flows.
Note 15 Contingent Liability
--------------------
There is a contingent liability in respect to a default judgement
entered against the company's subsidiary, USA Video Corporation, in
Texas, USA with regard to the company's lease of premises in Dallas,
Texas in the amount of $505,169 ($25,399 included in accounts payable
at December 31, 1999). The company vacated its premises in Dallas,
Texas during the year ended December 31, 1995 and a claim was made to
the company for the total amount payable under the terms of the lease
through the term of the lease, ending in 2002. Management of the
company is of the opinion that the amount payable under the terms of
this judgement is not determinable at this time as the landlords
renting the property to another party may substantially mitigate the
damages. Any settlement resulting from the resolution of this
contingency will be accounted for during the year of the
settlement.
-80-
<PAGE>
USA Video Interactive Corp.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998 - Page 14
(Stated in U.S. dollars)
- ------------------------
Note 16 Uncertainty Due to the Year 2000 Issue
--------------------------------------
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in
errors when information using the year 2000 date is processed. In
addition, similar problems may arise in some systems which use certain
dates in 1999 to represent something other than a date. Although the
change in date has occurred, it is not possible to conclude that all
aspects of the Year 2000 Issue that may affect the entity, including
those related to customers, suppliers or other third parties, have
been fully resolved.
Note 17 Valuation and Qualifying Accounts
---------------------------------
<TABLE>
<S> <C>
Balance of write-down of advances receivable at December 31, 1997 $ -
Additional write-downs 130,631
Collection -
---------
Balance of write-down of advances receivable at December 31, 1998 130,631
Additional write-downs 152,006
Collections (130,631)
---------
Balance of write-down of advances receivable at December 31, 1999 $ 21,375
=========
</TABLE>
Note 18 Comparative Figures
-------------------
Certain of the comparative figures have been restated to conform to
the current year's presentation.
-81-
<PAGE>
ITEM 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No changes in and disagreements with accountants are reportable pursuant to
this item.
ITEM 15(a). Financial Statements
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Report of Independent Auditors.............................................................................. F-1
Balance Sheets as of December 31, 1999 and December 31, 1998................................................ F-2
Income Statements for the years ended December 31, 1999, 1998 and 1997...................................... F-3
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997............................... F-5
Statement of Stockholders Equity for the years ended December 31, 1986 to December 31, 1999 and
January 1, 1992 to December 31, 1999........................................................................ F-7
Notes to Financial Statements............................................................................... F-14
</TABLE>
ITEM 15(b). Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- -------------- ------------------------------------------------------------
<S> <C>
3.1* Articles of Continuance (Wyoming) filed February 16, 1995
3.2* Articles of Amendment (Alberta) filed January 3, 1995
3.3* Articles of Amendment (Alberta) filed June 28, 1993
3.4* Articles of Amendment (Alberta) filed April 6, 1992
3.5* Articles of Amendment (Alberta) filed September 1, 1989
3.6* Articles of Incorporation (Alberta) filed April 18, 1986
3.7* Bylaws
4.1* Specimen Share Certificate for Common Shares
4.2* Form of Warrants
4.3* Share Option Plan
4.4* Form of Share Option Agreement (Directors)
4.5* Form of Share Option Agreement (Consultant/Employee)
10.1* Letter Agreement dated February 7, 2000 between VIANET and
registrant
10.2* Client Referral Agreement dated May 3, 1999 between UUNET
Technologies, Inc. and registrant
10.3* Co-Location Services Agreement dated June 3, 1999 between UUNET
Technologies, Inc. and registrant
10.4* Alliance Partner Agreement dated November 11, 1999 between Exodus
Communications, Inc. and registrant
21 * List of Subsidiaries
27 Financial Data Schedule
* Filed previously
</TABLE>
-82-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
USA VIDEO INTERACTIVE CORP.
Date: April 27, 2000
By: /s/ Edwin Molina
------------------------------------
Edwin Molina, President
Chief Executive Officer and Director
-83-
<PAGE>
Item 15(b). Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ---------------- ---------------------------------------------------------------
<S> <C>
3.1* Articles of Continuance (Wyoming) filed February 16, 1995
3.2* Articles of Amendment (Alberta) filed January 3, 1995
3.3* Articles of Amendment (Alberta) filed June 28, 1993
3.4* Articles of Amendment (Alberta) filed April 6, 1992
3.5* Articles of Amendment (Alberta) filed September 1, 1989
3.6* Articles of Incorporation (Alberta) filed April 18, 1986
3.7* Bylaws
4.1* Specimen Share Certificate for Common Shares
4.2* Form of Warrants
4.3* Share Option Plan
4.4* Form of Share Option Agreement (Directors)
4.5* Form of Share Option Agreement (Consultant/Employee)
10.1* Letter Agreement dated February 7, 2000 between VIANET and
registrant
10.2* Client Referral Agreement dated May 3, 1999 between UUNET
Technologies, Inc. and registrant
10.3* Co-Location Services Agreement dated June 3, 1999 between UUNET
Technologies, Inc. and registrant
10.4* Alliance Partner Agreement dated November 11, 1999 between Exodus
Communications, Inc. and registrant
21* List of Subsidiaries
27 Financial Data Schedule
* Filed previously
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SELECTED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 417,666 2,618
<SECURITIES> 20,700 73,920
<RECEIVABLES> 17,661 21,049
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 499,868 168,449
<PP&E> 0 0
<DEPRECIATION> 174,650 39,390
<TOTAL-ASSETS> 995,351 435,232
<CURRENT-LIABILITIES> 686,029 668,268
<BONDS> 0 0
0 0
0 0
<COMMON> 20,950,152 18,722,966
<OTHER-SE> (20,690,830) (18,956,362)
<TOTAL-LIABILITY-AND-EQUITY> 309,322 (233,396)
<SALES> 20,500 0
<TOTAL-REVENUES> 20,500 0
<CGS> 19,199 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,645,414 956,933
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 12,965 24,665
<INCOME-PRETAX> (1,657,078) (981,598)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,657,078) (981,598)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (27,390) 0
<NET-INCOME> (1,684,468) (981,598)
<EPS-BASIC> (0.03) (0.02)
<EPS-DILUTED> 0 0
</TABLE>
