Sample Business Plan VoDUSa

Franklin Hamilton 29 Broadway, Suite 2311, New York, NY 10006 Tel: (212) 509-2255 Fax: (212) 509-2256 Transmittal Date: To: November 15, 2000 Sheet Mr. Brett Moraski Sr Associate Lycos, Inc. From: Adrian Kneubuhl Telecommunication & Technology Group Total Pages: 59 ( including this cover page) Subject: VoDUSA Executive Summary & Business Plan Highly confidential This facsimile transmission is intended for the addressee indicated information that is privileged, confidential, or otherwise protected dissemination, or use of this transmission or its contents by persons strictly prohibited. If you receive this transmission in error, please telephone, and mail the original to us at the above address. above. It may contain from disclosure. Any review, other than the addressee is notify us immediately by VoDUSA 1 Confidential Franklin Hamilton A Technology,Broadband & TelecommunicationFinancialAdvisory Firm November 15, 2000 Mr. Brett Moraski Sr Associate Lycos, Inc. Dear Mr. Moraski: Per your request, please find attached a copy of the VoDUSA's business plan. As I mentioned this company is seeking contract financing or growth capital to finance a contract with a customer, a large hotel chain which is waiting for them to move their set top box to 5,000 rooms, 15,000, 40,000 and 110,000 rooms ASAP. VoDUSA offers their clients true DVD-quality video on demand content delivery and management over broadband via its set top boxes. VoDUSA is signed with a mid-size MSO with an OC-48 loop with 35 regional, next-generation communications companies on it (each of those having an average of 40,000 subscribers) giving VoDUSA access to upwards of 1.4 million potential subscribers/customers. There are over 6,000 regional, next-generation communications companies which are looking for the value add of integrated broadband entertainment delivery and the management which VoDUSA offers. VoDUSA has very impressive strategic alliance partners and several new super competent telecommunication companies are in the various stages of strategizing with VoDUSA in order to bring their powerful content delivery solution to market. VoDUSA's roll out plan for their clients is scheduled for January 2001. Our client would like to have a conference call or face to face meeting with you as soon possible. The speed to market in this case is very critical. I look forward to hearing your feedback. Best regards, Adrian Kneubuhl PS: Due to the broadband which are highly favorable be covered in this Business sector's fast transformation, there are several recent developments for VoDUSA's long term revenue and earnings growth which may not Plan. In order to better analyze VoDUSA's true potential before you. VoDUSA 2 Confidential BUSINESS PLAN Presented by Franklin Hamilton A Technology, Internet & Telecommunication 1-888-517-7232 Private and Confidential Financial Advisory Firm VoDUSA 1 Confidential SAFE HARBOR ACT This document contains forward-looking statements subject to the safe harbor created by the Private Securities Litigation reform Act of 1995. The Company cautions readers of this document that such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward looking statements. Although the Company's management believes that their expectations of future performance are based on reasonable assumptions within the bounds of their knowledge of their business and operations, there can be no assurance that actual results will not differ materially from their expectations. Factors which could cause actual results will not differ from expectations included, among other things, the risks associated with start-up companies, including start-up losses, liquidity problems, uncertainty of revenues, markets, profitability and the need for additional funding; the risks that the Company may be unable to raise additional capital through private financing, debt or equity offerings or collaborative arrangements with others on acceptable terms; intense competition from a variety of competitors with greater resources and market acceptance; the Company's limited experience in assembling a sales and marketing team and strategy; the potential need to make continuing significant investments in software development in response to rapidly evolving technologies and technological shifts; the risks associated with the potential loss of one or more key customers of the Company; the Company's dependence upon key personnel; the challenges and uncertainties in the implementation of the Company's expansion and development strategies; and other factors described in reports filed by the Company with the Securities and Exchange Commission. VoDUSA 2 Confidential _'_, 2¸ TABLE OF CONTENTS 4 9 10 12 13 15 16 17 20 22 24 27 28 29 32 44 Executive Summary VOD Market Background VOD Industry Overview Company Profile Management Team VODUSA Proprietary Technologies Recent Developments/Pending Growth Strategy Marketing Strategy Roll Out & Implementation Strategy Competition Competitive Advantages Risk Factors Press Comments Financial Projections Appendices Projects VoDUSA 3 Confidential 1. EXECUTIVE SUMMARY Company Profile VoDUSA (the "Company") is a leading integrator of digital media infrastructure services, applications, content, and delivery systems. Currently generating revenue from the encoding of analog content to digital content, it is now dedicating itself to providing true DVD-quality Video On Demand over Broadband/Internet Protocol (IP) technology through set-top boxes to provide a television-like viewing experience. Through its existing media and entertainment relationships, VoDUSA has built a library of over 3,000 titles (feature films, classic television episodes, children's programming, and foreign language films) which, when converted to digital format, can be distributed over a closed Location-Based Video-On-Demand ("LBVOD") system. In LBVDO delivery, content is stored on a server located on or near the end-user's premises. VoDUSA has contracted with Enron Broadband Services to utilize its highbandwidth streaming media service called Enron Intelligent Network ("EIN") to deliver the Company's content at speeds of up to 50 times faster than the public Internet, the bandwidth for which is too limited and download times too slow to support VoDUSA's content. VoDUSA is one of the few companies which provides a complete Internet/Broadband-based solution for the new media, broadband, entertainment and corporate markets using proprietary and non-proprietary content. It has the expertise to provide an end-to-end solution to VOD Service Providers, LBVOD System Providers and other businesses that utilize digital video applications, and will position itself as a supplier of turnkey digital media packages. In addition, VoDUSA has maintained a stable (and growing) revenue base in its existing business, built an impressive client list and entered into strategic partnerships all while in its development stage, and with limited capital. With the proposed capital infusion, VoDUSA believes it can immediately begin implementing its plan to obtain over 2 million subscribers in hotels, hospitals, apartment complexes and other such facilities by 2002. Over the long term, VoDUSA has the 'first mover' advantage and will be a leader in effectively integrating Internet Broadband delivery technologies with traditional consumer interfaces. It is VoDUSA's goal to integrate the platform and applications that will facilitate the convergence of Internet technologies. VoDUSA 4 Confidential i_ _ Proposed Transaction Second Stage Funds requested $10 million+ Stage of Fund Raising First Stage of Funding In January 1999, the company raised $1 million in equity from private investors for 11% of ownership. ,, • • Joint venture/strategic alliance partnership Venture capital investment Outright purchase $ 3,600,000 1,400,000 1,000,000 1,000,000 1,000,000 700,000 800,000 500,000 $10,000,000 Forms of Investment Use of Proceeds Working Capital Marketing and Advertising Equipment Purchases Content Acquisition Research and Development Conversion of Library to digital Cost of issue Website development Total Exit Strategy IPO or private sale by 2003 VoDUSA 5 Confidential T i Market Potential Digital Conversion: DataQuest estimates that global shipments of DVD-ROM optical disks will rise from approximately 2 million units in 1999 to more than 26 million in 2000. Digital Media Delivery: Consumer demand is pushing the digital media market to enhance existing technologies and improve the delivery methods for digital media. The delivery system itself and the end product define the market for digital media delivery. These delivery methods are Video-on-Demand, Location Based Video-on-Demand, and the Internet: Video-on-Demand (VOD): With the growth in broadband access to the Internet, the potential size of the VOD market could reach $3.6 billion by 2002 and $6.6 billion by 2005. Location Based Video-on-Demand (LBVOD): The LBVOD market is centered on providing its customers with complete systems for the delivery of digital media products including content, hardware, software, installation, and maintenance. The true size for this delivery mode is unknown, as most are being contemplated for new digital media applications. The hospitality segment of the LBVOD market alone is estimated to have the potential of being a $750 million market. The potential of other LBVOD markets for applications such as digital compression and storage of analog (VHS, film, tape) material, training and distance education, video conferencing, press release enhancement, streaming video websites, upgrading of virtual displays for e-commerce, intranet and extranet real-time access to audio and video material and distance x-ray and medical diagnosis is undetermined, as they are new markets created by the technology. Internet: Internet commerce is usually defined in terms of four categories: consumer-to-business (estimated to grow to $135 billion in 2003 from $106 billion in 1998, per Goldman Sachs), consumer-to-consumer (expected to be $3.8 billion in 2001, per Goldman Sachs), business-to-consumer (projected to grow from $8 billion in 1998 to $108 billion in 2003, per Forrester Research), and business-to-business ($89 billion in 1998 to $1.5 trillion by 2004, per Goldman Sachs). VoDUSA 6 Confidential L Competition The technology to digitize and electronically deliver movies and other media over a variety of delivery mechanisms exists today, however, there are few companies that are integrating the system components and digitally encoded content into an affordable, complete solution in the manner of VoDUSA. Most of the components that are currently being used for VOD systems are made by different manufacturers and must be configured and maintained differently in each system. Often movies and other media content have to be digitized to meet the specific hardware and software requirements of this system. There is a serious gap in the ability to integrate these various pieces. VoDUSA brings together its experience and corporate alliances in digital encoding, content acquisition, and distribution to provide integrated digital media solutions to this rapidly emerging market. Its main competitors in digitalization include Crawford Communications, CyberTech Media, Digital Outpost and Loudeye. Its main competitors in VOD includes Diva, nCube, Intertainer, Inc., Intervu, Inc. and Kool Connect. Existing Revenues & Client Lists VoDUSA has been generating revenue (through current and predecessor companies and consultancy work) from providing digital media services. VoDUSA's current client list is projected to provide in excess of $4 million in revenue in 2001 with substantial growth thereafter. This revenue provides a sustainable platform from which the Company can pursue VOD applications. Its past and current client list includes ABC Networks, Barnes & Noble, Arthur Anderson, Bell Atlantic, Coca Cola, Globix, CBS Sports, Estee Lauder, Front Row Entertainment, IBM, Johnson & Johnson and Sprint. Strong Management Team VoDUSA has over 50 years of collective experience. management and media industry Existing Strategic Alliances Enron Broadband Services, Exodus Communications, Stellar One Corp., Viagate, NEC America, nCube, Inprimus, Sun Microsystems, SGI, Liberate, ASR Entertainment, Global Access Entertainment, Inter Global Products, Infocomm, Media Group, Concurrent, Minerva, Federal Hill Communications, and Front Row Entertainment, and CCS Broadband Technologies. Proprietary Technologies VoDUSA has developed several proprietary technologies that allow it to process video and deliver digital audio and video signals at a quality level and cost that sets it apart in the new media industry. Unlike other competitors which only offer VOD via Internet where the quality is restricted by bandwidth limitations, VoDUSA currently concentrates on corporate closed systems and telephony based closed systems known as Location-Based-Video-on-Demand, or LBVOD. These systems are designed to stream media over a fixed size infrastructure usually located on the end user's premises. Hotels, cruise ships, corporations, governments, educational institutions and health care institutions most commonly utilize closed systems. VoDUSA, through its alliances, provides installs and maintains all of the components and network support required for LBVOD 7 Confidential VoDUSA systems. The Company has received an opinion that these technologies are eligible to be patented, and is currently preparing the necessary paperwork for filing. Although the Company is currently focused on LBVOD and telephone based systems, it is also working to adapt the technology to Internet protocols thus providing a solution for the streaming of high quality digital media over the Internet. Competitive Advantages • • • • • • • • • Growing Existing Revenue Stream Strong Management Team Proprietary Technologies Huge Market Potential Business to Business Focus Multiple Revenue Streams Sustainable Advantage Existing Alliances and Relationships Significant 'First mover' lead-time over new entrants Financial Summary & Projections Income Statement Ending Dec 31 Historical 1999 Revenue %Of Revenue Growth Cost of Good Sold % _,COGS/Revenue Gross Profit % Gross Profit Margin qet Income B4 Tax Net Income Growth Net ProtTt Margin $223,838 NA $171,612 NA $102,834 NA $52,226 NA 23% Proj ected 2000E $598,000 167% $265,050 45% $332,950 56% $107,640 106% 18% 2001" $10,000,000 1572% $4,100,000 41% $5,900,000 59% $500,000 365% 5% 2002 $41,710,600 739% $12,743,037 31% $28,967,563 69% $13,035,403 828% 31% 2003 $117,577,601 182% $29,924,640 25% $87,652,961 75% $50,738,265 289% 43% "2001 estimated projection has been modified here because the company has just signed a contract with a large hotel chain where our client has successfully completed a roll out test in 250 rooms. The hotel chain wants our client to move their set top box to 5000, 15,000, 40,000 and 110,000 rooms respectively as soon as possible. With new financing in place, our client can roll out the expansion plan in 6 to 8 months. It's projected revenue for next 12 moths will be at least $10-$12 million. (ANNUAL REVENUE PER ROOM IS $300) VoDUSA 8 Confidential 2.01 VOD MARKET BACKGROd IND Historically movies have been available to the home consumer through scheduled movie cable channels and payper-view (PPV) services. Scheduled movie cable channels have difficulty programming movies and show times that appeal to all consumers. PPV only has a limited selection and show times that may not meet consumer's needs. Digitization, or the process of converting an analog movie or other video material into a format that can be understood by computers, can greatly enhance the quality of those video images and allow utilization of alternative delivery methods. It is estimated that one-third of all 98 million US households will have one or more digital devices, such as a computer or digital set-top box (for the television) by 2003 and that ratio will increase to two-thirds by 2008. VOD will shift the programming decisions to the consumer With VoDUSA's product, a customer can sit in the comfort of his or her home or hotel room and use the remote control to select and immediately watch any one of 200 movies on television, with the ability to fast forward, pause and rewind. Essentially, the customer has remote control access to a video store and can truly have videoon-demand. Today, through digital video technologies, it is possible to shift the programming decision to the consumer and achieve true video-on-demand. Digital video technologies are reshaping the way in which media is consumed, replacing traditional delivery methods and creating opportunities for many companies that are at the forefront of these technologies. New revenue opportunities for a leading video technology firm Digital television and video-on-demand for the home have been the driving force behind the development of digital video technologies, however, the opportunities for the implementation of those technologies reach far beyond the home. Hotels, schools, hospitals, governments and other institutions have seen the emergence of digital technologies and the tremendous potential that they represent. For hotels and other institutions digital technologies make it possible for any number of guests to watch the same movie at the same time from a single copy on the hotels computer server, while giving the guest the choice of exactly when to watch and the ability to interact (pause, rewind, view other information such as biographies and trivia) with what he or she is watching. In addition to the opportunities in the home entertainment market, businesses are realizing that with the space savings of digital storage, the tremendous growth of the Internet, the advent of broadband access to the Internet and the improvements of the quality of streaming video images over all speeds of Internet access there are huge opportunities to utilize digital video technologies for many different business applications. All audio and video content must be processed (encoded) in order to be distributed over the Internet/Broadband. The penetration of DVD hardware systems into the home entertainment market implies that all existing films will have to be processed in an encoding facility capable of converting them to digital, adding interactive and graphical elements. The advent and acceptance of digital television requires that all television programming will need to be digitally produced or converted into a digital format in order to be broadcast at digital quality. In addition the vast array of existing and archival television programming will have to be digitally encoded as well. VoDUSA believes that by managing the first step of this conversion of video content into digital formats and maintaining a leading edge in a rapidly evolving technological environment, it will be able to take advantage of the tremendous revenue opportunity that currently exists, and puts it in a strategic position to enable the expansion of its technology and services as the market matures. VoDUSA 9 Confidential 2.02 VOD INDUSTRY OVERVIEW Digital Conversion As the technology continues to improve so does the market potential for the use of digital media. Many of the applications for the delivery of digital media require the conversion of analog audio and video material or the enhancement of existing digital material. The latest development in optical media technology involves a dramatic increase in capacity resulting in full-length movies being stored on DVDs. This creates the potential for DVDs to replace VHS tapes and laser discs as the standard medium for home movies. Electronics firms are optimistic that the new product could eventually replace the audio compact disc as the mainstream music-recording medium. DVD-ROMs also have potential as substitutes for CD-ROMs, and for recordable media in computers. Digital Media Delivery As with most products, consumer demand is pushing the digital media market to enhance existing technologies and improve the delivery methods for digital media. The market for delivery of digital media is defined by the delivery system in addition to the end use of the product. Video-on-Demand (VOD) The Home Video industry produced approximately $8 billion in revenue from cassette rentals and $9 billion in sales of videos and DVD's in 1998. VOD promises to bring these rentals and sales electronically into the home in addition to offering much more than is available in the video store today. Furthermore, with the added convenience and digitally enhanced quality the market for digital media is expected to grow beyond the levels of the Home Video industry. New technologies are converging to make the delivery of digital media to the home a reality. Those technologies are in two specific areas: the bandwidth size available to the home user and the compression of digital media. It is estimated that broadband access to the Internet will become widely available within the United States and beyond. Cable, telephone, satellite and wireless providers are all competing for this access to the consumer. Broadband will have the potential to reach 87% of total US households by the year 2000 representing approximately 90 million consumers. Penetration of this potential market will be shared initially by cable and telephony/DSL based providers and is estimated to be 17% by 2002 and 41% by 2005representing 18 million and 33 million consumer households respectively. Based on an average expenditure of $200 per year on video rental services alone the potential market size for VOD could reach $3.6 billion by 2002 and $6.6 billion by 2005. In a recent report on RCN Corporation, Morgan Stanley Dean Witter stated, "we expect that revenue for the core video product, which includes revenue from basic, premium, pay-per-view, and advertising will grow from about $50 million in 1999 to $1.4ol.5 billion in 2005." and "we expect that penetration of RCN's video product will initially be about 25-28% of marketable homes and then steadily rise to about 31% by 2005." All of the delivery technologies have their respective advantages and disadvantages and at this point in the delivery of digital media the only clear advantage is the first mover advantage of the cable companies as they already provide video to the home consumer. The emerging VOD market provides the opportunity for those with the ability to offer a bundled service (voice, data and video) to participate in the large market that exists for VOD and other broadband services. There is an expectation of rapid consolidation of the broadband providers, and the same expectation existed with the narrowband (dial-up) growth phase between 1994-99. However, in narrowband growth, only the larger players grew larger through acquisition, the actual number of service providers in the industry grew. Today there are over 5,000 ISP's in North America. VoDUSA 10 Confidential Although broadband is a very important step in the development of VOD, narrowband access to the Internet will remain cost effective for many consumers in the United States and internationally. By the end of 2002, it is estimated that in excess of 70 million households will have Internet access and narrowband will continue to play an important role. There is a large opportunity for new compression technologies to make the delivery of digital media over narrowband access economically viable. Location Based Video-on-Demand (LBVOD) The home consumer has been a driving force behind the development of the technology and applications for the conversion and delivery of digital media. Businesses are beginning to realize that digital media can play an important role in every facet of their operations including product offerings, administration and training. The LBVOD market is centered on providing businesses and institutions with complete systems for the delivery of digital media products including content, hardware, software, installation and maintenance. The true market size for these systems is unknown as most are being contemplated for new digital media applications. The hospitality market, which makes up a segment of the entire LBVOD, is estimated to include 3.5 million rooms in the United States and to have a market potential of approximately $750 million. Lodgenet Entertainment, which currently provides in-room movies to approximately 600,000 guest paying rooms, generates approximately $19.00 per room in monthly movie revenue. This revenue is based on a limited selection of available movies (approximately 10) as the Lodgenet system simulates VOD (albeit on a much smaller scale) by using multiple VHS players. The potential of other LBVOD markets for applications such as digital compression and storage of analog (VHS, film, tape) material, training and distance education, video conferencing, press release enhancement, streaming video websites, upgrading of virtual displays for ecommerce, intranet and extranet real-time access to audio and video material and distance x-ray and medical diagnosis is undetermined as they are new markets created by the technology. Internet The Internet has become a large medium for the delivery of content of all forms as it provides an opportunity for the unrestricted delivery of digital media. Internet commerce is usually defmed in terms of four categories: consumer-to-business, consumer-to-consumer, business-to-consumer and business-to-business. VoDUSA believes that digital media will be used to enhance ecommerce in all of these four Internet commerce areas. Goldman Sachs estimates that consumer-to-business Internet commerce will grow to $135 billion in 2003 from $106 billion in 1998. It was noted that their estimates are restricted to consumer-to-business models that are currently Web-enabled, and they expect the estimates to increase substantially as new models move online. The consumer-to-consumer markets are highly fragmented and inefficient due to the informal way in which it is facilitated over the Internet. However Goldman Sachs believes that the U.S. market for traditional consumer-to-consumer trading, including auctions, classified ads, and collectibles, exceeded $100 billion in goods sold in 1997. The online portion of this market could grow to $3.8 billion in 2001. Widespread purchase of goods and services by consumers has caused tremendous growth in the business-to-consumer Internet market. Forrester Research expects business-to-consumer Internet commerce in the U.S. to increase to approximately $108 billion in 2003 from $8 billion in 1998. According to Jupiter Communications, the leading product categories for business-to-consumer Internet commerce include technology products (computers and electronics), books, apparel, groceries and music. Goldman Sachs estimates that the business-to-business Internet market in the U.S. will grow to $1.5 trillion by 2004 from $89 billion in 1998. Goldman's equity analysts were surveyed to determine both the total market size of their respective industries as well as the percentage of the business-to-business sales in those segments that will be Internet-based. VoDUSA 11 Confidential 3. COMPANY PROFILE VoDUSA (the "Company") is a leading integrator of digital media delivery services. Currently generating revenue from the encoding of analog content to digital content, it is now focusing on providing true DVD-quality Video On Demand over Broadband/Internet Protocol (IP) technology through set-top boxes to provide a television-like viewing experience. CorporateHistory VoD Network Solutions, Inc. (d.b.a. VoDUSA) was formed by the merger of Stimulus.net and Atlantic Coast Digital Concepts, and was incorporated on October l, 1999 under the laws of the State of Delaware. It has authorized capital of (a) 50,000,000 common shares, par value $0.0001 per share, and (b) 10,000,000 shares of preferred stock, par value $0.0001 per share, the rights and preferences of which may be established from time to time by its board of directors. Principal Offices The Company leases 4,700-sq. ft. in New York City's financial district, and has a second office in Boca Raton. Client List 1998 - Present ABC Networks Aggrenox Andersen Consulting Astral Ocean Cinema AT&T Barnes & Noble Bell Atlantic Broadway Groups CBS Sports Coca Cola Cole Media Counterproductions Diamond Entertainment Disney Estee Lauder ETD/Exclusive English Productions Front Row Entertainment Globix IBM InfoComm Johnson & Johnson Live Up Link Met Life Oxygen Media PPI Entertainment Sprint WRS Motion Picture & Video Library Live On The Web. Com Y100 Country Radio (sponsored by Pepsi) Sourcenet Corporation Strategic Alliances Enron Broadband Services, Exodus Communications, Stellar One Corp., Viagate, NEC America, nCube, Inprimus, Sun Microsystems, SGI, Liberate, ASR Entertainment, Global Access Entertainment, Inter Global Products, Infocomm, Media Group, Concurrent, Minerva, Federal Hill Communications, and Front Row Entertainment, and CCS Broadband Technologies. VoDUSA 12 Confidential 4. MANAGEMENT TEAM The Company currently has 21 full time employees, including the following managers: Name Raymond R. Cottrell Daniel A. Johnson Christopher R. Cottrell Kenneth Chin Daniel Deitchman Ronald Obsgarten Age 60 39 30 38 40 63 Title Chief Executive Officer President & COO Chief Financial Officer Vice-President Vice-President Marketing Manager, Content Raymond R. Cottrell, CEO, has been active in the area of early-stage business development since 1976. Prior to 1987 he was a partner in Noramco Capital Corp., a privately owned investment-banking firm. During his time at Noramco, more than $500,000,000 was raised for client companies, and the assets of the firm grew to $50,000,000. In 1987, Mr. Cottrell formed Grey Point Capital and served a small number of clients until 1992, when he assisted in the formation of Biocoll Medical Corp., a public company, engaged in the development of products for the regeneration of bone and tissue in humans. From 1993 to 1998, he served as an Officer and Director of the firm, which changed its name to GenSci Regeneration Sciences, Inc., along the way. In excess of $50,000,000 was raised for GenSci during that period. In 1998, he stepped down from the positions to continue his career in investment banking but agreed to remain as a consultant to GenSci. Since 1976, Mr. Cottrell has served as a Director and Officer of several public companies, and has accumulated an extensive amount of general business and public company experience. Daniel Johnson, President & COO, Since 1984 Mr. Johnson has been active in new media technology. He has worked with such notable companies as AT&T, Time Warner, Disney, Manhattan Advanced Digital, Data Motion Arts and Image Group. During that time he has created many computer graphic commercials for companies such as Pizza Hut, CUC International, Vtek Toys and CNN Sports. He also led in the creation of the critically acclaimed CD-ROM called "Millennium Auction" from Eidolon. Mr. Johnson spent five years in Europe consulting for PIXIBOX and Thompson Digital Software for military projects. His activities there included creating and directing computer graphics simulations and two television series for TF1 and ZDF. Recently, through his own company, he has produced innovative content for DVD, CD-ROM, Internet, next generation interactive delivery systems, and Video on Demand ("VOD") systems. Mr. Johnson has earned a Masters in Communications with a major in computer graphics animation and business from the New York Institute of Technology. He also holds a Bachelor of Fine Arts and Sciences from the San Francisco Art Institute. Christopher R. Cottrell, CFO, has been in the finance industry since 1993. He worked in various capacities in corporate finance for CIBC, a major banking institution, until 1996. He then joined GE Capital Services (a wholly owned subsidiary of the General Electric Corporation) in Commercial Equipment Finance. While at GE Capital Mr. Cottrell developed a regional manufacturing equipment finance market and successfully completed $17,000,000 in financing for a number client companies. In 1998 he made the decision to join in the formation of McKinley Greenfield Capital Corp. Mr. Cottrell graduated with a Bachelor of Commerce in finance from the University of British Columbia in 1992. In 1998 he was awarded the Chartered Financial Analysts (CFA) designation and is a current member of the Association of Investment Management and Research (AIMR). Kenneth Chin, Vice President, has worked with all major networks including ABC, CBS, NBC, FOX, TNT and HBO as well as many of the top corporations specializing in video/audio engineering. Those corporations include Oxygen Media, which is headed by Oprah Winfrey. In addition Mr. Chin has worked with over 16 major VoDUSA 13 Confidential Broadway productions. During the past five years he has focused his skills in the areas of new media production and broadband application development. Mr. Chin's current affiliations include International Brotherhood of Electrical Workers (CBS - Local 1212) and National Association of Broadcast Employees and Technicians (ABC/NBC). Mr. Chin holds a degree in Communications from the New York Institute of Technology and has been the recipient of numerous awards including four Emmy Awards and Telly Awards. Dan Deitchman, Vice President Marketing, has been in the film production industry for the past 25 years. He has extensive experience in television commercial, music video and related film productions including advertising and postproduction with a specialization in digital visual effects and computer animation. He has held the position of executive producer for some of the most notable film production companies in the world including Levine/Pytka & Associates, James Garrett & Partners and Great Southern Films. Mr. Deitchman has worked with such directors as Joe Pytka, Tony Kaye and Nicholas Roeg. He holds a Bachelor of Science degree from State University College at Buffalo and is a member of the Director's Guild of America. Ronald Obsgarten, Content Manager, a pioneer in the entertainment content field, has spent the last 35 years marketing pre-recorded product to consumer electronics retailers and has gained a solid foundation in the entertainment product industry. Since his first product line of open reel pre-recorded tape, his ability to spot trends, track growth and distribution formulas, project the success of new technologies and aggressively market new products has given him a depth of experience and involvement that few executives can claim. Working on both sides of projects he is equally comfortable buying or selling content. Mr. Obsgarten was founder and president of RPM Duplicators, a producer of pre-recorded open reel tape, 4 track and 8 track cartridges and audiocassettes. The company was later sold to what would later become a United Artists company. In 1978, he founded Premiere Video, the second Beta & VHS duplicating facility in North America, whose video warehouse division became a major supplier of pre-recorded videos nationally. Budget Entertainment Software was the next natural progression, and Value Software was formed to market that product. The new technologies that VoDUSA is working with today will take pre-recorded content into the next millennium. Mr. Obsgarten's knowledge and expertise of the video industry enables him to visualize the marketing and sales strategies necessary for the ultimate success for this new challenge. Advisory Board Name Robert Sklar Title Professor of Cinema Organization Tisch School of the Arts, New York University Vogel Capital Management LLC FARGOS Development, LLP Globix Corporation Harold L. Vogel William O'Brien Dan Rayburn CEO Executive Vice President Worldwide Product Manager For Streaming Media (See Appendix 3 for detailed biographies) VoDUSA 14 Confidential T • 5. VoDUSA =ROPRIETARY TECHNOLOGIES VoDUSA has developed three proprietary technologies that allow it to process video and deliver digital audio and video signals by real-time streaming or through closed electronic delivery systems at a quality level and cost that sets it apart in the fast-paced new media industry. The Company has received an opinion that these technologies are patentable, and is currently preparing the data necessary for filing. Additional information on the technologies is listed below. TransMediacoder (tentative name) The TransMediacoder uses the Windows Media SDK (software development kit) as its platform. The TransMediacoder facilitates an end-to-end streaming solution for the simultaneous encoding of digital video. Through the TransMediacoder, VoDUSA can simultaneously encode video in various formats including low band encoding and broadband streaming applications such as VOD (video on demand), LBVOD (local based video on demand) and DVT (digital video transmission). This "encode once, transcode many" approach enhances and streamlines in-house production and the delivery process. Multiehannel Manager (tentative name) VoDUSA has designed a customized production software tool to facilitate and manage the digital watermarking, logo insertion and Windows Digital Rights Management process of digital media assets. The technology allows VoDUSA to create branded content that can be distributed and tracked in VPN's (virtual private networks), LAN's (local area networks) and Internet applications. CSS (Macro Vision) and Bluetooth consortium's SDKs will also be integrated to create a strong encryption scheme within the content stream as it is encoded. Media Pump (tentative name) VoDUSA has designed and built a proprietary, scalable multi streaming/encoding production system for encoding video. Using Minerva's Java based SDK as the platform; the technology includes the development of the user interface, which controls VTR's and compressors from the one server based configuration. Up to ten systems can be controlled by one user. These files can then be processed for storage and remote ffp. (See Appendices 1 and 2 for technology details.) VoDUSA 15 Confidential 6. RECENT DEVELOPMENTS / PENDING PROJECTS VoDUSA has built a potential client list for VOD delivery of its digital content to in excess of twenty accounts. With the latest additions being large, well-established service providers who are at the stage of running a test project in one of their already wired and activated buildings or projects. Typically these clients have wired apartments or hotels to initially provide high speed Internet access, and now want to move to the next step of providing content such as Video On Demand to their product lines. It has been asked to participate in two tests so far this year, and several more clients have indicated that they are interested in moving forward. The following are some of other projects in progress: • • In discussions with two firms who are interested in supplying it a cable channel to display VoDUSA's content on a revenue share basis. In discussions ongoing with several firms that would license us to manufacture, sell and distribute their product. These products are items such as set top boxes, which are a necessary item that its content clients need to deliver their signal and the VOD option to the consumer's television set. The reason VoDUSA would get involved in hardware and software is that the set top box must work with the server, the modems, the encoded signals and the various software programs to form a turnkey solution that delivers a quality, uninterrupted video signal to the consumer. As it is necessary for VODUSA to coordinate the hardware and software components it is logical for it to manage the production and distribution, and participate in that revenue stream. In discussions with a large Internet hosting company to offer its films on the Internet via the hosting company's other client's web sites. This would be an advertising revenue model, and the hosting company is confident that VoI)USA could develop a significant number of visitors to VoDUSA website and thus produce value based on the number of visitors as well as the advertising revenue. Several potential clients have indicated that they would like to have their current video files digitally encoded and stored on a server managed by a company like VoDUSA to facilitate the access by the client and its representatives of single or specifically combined segments, either in DVD format or in a custom file format using the Internet. In an effort to increase current revenues VoDUSA have been in discussions with and currently doing some work for a distributor of DVD disks. It is its intention to encode, author, replicate and distribute some Public Domain titles that VoDUSA currently have access to. VoDUSA are in the process of executing a distribution contract and will start with one film on a trial basis. Actively engaged in a test with a company providing downloadable content to peripherals such as palm pilots. The content is short and utilizes the wireless network in a way that has the ability to create revenue immediately. One company is already receiving revenue from this application in Japan. VODUSA has the ability with its content library and efforts in producing specialty content to produce short films and video clips that will continue to draw revenues from this exciting new applications. • • • • VoDUSA is also currently working with such companies as Intellespace, Elastic Networks (Nortel), CCS Broadband Technologies, Fantastic Network (whose customers include: British Telecom & Deutsche Telecom) and NEC Multimedia. VoDUSA 16 Confidential 7. GROWTH STRArEGY VoDUSA intends to become a leading integrator of digital media services and content distribution through the leverage of alliances and systems that facilitate the delivery of full size, feature length digital media. In order to achieve this goal, VoDUSA will: 1. Expand the existing digital media services business 2. 3. Enable an Internet/Broadband infrastructure Utilize core technologies and expertise to advance streaming media applications for feature length, full size digital media content 4. Expand technologies and processes 5. Leverage existing expertise and relationships to create and maintain the largest database of feature length digital media content available over Intemet/Broadband based infrastructures Pursue content alliances and acquisitions to continually expand its database of digital media content 6. 7. Utilize agnostic hardware and software platform position to integrate interactive digital media distribution systems 8. Integrate digital media services with content and systems to provide a complete solution for the wholesale distribution of interactive, on-demand digital media content through Internet based infrastructures Target existing and potential retailers and other distributors of digital media content around the world 9. 10. Pursue strategic alliances and acquisitions Each of these strategy items is discussed in detail below: Enable Internet/Broadband infrastructure - The Internet/Broadband infrastructure links digital content and hosting companies and provides the means for the effective distribution of digital media content over Internet/Broadband based infrastructures to the consumer. Through its current relationships and the customization of its digital media services it can enable this infrastructure and provide its customers with a high quality, flexible and reliable delivery mechanism for feature length digital media content over Internet/Broadband based infrastructures. This mechanism will be a complete back-end system designed for the wholesale distribution, maintenance and monitoring of its proprietary digital media content and the content of its customers. It will include value-added services such as digital watermarking, indexing, metadata collection and analysis, search capabilities and copyright management. Utilize core technologies and expertise to advance streaming media applications for feature length, full size digital media content - It plans to leverage its expertise in high quality, feature length digital media and infrastructure into leading edge applications that provide for a number of end-to-end distribution systems. VoDUSA believes that by developing a cutting edge application platform for feature VoDUSA 17 Confidential length digital media, it can develop applications that provide a complete solution for the conversion, distribution, management and transaction of digital media. Its current expertise and performance for its past and current clients sets us apart from its competition. The Company also believe that the expertise that it have developed, coupled with an understanding of the technology surrounding the delivery of digital media, will allow it to effectively integrate Intemet/Broadband delivery technologies with traditional consumer interfaces. It is the Company's further contention that the market for feature length digital video content resides with the television and it is its goal to integrate the platform and applications that will facilitate the convergence of Internet technologies and the television. Expand technologies and production processes - The Company will continue to leverage technology and its production-based processes to continue to provide the highest quality product and further differentiate itself from its competition. By building complete systems that focus on high quality, high volume output it position itself also allow us the ability to convert and develop its proprietary content. The Company plans to invest significantly in the expansion of its research and development efforts and build its intellectual property based upon applications for feature length digital media and Internet/Broadband based infrastructures (with a focus on broadband). Leverage existing expertise and relationships to create and maintain the largest database of feature length digital media content available over Internet/Broadband based infrastructures - Through its existing relationships in the entertainment industry, it has gained access to a catalog of more than 3,000 master copies of unregistered (un-copyrighted) video titles. This catalog contains feature length films, classic television episodes, children's programming, documentaries and foreign language films. The Company intends to use its existing expertise and capacity to digitize these films and, together with its hosting partner, create the largest database of digital video content currently available over Internet/Broadband based infrastructures. The Company believes that a significant market exists in the wholesaling of this product to those businesses providing digital media content over Internet/Broadband based infrastructures. The Company also believes that the largest revenue opportunity for this content and its entire content offering exists with those companies providing digital video over high-speed Internet/Broadband infrastructures either through a locally based server (apartment buildings, hotels etc.) or over a broadband Internet connection (DSL, satellite, cable) due to the higher level of quality that can be achieved over these delivery systems. However, the platform for the storage and delivery of its digital media content will have the ability to deliver feature length digital video content to any company using an Internet/Broadband based delivery mechanism or directly to the consumer through a browser user interface. Pursue content alliances and acquisitions to continually expand its database of digital media content - The Company intends to wholesale a complete offering of digital video content to its businessto-business customers and, in order to do so, it will actively pursue alliances with content owners to expand upon its own digital video database. The Company will pursue non-exclusive alliances and relationships with distributors of syndicated video content, independent producers and production studios. The Company also intends to pursue acquisitions that would increase its database of video content. Utilize agnostic hardware and software platform position to integrate digital media distribution systems - With so many competing and conflicting standards and technologies in the streaming media market, its customers require assistance in the design and implementation of their digital media solution. VoDUSA's team will continue to work with and receive training across all platforms. This knowledge and focus establishes a credibility that helps differentiate us from single platform providers. Integrate digital media services with content and systems to provide a complete solution for the wholesale distribution of interactive, on-demand digital media content through Internet/Broadband VoDUSA 18 Confidential based infrastructures - Through the provision of its other products and services, the Company has determined that there is a large opportunity to become an integrator of digital media content, value added digital authoring (adding interactive elements) and digital media systems. Most of the components that are currently being used for video on demand systems are made by different manufacturers and must be configured and maintained differently for each system. Often movies and other media content have to be digitized to meet the specific hardware and software requirements of the system. The Company is positioning itself as a supplier of turnkey digital media packages. The Company believes that the focus by technology companies and manufacturers on individual pieces of the technology package required to compose a digital media system and the absence of foresight regarding digital media content has left a serious gap in the integration ability of those various pieces. The Company have amassed the expertise through its work in digital media services, content acquisition and the individual system components, to provide the service of combining, configuring and maintaining a complete digital media content delivery package designed for any particular type of infrastructure being used. Target existing and potential retailers and other distributors of digital media content around the world - In addition to expanding its current services business it plans to pursue the opportunity to provide an integrated package of services, content and systems to domestic and international retailers of digital media content. The Company will initially focus on companies developing locally based Internet based infrastructures in the multi-unit dwelling and hospitality markets, Digital Subscriber Line (DSL) services providers, telephone service providers and satellite service providers. The Company will also supply its digital media services and content to ecommerce companies developing Internet streaming media revenue opportunities. Pursue strategic alliances and acquisitions - The Company will continue to look to outside technology companies to expand its products and services. It will focus its research and development efforts on improving and expanding upon capabilities that it believe do not currently exist in the market. The Company intends to continually look for components and technologies to augment its solutions through partnering with industry leaders outside of its core area of expertise. It intends to acquire companies or technologies that would further expand its proprietary products and services. VoDUSA 19 Confidential 8. MARKETING STRATEGY VoDUSA intends to rapidly deploy its video on demand solution and become a leading integrator of digital media services and content distribution and management. The Company will achieve this through an aggressive business-to-business marketing strategy. Specifically that marketing strategy will include the following: • • • • • Aligning with Infrastructure Providers (IFP's) as a value added service to their IP products Initially focusing on local service providers in the hospitality and MDU/MTU markets Expanding the focus to include regional service providers (ISP's, Telco, Cable and Utility providers) Licensing/Reselling the hardware and software through the IFP's Using unique and custom technologies and the resulting first mover advantage to secure long term content provisioning and management contracts Each of these items is discussed in detail below: Aligning with Infrastructure Providers (IFP's) as a value added service to their IP products - IFP's are currently providing the hardware, software and installation services to business customers to enable them for broadband/high speed Internet access. These IFP's are able to use VOD as a value added service to assist them in marketing their products and services customers. The Company has access to the IFP's customer base and customers that are installing the infrastructures that can support VOD. Initially focusing on local service providers in the hospitality and MDU/MTU markets -Focusing on these service providers and markets allows VODUSA to deploy its systems to multiple consumers very rapidly. In a local environment bandwidth restrictions are easily overcome through the use of a local based server used to distribute video to the consumers televisions through a set-top box device. The VOD billing is integrated with the service provider's existing billing system (e.g. Hotel Property Management System (HPMS)) to allow the service provider to bill multiple services (VOD, Internet Access, Email, Shopping and Teleconferencing) in addition to its regular services seamlessly to the hotel guest or consumer. Furthermore, the VODUSA system allows the service provider the opportunity to insert local, regional and national advertising into the customer interface and realize on an additional revenue opportunity. Expanding the focus to include regional service providers (ISP's, Telco, Cable and Utility providers) - Regional service providers are upgrading their networks to be able to actively complete with national cable, telephone and broadband providers. VODUSA will use its local based system to enable these service providers with the ability to deliver video on demand to their subscriber bases at a pace with the national telephone and cable providers. The regional service provider can enjoy all of the same benefits of providing video on demand to its subscribers, integrating VOD billing with existing billing systems and realizing on additional advertising revenue as the local service provider. VoDUSA 20 Confidential Licensing/Reselling the hardware and software through the IFP's - VODUSA may resell the hardware and software for the VOD systems through the IFP. Allowing the IFP to resell the hardware and software completes the relationship and solidifies ongoing access for VODUSA to the IFP's existing and potential customers. In the case where VODUSA has developed the technology for specific hardware or software components of the VOD system, it may license the [FP to manufacture/resell those components. Reselling also allows the Company the ability to focus on its core business, which is the provision and management of digital content on its VOD systems. Using unique and custom technologies and the resulting first mover advantage to secure long term content provisioning and management contracts - The VOD system that VODUSA has developed and this unique marketing strategy gives it the opportunity to quickly enter and expand into the VOD market and the ability to secure long term contracts with service providers. The future products of VODUSA will further enhance the Company's ability to remotely manage video content allowing it to maintain a leading position in the VOD sector. VoDUSA 21 Confidential 9. ROLL-OUT AND IMPLEMENTA T/ON STRATEGY Roll-out: VoDUSA can quickly enter markets and invest significantly less capital than its competitors by leveraging its existing technological expertise, proprietary processes and media contents. VoDUSA will expand region by region to increase its subscriber base. It initially will start in the Southeast, then to the East Coast, and then expand to the other cities in North America. Implementation: Given the current bandwidth restrictions, VoDUSA intends to facilitate the delivery of full motion, feature length, interactive video through a three-stage process: Initial Stage Objective: Enhance its branding as an integrator of digital media content, and digital media systems over local, community and Internet/Broadband based infrastructures. VODUS Intends to capture at least 2 million hospitality, residential and commercial buildings subscribers when the current bandwidth is still not fully developed. In addition, VoDUSA will continuously provide the service of combining, configuring and maintaining the components into a complete package designed for the particular type of infrastructure being used. Service LBVOD Segment Details Deliver VOD through a system via LBVOD. This system involves the placement of a video server in a specific location or building and serving electronic digital video from that server over Broadband/IP technology to set-top boxes on television sets. Through its proprietary technologies, VoDUSA provides the digital video delivery system including hard-ware and software, encoded content, interface design and billing system integration to infrastructure providers as value added service. Wholesale of catalog library of over 5,000 media titles content products to the businesses providing digital media content over Internet/Broadband based infrastructures. Provides digital encoding which is the conversion of audio and video from analog to digital format. Once in a digital format the audio or video material can be compressed, authored, stored and otherwise utilized. Digitization allows for the audio or video material to be transmitted over an electronic infrastructure on a real time basis. Provide value-added services such as digital watermarking, indexing, metadata collection and analysis, search capabilities and copyright. Pricing Structure -Installation and hardware -Monthly subscriber fee -Pay Per View Fee -Technical Service Content Wholesale -Down load fee -Production fee -Licensing fee Media Conversion -Per minute fee -Hourly fee -Per product fee -Technical service Value Service Added -Hourly Fee -Production fee -Technical service VoDUSA 22 Confidential Second Stage In addition to the above service, VoDUSA plans to perfect the centralized management of the individual servers and systems. This would allow us to remotely control and manage the digital video content on all of the individual servers or groups of servers in its system. VoDUSA intends to utilize a proprietary Virtual Private Network (VPN) which will include all of the servers VoDUSA are managing and provide for a secure environment in which video files being sent and received and all of the information about the usage and the users on the system will be available. Third Stage At VoDUSA, it has developed a solution that can deliver high quality, feature length digital video content over local based broadband infrastructures today and has the flexibility to adapt to the electronic delivery of digital video over the Internet tomorrow as that becomes practically and economically feasible. Action Convert LBVOD to VOD Segment Details Leverage VoDUSA's first move advantage and covert existing subscribers to VOD (Real Time high quality video-on-demand over the Internet) Offer VoDUSA's fully integrated digital, media solutions to large number of new clients and become a leader in meeting the demand of the consumers from this rapid emerging market. Revenue Sources -Initial installation fee -Monthly subscriber fee -Pay Per View Fee -Consulting Fee -Technical Service -Revenue sharing -ASP model VoDUSA 23 Confidential 10. COMPETITION Digitization Crawford Communications was established in 1981 and remains privately held. It offers a full spectrum of services for clients involved in all aspects of television, film, Internet, audio and satellite. CyberTech Media Group is a privately held company located in Winfield, IL, a western suburb of Chicago that provides video encoding services to both a national and international customer base. CyberTech began business in 1991. Digital Outpost was founded in 1990 as GTE Interactive Media Studios, and offers DVD, MPEG-2, MPEG-2 VOB's, MPEG-1, "Internet MPEG," QuickTime and AVI encoding services. Loudeye, is focused on creating and advancing business solutions using web-based digital media. It offers service solutions and applications for encoding, optimizing and delivering audio and video content on the Intemet. OverDrive Media and Development is located in Seattle, Washington and was founded to meet the needs of a growing demand for Streaming Media Development. Ecommerce There are many companies that are retailing DVDs and VHS tapes on the Intemet including CDnow, Amazon, Bigstar and Columbiahouse.com. Most of these companies have an established web presence and active marketing programs. Video-on-Demand Intertainer, Inc., is a provider of home entertainment services on demand, it provides customers with movies, music, TV, shopping and information programming to the PC or TV using+ high-speed data lines over cable or telephone connections. Intervu Inc. is a service provider for Internet video delivery solutions. The company offers solutions to deliver live and on-demand audio and video streaming over the Intemet, from narrow band (28.8, 56.6 and 100 Kbps) to broadband (300Kbps and higher, for near television-quality video). NASDAQ Traded, ITVU currently has a market capitalization of $748 million. DIVA Cable system focused. Customers include Time Warner. Pros: Complete VOD system that is available real-time and is rolling out with cable companies. Well funded. Cons: Cable focus and has prohibitive costs for smaller cable co's. Non-IP approach does not allow modular services to be added. Large losses and heavy burden. Proprietary server and other hardware will become difficult to upgrade. Demand Video Real time video on demand solution that is delivered over two-way broadband networks. Pros: Appear to have a complete IP based VOD system with back end support. Have deployed minor rollout in Panama City, FL. Cons: Outsource encoding and therefore have less control over quality. Relatively new and using a cost prohibitive set-top box manufacturer. Proprietary software and hardware will be difficult to upgrade. Lodgenet Communications Develops and delivers services for Hotels including Cable TV and PPV movies. Attempting to upgrade to broadband and VOD. Pros: Existing subscribers and VoDUSA 24 Confidential q hotel customers. Approximately 750K guest paying rooms. Revenue >$100M per year but profitability minor. Established relationships. Cons: Near VOD solution (VCR) and upgrading to internet only not real VOD. Very cost intensive to upgrade existing customers to VOD and large capital required. On Command Provides Hotel services including Cable TV and PPV Movies. Currently a NVOD solution. Pros: Leading supplier of movies to hotel rooms with Sprectravision platform. Approximately 900K guest paying rooms and $280M in revenues. Cons: Near VOD solution and large capital requirement to upgrade existing customers to true VOD solution. Upgrade of existing customers will be focus for at least 6-12 moths. NCube Manufacturer of video servers and applications that has developed a complete VOD system. Pros: Server manufacturer and has expanded services. Good backing from Larry Ellison and Oracle. Cons: Broad based application that is targeting DSL, Cable and Telco's and will depend on the Broadband infrastructure being able to handle bandwidth requirements. Outsource encoding and tech services. Video Networks a.k.a. Homechoice VOD system over broadband networks that has had a limited rollout in the UK. Level of success uncertain. Pros: VOD system that has had a limited roll out in the UK. Well funded. Cons: Focused on Europe. Proprietary software may not be applicable in North American applications. e-videotv is a B to B content and systems aggregator to deliver VOD to customers of cable, satellite and broadband DSL distributors. Pros: Good management, former CEO of Lucas film. Cons: Complete solution unclear. OTCBB company that will have limited funding opportunities. Outsource encoding and interface design. Have not yet deployed. Kool Connect provides solutions to commercial and nonprofit institutions around the world, helping business executives, hotel guests, educators, hospital patients, consumers and many others. Pros: Have branded Hotel software system. Cons: VODUSA has had prior dealings with this company and they were inexact about their VOD solution if any. They have not deployed or even completed their complete solution to date. Streaming VOD - WebTV Solutions Intertainer is the Broadband Entertainment Network TM, providing movies, music, TV shows, concerts and shopping on demand via the new, high-speed broadband networks. Pros: Good management, limited rollout of products and well funded. They have established good relationships with some of the major studios. Cons: PC based solution with TV applications not available at +VHS quality levels if a particular DSL provider cannot guarantee bandwidth and line quality. No economic model. MeTV, USA Video Interactive, ADC Telecommunications Various Internet based services attempting to provide video over broadband to some sort of set-top box device. Pros: Good branding and have made some improvements to systems recently. Cons: PC/web based system that relies mostly on DSL and bandwidth being available to get quality. USVO has no real access to content and has a suspect history. Cost of streaming very prohibitive. VoDUSA 25 Confidential Streaming Internet B to C Major Players - ABC, NBC, Fox, MGM etc...Websites of major networks and studios are beginning to offer streaming media but not really VOD. Pros: Major strength and brand names. Intemet strategies may or may not include VOD. Cons: Looking for Internet solution that will deal with security, quality and distribution all at the same time. There appears to be no viable, cost effective solution today. Streaming full-length movies at high bandwidth is not economical today. Minor Players - Atstream, Edgestream, Cineports, Edgestream, Cinema-on-demand, Click Movie, KKRS, Ifilm, Psuedo, ON24, Videnet, Webfreetv, Load TV, etc... Various web destination/consumer sites attempting to provide video over the Intemet. Pros: These companies have all built a certain level of brand name and received funding to varying degrees. Cons: Because they outsource everything except Internet apps they only have branding. Economically infeasible strategy for at least the next 2-3 years. They will focus on clips and rich media ads for the time being. Telcos/Cable/DSL ATT Broadband/Enron-Blockbuster/Time Warner/RCN/Covad/Rogers/Cox Cable/GTEVerizon/Qwest/SBC etc... Pros: They have the subscriber bases, and have the distribution to roll out VOD on a large scale. Cons: They do not have a solution and are tending to outsource. They are all more potential customers than competitors. Some are already working with DIVA and nCube, which are competitors. VODUSA has already had some discussions with GTE and RCN but there is no apparent solution for wide scale distribution of VOD. Streaming Providers Akamai, iBeam, Digital Island, Globix, Enr0n, Exodus and any other ASP provider. Major Streaming Bandwidth providers. Pros: They have access to the pipe and could potentially distribute video for their customers on a large scale. Cons: They do not have a solution and are tending to outsource. They are all more potential customers than competitors. Streaming fulllength movies is today cost prohibitive and these companies would have to upgrade infrastructures on a large scale to provide wide scale VOD. Satellite/Wireless Direct TV, Echo Star, Dish Network, Skypath Current providers of satellite TV services and PPV. Pros: They are already delivering TV and PPV movies to customer bases. They can roll out an area faster than wired solutions because of wireless. Cons: Direct Broadcast Satellite is a one-way communication and there are significant hurdles to over come. Revenue model is prohibitive to local telcos and cable operators who are now actively looking for alternative solutions to compete directly with these companies. This is where VODUSA is concentrating its marketing effort. VoDUSA 26 Confidential 11. COMPETITIVE ADVANTAGES • Existing Revenues - VoDUSA has been generating revenue (through current and predecessor companies and consultancy work) from digital media services for the past three years. Strong Management Team - In excess of 50 collective years of experience. Proprietary Technologies - VoDUSA has developed several proprietary technologies that allow it to process video and deliver digital audio and video signals at a quality level and cost that sets it apart in the fast-paced new media industry. Huge market potential - The current market for entertainment products is estimated to be in excess of $600 billion and the current market for the Internet is estimated to in excess of $100 billion with the potential to exceed $1.5 trillion within the next five years. Business to Business focus - Its focus is to be the premier provider of wholesale digital media services, applications, content and systems to companies taking advantage of digital media content and electronic and Internet based sales infrastructures. Multiple Revenue Streams - In addition to the opportunity for revenue generation from digital media services, digital media applications, digital media content distribution and management and integration services there are possible revenue streams that are not discussed within the scope of this plan including production and distribution of unique content, resale of broadband access, the electronic sale of DVDs and other video content and high-level consulting. Sustainable advantage - Its current client list will provide in excess of $4 million in revenue in 2000 and substantial further opportunity. This revenue provides a solid, sustainable platform from which the Company can pursue the emerging market opportunities. Existing Alliances and Relationships - Enron Broadband Services, Exodus Communications, Stellar One Corp., Viagate, NEC America, nCube, Inprimus, Sun Microsystems, SGI, Liberate, ASR Entertainment, Global Access Entertainment, Inter Global Products, Infocomm, Media Group, Concurrent, Minerva, Federal Hill Communications and Front Row Entertainment. Significant 'First-Mover' Advantage - The Company believes it has a [2] year lead-time over new entrants, given its technology development and the relationships that must be established to deliver Video-On-Demand. • • • • • • • • VoDUSA 27 Confidential 12. RISK FACTORS Management is well aware of the risks that are inherent in the expansion of an existing business. The principals of the Company believe that good management and strategic planning can mitigate a large number of these risks. Outlined below are a number of risks that have been identified and management's approach to dealing with risk: • Limited Operating Histmy. Since operations commenced in1998, it has focused its attention on building infrastructure while still generating revenue. Revenues from this existing line of business are expected to reach over $4,000,000 next year. Rapid Growth. The Company recognizes the significant risks associated with rapid growth. The strategy outlined is based on aggressive recruiting of technical personnel before there may be productive assignments for them. The plan is based upon the large demand is currently experiencing for its services. In the event there is a significant drop in demand, it can easily transition to its current strategy of hiring after the work engagement is secured. Additionally, it will be hiring appropriate management personnel to help address the issues that are associated with rapid growth. The loss of the key personnel could harm its business because skilled personnel are in short supply and demand high salaries. The Company has positioned itself as a streaming technology innovator. The Company intends to invest heavily in employee training to ensure VoDUSA to maintain a competitive edge in its industry. Its future success depends significantly on the continued service and performance of its key personnel. The loss of the services of one or more of its key personnel, or the failure to retain service providers with skilled personnel, could limit its ability to manage the growth and develop and achieve its business objectives. Growth of VOD depends upon the consumer's acceptance of VOD and availability of high-speed access over Internet and it can't assure you that this development will occur quickly. During its third phase growth stage, its development of VOD via Internet will depend largely on its success in deploying the infrastructure necessary to grow its customer base. If the development of broadband access is slower or if the consumers do not perceive us as offering a cost-effective, value-added and quality media content delivery services, its business, prospects, financial condition and results of operations will be materially harmed. Its planned aggressive growth may strain its resources and the resources of tile third party service providers. Its plans on rapidly and aggressively expanding its operations to pursue market opportunities. This rapid growth will continue to place a significant strain on its managerial, operational and financial resources. In order to manage its growth, it must continuously improve its operational systems, procedures and controls on a timely basis. Need for Additional Capital. The growth of its business will depend significantly on its ability to acquire additional capital to expand its operations. The Company needs to raise additional capital through either public or private debt or equity financing to deal with unforeseen changes in the environment. These situations may include opportunities for a more rapid expansion, potential acquisitions, to develop new services or technologies, and respond to competitive pressures. Potential New Competitors. There are relatively few barriers to entry in the streaming Technology market. As a result, new market entrants may pose a threat to the Company's business. In addition, it may face pricing pressures as a result of competitors in its market and increases in LBVOD by other competitors. • • • • • • VoDUSA 28 Confidential 13. PRESS COMMENTS CCS Broadband Technologies Solutions and VOD Network Content Solutions to Clients Partner to Offer Broadband ATLANTA, Integration and Video June 21 /PRNewswire/ -- CCS Broadband Technologies and New York- based VOD Network Solutions Inc. (d.b.a. VODUSA) have jointly announced today that they have formed a strategic partnership. Together they will deliver Video-On-Demand, streaming content, and High-Speed Internet on TV to customers over a variety of Broadband networks such as cable, xDSL, Ethernet, wireless and fiber using an open standards Broadband set top box. CCS will supply the Broadband integration, support, sales and marketing services, which will be paired with VODN's content and video server technology. CCS and VODUSA worked jointly on the design of the set top box and a third party will manufacture it. "we're very excited about this partnership. VODUSA gives us access to valuable content and video server technology that far exceeds its competitors. Our solution is so scalable that VODUSA can even deliver it to providers with as few as a couple of hundred subscribers," said Anthony Flatt, Director of CCS Broadband Technologies. "This partnership allows us to provide our customers with an end-to-end Broadband set top solution that is unmatched in the industry." "Working with CCS and the level of their professionalism in the area of infrastructure development for Broadband technologies creates a strong partnership on both content and delivery mechanisms," said Dan Johnson, President and COO of VOD Network Solutions Inc. About VOD Network Solutions Inc. VOD Network Solutions Inc. d.b.a. VODUSA is a leading integrator of digital media delivery services, applications, content and systems that creates a complete Intemet/Broadband based solution for the new media, broadband, entertainment and corporate markets. and non-proprietary digital media content combined with its services and Access to proprietary applications allows VODUSA to provide an integrated solution for the distribution of feature length, full size digital media over local, community and global Internet/Broadband based infrastructures. Additional information Technologies. File:///C[/My Documents/CCS Technologies.htm [7/7/2000 7:41:10 PM] will be available on the VODUSA website http://www.vodusa.com/ CCS VoDUSA 29 Confidential "i A Press Comments VOD Network Solutions To Use The Enron Intelligent Broadband Entertainment And Educational Content Thursday, March 30, 2000 HOUSTON Network To Stream -- Enron Broadband Services, a wholly owned subsidiary of Enron Corp. application services, announced today a one-year contract with and a leader in the delivery of high-bandwidth VOD Network Solutions, Inc. (VODN), a leading integrator of digital media infrastructure services, applications, content and systems. Under terms of the agreement, VODN can utilize Enron's network and ewer TM Media Cast to deliver rich media content with guaranteed quality of service at speeds up to 50 times faster than the public Internet. VODN, formerly Atlantic Coast Digital Concepts, will use the Enron Intelligent Network (EIN), an optical overlay to the Internet with integrated Media Cast software optimized for the delivery of streaming media, to enhance the quality and speed of its multimedia offerings. VODN's offerings include full-length motion pictures, classic television episodes, children's programming, documentaries and educational programs. VODN plans to encode 8,000 motion pictures by the end of 2000 for online consumption via the Enron network. "The motion picture content that VODN is now streaming over the EIN adds yet another compelling dimension to the content we're making available over our network," said Joe Hirko, CEO of Enron Broadband Services. "Our goal is to be the distribution platform for the most interesting, relevant and in-demand broadband available on the Internet." content Enron's solution provides TV-quality streaming video and the required bandwidth for VODN to broadcast videos on demand in a richer and more reliable fashion than can be achieved by simply sending content through the oversubscribed public Internet. "The public Internet, with its limited bandwidth and slow download times, can't support what VODN wants to broadcast," said Daniel Johnson, president and COO of VODN. "Enron's network, on the other hand, has unbelievable speed, clarity and quality." About the Enron Intelligent Network TM . The E1N is based on a distributed server architecture, a pure Internet Protocol strategy, Enron's global fiber and satellite distribution, and the embedded software intelligence, called the Enron Broadband Operating System (BOS), that sets it apart from other network providers. The E1N and VoDUSA 30 Confidential Enron's BOS enable a whole new breed of application services, called ePowered Services, which transport rich m_ edia and live, streaming video, faster than using the public Internet. t About Enron Broadband Services Enron: Enron Broadband Services -- Press Releases I I file:///CI/My Documents/Enron Enron Broadband Services -- Press Releases.htm (1 of 2) [7/7/2000 7:38:00 PM] VoDUSA 31 Confidential A FINANCIAL PROJECTIONS VoDUSA 32 Confidential SAFE HARBOR ACT This document contains forward-looking statements subject to the safe harbor created by the Private Securities Litigation reform Act of 1995. The Company cautions readers of this document that such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward looking statements. Although the Company's management believes that their expectations of future performance are based on reasonable assumptions within the bounds of their knowledge of their business and operations, there can be no assurance that actual results will not differ materially from their expectations. Factors which could cause actual results will not differ from expectations included, among other things, the risks associated with start-up companies, including start-up losses, liquidity problems, uncertainty of revenues, markets, profitability and the need for additional funding; the risks that the Company may be unable to raise additional capital through private financing, debt or equity offerings or collaborative arrangements with others on acceptable terms; intense competition from a variety of competitors with greater resources and market acceptance; the Company's limited experience in assembling a sales and marketing team and strategy; the potential need to make continuing significant investments in software development in response to rapidly evolving technologies and technological shifts; the risks associated with the potential loss of one or more key customers of the Company; the Company's dependence upon key personnel; the challenges and uncertainties in the implementation of the Company's expansion and development strategies; and other factors described in reports filed by the Company with the Securities and Exchange Commission. VoDUSA 33 Confidential SELE(,TED FINANCIAL DATA AND PROJECTIONS 1.0 Financial Highlights 2.0 Past Performance 3.0 Market Analysis 4.0 Sales Forecast 5.0 Personnel Plan 6.0 Profit & Loss Statement 7.0 Monthly Profit & Loss Statement 8.0 Pro-Forma Cash Flow 9.0 Pro-Forma Balance Sheet 10.0 Selected Ratios 34 34 35 36 37 38 39 40 41 42 VoDUSA 34 Confidential 1.0 Financial Highlights Highlights //L $120,000,000 $I00,000,000 $80,000,000 $60,000,000 [] [] $4o,0o0,000 $20,000,000 $0 ($20,000,000) FY2001 FY2002 FY2003 [] Sales Gross Net 2.0 Past Performance Past Performance $400,000 $300,000 $200,000 $100,000 / $0 ($100,000) ($200,000) ($300,000) ($400,000) ($500,000) FY1998 FY1999 FY2000 , _ I ] [] [] [] Sales Gross Net I VoDUSA 35 Confidential 3.0 Market Analysis Market Analysis (000's) Potential Customers Technical Services VOD Internet Total Growth 20% 200% 400% 254.89% 2000 50,000 500,000 100,000 650,000 2001 60,000 1,500,000 500,000 2,060,000 2002 72,000 4,500,000 2,500,000 7,072,000 2003 86,400 13,500,000 12,500,000 26,086,400 2004 103,680 40,500,000 62,500,000 103,103,680 CAGR 20.00% 200.00% 400.00% 254.89% Market Analysis (Pie) [] [] VOD Internet [] Technical ervices S VoDUSA 36 Confidential A 4.0 Sales Forecast 4.1 Annual Sales Forecast Summary Sales LBVOD VOD Internet Tech Services Other Total Sales Direct Cost of sales LBVOD VOD Internet Tech Services Other Subtotal Cost of Sales FY2001 $1,872,036 $205,830 $0 $2,895,699 $0 $4,973,565 FY2001 $532,176 $799,020 $0 $812,352 ($598,500) $1,545,048 FY2002 $21,766,932 $13,126,380 $0 $6,817,288 $0 $41,710,600 FY2002 $5,018,500 $6,065,947 $0 $1,658,590 ($1,467,500) $11,275,537 FY2003 $75,507,300 $28,435,725 $0 $13,634,576 $0 $117,577,601 FY2003 $18,085,954 $8,521,500 $0 $3,317,186 ($3,766,500) $26,158,140 Sales by Year $12o,ooo,ooo ................................. $80,000,000 $100,000,000 [] [] LBVOD VOD ooooooo ILl[. ee $40,000,000 $20,000,000 [ [] Tech Services Other $o FY2001 FY2002 FY2003 VoDUSA 37 Confidential "t * 5.0 Personnel Plan Personnel Plan Production Personnel Exec Producer VOD Producers VOD Assistant Producers VOD Exec Producer Tech Services Producers Tech Assistant Producers Tech Subtotal Sales and Marketing Personnel Sales Manager VOD Sales Manager Tech Sales People VOD Sales People Tech Subtotal General and Administrative Personnel Admin Assistant Reception/Clerical Name or title Other Subtotal Other Personnel Ray Cottrell Dan Johnson Dan Johnson Chris Cottrell Chris Cottrell Ken Chin Ken Chin Other Other Subtotal Subtotal FY2001 $60,000 $24,000 $136,500 $84,000 $84,000 $84,000 $472,500 FY2002 $96,000 $150,000 $585,500 $90,000 $84,000 $462,000 $1,467,500 FY2003 $288,000 $450,000 $1,756,500 $180,000 $168,000 $924,000 $3,766,500 $24,000 $96,000 $67,500 $266,760 $454,260 $96,000 $96,000 $486,000 $386,760 $1,064,760 $288,000 $192,000 $1,458,000 $773,520 $2,711,520 $45,000 $30,000 $0 $15,000 $90,000 $66,000 $30,000 $0 $180,000 $276,000 $99,000 $45,000 $0 $270,000 $414,000 $111,000 $I 11,000 $111,000 $87,000 $87,000 $87,000 $87,000 $0 $0 $396,000 $396,000 $240,000 $240,000 $240,000 $180,000 $180,000 $180,000 $180,000 $480,000 $480,000 $1,320,000 $1,320,000 $360,000 $360,000 $360,000 $270,000 $270,000 $270,000 $270,000 $720,000 $720,000 $1,980,000 $1,980,000 Total Headcount Total Headcount Total Payroll Total Payroll Payroll Burden Payroll Burden Total Payroll Expenditures Total Payroll Expenditures 39 39 $1,412,760 $1,412,760 $211,914 $211,914 $1,624,674 $1,624,674 94 94 $4,128,260 $4,128,260 $619,239 $619,239 $4,747,499 $4,747,499 188 188 $8,872,020 $8,872,020 $1,330,803 $1,330,803 $10,202,823 $10,202,823 VoDUSA 38 Confidential 6.0 Profit & Loss Statement Profit and Loss (Income Statement) Sales Direct Cost of Sales Production Payroll Other Total Cost of Sales Gross Margin Gross Margin % Operating expenses: Sales and Marketing Expenses Sales and Marketing Payroll Advertising/Promotion Travel Miscellaneous Total Sales and Marketing Expenses Sales and Marketing % General and Administrative Expenses General and Administrative Payroll Payroll Burden Depreciation Leased Equipment Web Site Development Enron Communications Exodus Utilities Telephone Intemet/Tl Legal Accounting Travel/Entertainment personal) Other Rent Rent FY2001 $4,973,565 $1,545,048 $472,500 $0 .................................... FY2002 $41,710,600 $11,275,537 $1,467,500 $0 $12,743,037 $28,967,563 69.45% FY2003 $117,577,601 $26,158,140 $3,766,500 $0 $29,924,640 $87,652,961 74.55% $2,017,548 $2,956,017 59.43% $454,260 $330,000 $288,000 $0 .................................... $1,064,760 $1,378,000 $1,278,000 $0 $3,720,760 8.92% $276,000 $619,239 $360,060 $175,536 $360,000 $72,000 $360,000 $135,400 $38,400 $36,000 $360,000 $40,000 $288,000 $89,266 $432,000 $432,000 $2,711,520 $2,962,201 $3,800,000 $0 $9,473,721 8.06% $414,000 $1,330,803 $500,000 $351,072 $720,000 $144,000 $720,000 $270,800 $76,800 $72,000 $720,000 $80,000 $576,000 $0 $864,000 $864,000 $1,072,260 21.56% $90,000 $211,914 $90,000 $175,536 $195,000 $72,000 $110,000 $18,000 $30,000 $6,000 $108,000 $12,000 $144,000 $276,000 $144,000 $144,000 .................................... .................................... (non-sales Total General and Administrative Expenses Total General and Administrative Expenses General and Administrative % General and Administrative % Other Expenses Other Expenses Other Payroll Other Payroll Contract/Consultants Contract/Consultants Research & Developement Research & Developement Content Development Content Development Content Aquisition/Development Content Aquisition/Development Other Other $1,682,450 $ 1,682,450 33.83% 33.83% $3,641,901 $3,641,901 8.73% 8.73% $6,839,475 $6,839,475 5.82% 5.82% $396,000 $396,000 $0 $0 $300,000 $300,000 $864,000 $864,000 $354,000 $354,000 $57,600 $57,600 .................................... .................................... $1,320,000 $1,320,000 $264,000 $264,000 $1,700,000 $1,700,000 $864,000 $864,000 $4,000,000 $4,000,000 $400,000 $400,000 $1,980,000 $1,980,000 $1,500,000 $ 1,500,000 $5,100,000 $5,100,000 $0 $0 $12,000,000 $12,000,000 $0 $0 Total Total Other Other Other Expenses Other Expenses % % $1,971,600 $1,971,600 39.64% 39.64% $8,548,000 $8,548,000 20.49% 20.49% $20,580,000 $20,580,000 17.50% 17.50% VoDUSA 39 Confidential Total Operating Expenses Profit Before Interest and Taxes Interest Expense Short-term Interest Expense Long-term Taxes Incurred Net Profit Net Profit/Sales $4,726,310 ($1,770,293) $2,500 $19,000 ($447,948) ($1,343,845) -27.02% $15,910,661 $13,056,902 $2,500 $19,000 $3,258,851 $9,776,552 23.44% $36,893,196 $50,759,765 $2,500 $19,000 $12,684,566 $38,053,699 32.36% VoDUSA 40 Confidential _0_ o ooooo o.oooooooooo oo ooooi ooOoooo l _00_ ° _0_0000000000 _ooo_oooo 0 o 000 000 o_ _o_o_o __ _oo_o _ooOOO__o_o_ggoooog_oO_o_ooo_ooooOOOO oo o oooOOOi_Q g o _ ___ og§°°°°§_°°°_OOoo ooo_OOO o _ _ oo_ _o_oooo_oo . . _ oo g o oo_ _ ooc _ oo oooooo_ oog__o oo_o_oooooooooo ooo i_ _ _ ggooooggoo__oo oo_ _ O_ _ _ _ _ _ oo_o _ooo_oooo o ooc _ _ _ KK oo oooooo_ =_°°°I__o._o _oo_ _o _00_ ° _._o_OOOOO_SOOO _0_0000000000 _ oo°_ OOC OOC _ g_oooo_oo_ O0 000000_ _oooo__ _ _°°°°1°_ ._ _0 _ oo_o_oooooooooo _000_0000 g 0 ooc 000 i_ _ . _ oooooooooO_oo_ooooooc _o_ _ N _ _ _N _NgN°°°° 000000_ 0_0_o _00_ ° _0_0000000000 _OOO_O000 0 0 000 00_ O0 00000_ _ _o_I_ _m_ _ m_ s_4 _. _o°° _ _o _ _ _sd_s_s oo_o_oooooooooo_o_o O_O0 _ _og oooooo _g oo O0 O0 O0 _ g o _ _oO_oo . _ o _ _ _ _ _ _ _ _ss_" oo_ooooooo°°°°°°°°°°° oo oooooo_ _ _00_0_ _ _ O0 _ _o _ _ 0_0_ _o 00000 00_ o qq O0_J O0 ooo .. _ _ _ _ 00000000000 00_0000000 oo ....... oooooo_ _oooog_ <_o _ 3_0_ o_ _goo_ _o _o _o_oooooooooo oo_o_oooooooooo _ _ooo_oooo g o ooo_ ooo ooo_ _ _ _ _ ggooooooooo_ooooooo oo qqqqqq_ _ _oOO_ _oo°°_o _o_ _ _ _ oo_omoooooooooo _°_°°°°°°°°°°_ooo_oooo g o ooc°°C oo_o_ _ _ oo _ oo_ oo oggg°°o o o_ ooo_oo_ _0_ _o _ ° ooooo_ _00_ _q _ ° oo_oooooooooo _00_ 0000000 _00 _ o 0 _oooo o oo_ 000 oooom o _ _ _ _ oooo o 0 0_0 0 _ oooc oo 000_ O00C 0 _ _ _ c _= _ _ >> o o __ EE D D _ _ 0 oo o m _ _ _ C C _ =_ m C C C _ C W E_ E _ _ _XDD _ _ C _ C "_ "_ _ _ _ DD >> 0 _ o -O_ _m_ _ c c _ 0_ _m_ c _ cc'N c _<< "_ "_ o_ _c-__ _ _ _ .... m _ m c ........ _ _ .... E c c c mc----_m_m°_ __oo_V,c ram---- mN_xxmmoo°° _ m _00_ G - 6_ _" o. M N,-co'/,-4 I C) LO 0 CO COo _ :0_ LO "q" Lo_co oo_ CO o CO _1" l_l LO CO 0 h0 C_O0 .cOo, ) -O_oO 09(0 _g (00_" _vgT X mLEE 0"0 _0 E g_ _N .C 0 (_ (3. X X _CO-J o) C "0 ¢,} O} _¢_®_ -o _xx= =_u_uJ___ O_O,-n _ _-- o o _a_:_o_X_ uJ {:i}_ _ C (:: C _ Cl--ZZ &O Pro-Forma Cash Flow Pro-Forma Cash Flow FY2001 ($1,343,845) ($1,343,845) FY2002 $9,776,552 $9,776,552 FY2003 $38,053,699 $38,053,699 Net Profit Net Profit Plus: Plus: Depreciation Depreciation Change in Accounts Payable Change in Accounts Payable Current Borrowing (repayment) Current Borrowing (repayment) Increase (decrease) Other Liabilities Increase (decrease) Other Liabilities Long-term Borrowing (repayment) Long-term Borrowing (repayment) Capital Input Capital Input Subtotal Subtotal Less: Less: Change in Accounts Receivable Change in Accounts Receivable Change in Other Short-term Assets Change in Other Short-term Assets Capital Expenditure Capital Expenditure Dividends Dividends Subtotal Subtotal Net Cash Flow Net Cash Flow Cash Balance Cash Balance $90,000 $90,000 $517,888 $517,888 $0 $0 $0 $0 $0 $0 $0 $0 ($735,957) ($735,957) FY2001 FY2001 $876,079 $876,079 $0 $0 $0 $0 $0 $0 $876,079 $876,079 ($1,612,036) ($1,612,036) ($1,012,036) ($1,012,036) $360,060 $360,060 $2,810,509 $2,810,509 $0 $0 $0 $0 $0 $0 $20,000,000 $20,000,000 $32,947,120 $32,947,120 FY2002 FY2002 $6,631,696 $6,631,696 $0 $0 $0 $0 $0 $0 $6,631,696 $6,631,696 $26,315,424 $26,315,424 $25,303,388 $25,303,388 $500,000 $500,000 $5,120,414 $5,120,414 $0 $0 $0 $0 $0 $0 $0 $0 $43,674,112 $43,674,112 FY2003 FY2003 $13,695,359 $13,695,359 $0 $0 $0 $0 $0 $0 $13,695,359 $13,695,359 $29,978,753 $29,978,753 $55,282,141 $55,282,141 VoDUSA Confidential Cash $600,000 > $4OO,OOO / $200,000 ($200 000) ($400,000) ($600 o00) [] [] Cash Flow Cash Balance ($1ooo.ooo) 44 VoDUSA Confidential 9.0 Pro-Forma Balance Sheet Assets Short-term Assets Cash Accounts Receivable Other Short-term Assets Total Short-term Assets Long-term Assets Capital Assets Accumulated Depreciation Total Long-term As sets Total Assets FY2001 ($1,012,036) $897,818 $0 ($114,218) $300,029 $142,510 $157,519 $43,301 FY2002 $25,303,388 $7,529,514 $0 $32,832,902 $300,029 $502,570 ($202,541 ) $32,630,361 FY2003 $55,282,141 $21,224,873 $0 $76,507,014 $300,029 $1,002,570 ($ 702,541 ) $75,804,473 Liabilities & Capital Accounts Payable Short-term Notes Other Short-term Liabilities Subtotal Short-term Liabilities Long-term Liabilities Total Liabilities Paid in Capital Retained Earnings Earnings Total Capital Total Liabilities and Capital Net Worth FY2001 $525,688 $25,000 $0 $550,688 $190,000 $740,688 $1,105,000 ($458,542) ($1,343,845) ($697,387) $43,301 ($697,387) FY2002 $3,336,196 $25,000 $0 $3,361,196 $190,000 $3,551,196 $21,105,000 ($1,802,387) $9,776,552 $29,079,165 $32,630,361 $29,079,165 FY2003 $8,456,610 $25,000 $0 $8,481,610 $190,000 $8,671,610 $21,105,000 $7,974,165 $38,053,699 $67,132,864 $75,804,473 $67,132,864 Proi ect ed Net I ncorre $35, O0 $30000 _ _:__ d _ Proi ect ed Revenue $120,0 00,000 020000 _0000 o0oo $50000 $0 _ _ _ $1oo o $60000 $00000 o, ooo $40, O0 O, 000 !_ _;_ _ _% _ _i :_;_ _;: _ _i/_!i: i _,_,_ _,; _:_ ,._;_,, 'F ,=v enue ............... _Z ( $5, oo o, ooo) 1 2 3 j $o 1 2 3 / 45 VoDUSA Confidential i l 10.0 Selected Ratios Ratio Analysis Profitability Ratios: Gross Margin Net Profit Margin Return on Assets Return on Equity Activity Ratios: AR Turnover Collection Days Inventory Tumover Accts Payable Turnover Total Asset Turnover Debt Ratios Debt to Net Worth Short-term Liab. to Liab. Liquidity Ratios Current Ratio Quick Ratio Net Working Capital Interest Coverage Additional Ratios Assets to Sales Debt/Assets Current Debt/Total Assets Acid Test Asset Turnover Sales/Net Worth Dividend Payout FY2001 59.43% -27.02% -3103.51% 0.00% FY2001 2.77 67 0.00 7.88 114.86 FY2001 0.00 0.74 FY2001 -0.21 -0.21 ($664,906) -82.34 FY2001 0.01 1711% 1272% - 1.84 114.86 0.00 $0 FY2002 69.45% 23.44% 29.96% 33.62% FY2002 2.77 74 0.00 7.88 1.28 FY2002 0.12 0.95 FY2002 9.77 9.77 $29,471,706 607.30 FY2002 0.78 11% 10% 7.53 1.28 1.43 0.00 FY2003 74.55% 32.36% 50.20% 56.68% FY2003 2.77 89 0.00 7.88 1.55 FY2003 0.13 0.98 FY2003 9.02 9.02 $68,025,405 2360.92 FY2003 0.64 11% I 1% 6.52 1.55 1.75 0.00 RMA 0 0 0 0 RMA 0 0 0 0 0 RMA 0 0 RMA 0 0 0 0 RMA 0 0 0 0 0 0 0 46 VoDUSA Confidential APPENDICES 47 VoDUSA Confidential APPENDIX 1 TECHNOLOGY OVERVIEW Consumer demand for electronic entertainment and information continues to explode at roughly the same pace as developments in the field of digital media and communications technologies. New technologies are converging to make the on-demand delivery of digital media to the home a reality. Those technologies are in two specific areas: 1) the digital delivery to the end user and 2) the compression of digital media. Video on Demand (VOD) is one such technology application that is revolutionizing the entertainment industry, offering great market and income potential. It essentially refers to the ability of individual consumers to view programming such as movies anytime they wish to. VOD Classes VOD and related services can be classified into several categories, largely differentiated by the level of interactivity and cost. It is helpful to this discussion to clarify the related terminology and associated capabilities. Broadcast (Non-VOD) Broadcast, cable or satellite TV makes the user a passive participant with no control over the session other than changing channels. This is one-to-many distribution model is the least expensive method for delivering video programming. Pay-per-view (PPV) Pay Per View services are transmissions with restricted access. The user requests and pays for specific programming such as movies, concerts and sporting events either via telephone or the same set-top box that delivers the content. All viewers watch PPV events at the same time with no interactivity or VCR-like controls. Therefore the only personalization is whether or not the viewer chooses to view restricted-access programming. Quasi Video-on-Demand (Q-VOD) Quasi Video-on-Demand services are found primarily on the web. They are usually structured as a combination of video stream and chat forum where like minded individuals can congregate and interact regarding the video they are viewing in common. Q-VOD is also beginning to see use in the education and corporate training markets. Near Video-on-Demand (N-VOD) Near video-on-demand systems simulate true video-on-demand by streaming multiple versions of a program at staggered time intervals on separate channels, Users of such systems select the program and the closest pre-scheduled start time. For example, 12 channels showing the same movie staggered progressively at 10 minute intervals allows any viewer to watch that movie from the beginning with a wait of no more than 10 minutes. Interactive functions such as fast-forward and rewind are simulated by the user switching to a different stream. In situations with a large number of viewers and a modest amount of specialty programming choices, near video-ondemand has been cost-effective because multiple viewers watch a finite number of streams simultaneously. True Video-on-Demand (VOD) By definition, true VOD is a system where end users have control over all media delivery. (For the purposes of this report, the term "VOD" shall imply true VOD unless otherwise specified.) There is no pre-scheduled time slotting and the media is delivered as requested. 48 VoDUSA Confidential VOD often offers full-function VCR-like capabilities, including forward and reverse play, freeze, and random positioning. The fully interactive nature of VOD also makes it possible for viewers to interact with elements such as commercials or multimedia content accompanying the video. This same advantage of interactivity also means that VOD requires greater bi-directional capabilities between the viewer and the centralized controller. VOD utilizes a single channel per customer, even if multiple customers request the same program at approximately the same time. Thus, VOD can become quite a daunting proposition on large scales. Location-Based Video-on-Demand (LBVOD) Location-based VOD is designed to stream media over an infrastructure of fixed size. A local video server is housed in the same building or complex as the viewers, connected to the various set-top on a form of local area network. LBVOD is most commonly used by hotels, cruise ships, corporations, governments, educational institutions and healthcare facilities. Like true VOD, viewers can access programs on demand. Video Compression Digital video and, by extension, VOD, is made possible by highly-advanced and specialized data compression technology. Uncompressed broadcast-quality digital video requires approximately 27 MB per second of information-an impractical amount of data to process, store and transmit. Various forms of compression are in use today to realize smaller video sizes. As part of the process, video is encoded using specialized hardware during the compression process and subsequently decoded at the point of delivery. Compression Concepts Traditional image compression technology compresses images by simply looking for redundancies in adjacent pixels and encoding them appropriately. The sheer volume of information in motion video requires additional compression solutions. One method is reducing the image viewing size. In tandem, many technologies also drop frames as necessary to maintain overall temporal accuracy and synchronization of imagery to audio. While these compromises are currently acceptable in the delivery of token video imagery via the web at large, they are unacceptable for the purposes of mainstream entertainment. Most digital video averages out color information that is too subtle for the human eye to distinguish, thereby increasing the amount of redundancies in adjacent pixels available to be encoded. This is similar to the JPEG compression used to compress still images in digital cameras and web sites. In video, this approach is sometimes referred to as intra-frame compression. Digital video compression also entails tracking and recording only the changing areas in a series of frames. This is often referred to as inter-frame compression. Consider footage of a person talking in front of a fixed background. If only the lips move, there is very little change of pixel data between frames. If the person's entire head moves, the data requirements increase somewhat but are still relatively low. If, on the other hand, the entire camera moves, every pixel changes and there is little or no opportunity for the encoding of redundancies. Hence content such as action movies and sporting events require a higher data rate than does more subdued programming. Most of these technologies periodically record key frames-frames in which no intra-frame compression is calculated or applied. Although key frames require more data, they serve as baseline reference frames that regularly insure that the inter-frame encoding does not mutate the image too severely. Even given the combined use of inter- and intra-frame compression technologies, full-frame, full-motion video requires a formidable amount of data. Simple 49 VoDUSA Confidential J broadcast video typically requires 1 to 3 Mbps (megabits per second), while most video content that contains flesh tones (close-up shots), detail, fast-paced action and special effects such as explosions typically requires 3 to 8 Mbps. Various media compression and viewing technologies are in use today in the area of personal computers and the Internet. These include Apple's QuickTime, Microsoft's Windows Media Technologies and Real Networks Real Video. Many of these technologies employ a variety of codes (encoder/decoder software components) designed to convey different media types such as still images, audio and video. Most experts agree that the various MPEG formats are the only serious choice for broadcast-quality video. Moreover, MPEG as related to VOD is often used without the overhead of shell technologies such as QuickTime. VoDUSA will therefore focus the rest of the compression discussion on variants of MPEG itself. Motion Picture Experts Group Much of the video compression technology used today was initiated by the Motion Picture Experts Group (MPEG), an international standards committee created in 1988 to define a way to digitally encode video and audio on compact discs. The language, or syntax, of MPEG defines the structure of the bitstream. The semantics of MPEG define a decoder that reconstructs bitstreams into frames of video and audio samples via a pre-defined rule base, or algorithm. Various companies also offer specialized encoding techniques to optimize the ratio of bit rate and image quality. MPEG uses both inter- and intra-frame compression in conjunction with key frames known as Iframes. Unlike most other technologies, MPEG has the ability to look both forward and backward from I-frames in order to optimize the compression quality. An MPEG encoder will break up a sequence into GOPs, starting with an I-Frame. Generally, GOPs are made up of about 15 frames, with an I-frame at each end. This gives it a chance to periodically (about every half-second) look at the entire image and make sure that it is keeping up with the changes from frame to frame. MPEG-1 was the first standard released by the MPEG organization in 1991. It was designed specifically for transferring data from a T1 data stream or 32x speed CD-ROM. It is built around a standard image format (SIF) of 352 x 240 pixels at 30 frames per second with a data rate of 1.5 Mbps. While this image size fills only a portion of the screen in its native format, the pixels can be doubled on decoding and through the use of special filtering, approximate the quality of VHS videotape. In its native state, MPEG-1 is also useful for less demanding applications such as business video. MPEG-2 In 1994, the MPEG standards committee released the specification for MPEG-2. Designed to include HDTV and SDTV programs over many mediums such as disc, broadcast, and tape, this standard offers a much wider range of resolutions and bitrates than MPEG-1. MPEG-2 design and implementation make it the idea compression scheme available today and is the compression format of choice by the majority of digital broadcasters. MPEG-3 was originally intended for high definition video applications. However, HDTV specific compression requirements were incorporated into MPEG-2, and standardization efforts on MPEG-3 were never started. MPEG-4 is the result of another international effort involving hundreds of researchers and engineers around the world. In general, it handles more advanced image composition and issues surrounding high-definition television. A version of MPEG-4 was released in late 1998, however numerous problems caused it to go largely unimplemented. A revised version is currently in the final release stage and many companies currently used MPEG-2 are expected to migrate to MPEG-4 over the next year or so, whose formal ISO/IEC designation will be ISO/IEC 14496, was released in October 1998 and became International Standard in December 1998. MPEG-4 is 50 VoDUSA Confidential building on the proven success of three fields: digital television, interactive graphics applications that create synthetic content, and interactive multimedia like the World Wide web that allows distribution of and access to content. It provides the standardized technological elements enabling the integration of the production, distribution and content access paradigms of these three fields. Delivery Mechanism Overview While, on the surface, the various levels of VOD are differentiated by interactivity and implementation costs, much of the reason for the disparate classes and minimal market penetration owes to issues of delivery infrastructure. Note that the delivery of digital video and related services often requires that a high-speed data pathway be available throughout the delivery path. In spite of the fact that new infrastructure is being added all the time, slower connections in "the last mile" to the customer's home are often still bottlenecks. The following are delivery technologies that are common in today's infrastructure. Terrestrial Systems DSL / ADSL Increased bandwidth capability has provided the opportunity for telephone companies and High Speed Internet Access/DSL Providers such as AT&T, Covad Communications, Bell Atlantic and NorthPoint Communications with the opportunity to compete with cable and satellite companies in providing movies and other digital media to the consumer. DSL is popular, in part, because it uses modem technology to work with simple twisted-pair copper wire. The form of DSL in common use today is asymmetrical DSL (ADSL), This is an asymmetrical bi-directional transmission system used as the local subscriber loop between the local telephone switch and the subscriber's home, thus allowing the economical transmission of broadband services without signal regenerators. ADSL has downstream speeds capable of reaching up to 6 Mbps and upstream speeds ranging from 64kbps up to approximately 1.5 Mbps (depending of the length and condition of the existing copper wires). In combination with the telephone signals, which may be analog or digital (ISDN), control (16 and 24 kbps) and video (2 to 6 Mbps) information channel may be transmitted downstream towards the customer. In the upstream direction there are at least telephone and control channels, and optional duplex bearers to 576 kbps. Carrierless AM/PM (CAP), Discrete Multitone Transmission (DMT), and Frequency Division Multiplexing (FDM) are to be considered as the modulation techniques. ADSLs are not usable as VOD access networks when operating with PCM (Pulse Code Modulation) systems using multiplexing techniques in the subscriber loop, because the lines are not physically switched. ADSL uses relatively low bitrates. In particular, the return channel is quite narrow, thus limiting emerging new services. It is based on a star configuration using unshielded wire cables, with a two-wire line for each user. Due to physical constraints such as cable attenuation and frequency distortions, both variants of DSL are limited in the distance that can be covered between servers or relay stations. Depending on the integrity of the copper ware, the maximum length ranges from between 25 m to 3.5 km. ADSL is much more forgiving. The spanning distances related to the transmission bandwidth through a cable with diameter of 0.4 mm are the following: 2 Mbit/s @ 3.2 km 4.2 Mbit/s @ 2.0 km 6.2 Mbit/s @ 1.6 km G.Lite Recently the International Telecom Union approved the use of G.Lite. G.Lite is an emerging standard that defines a specific type of ADSL that is slower than traditional ADSL but does not 51 VoDUSA Confidential require a plain old telephone services (POTS) splitter to be installed at the subscriber site to allow data and POTS voice service on the same line. G.Lite is often a cost"effective delivery system for residential customers because of the low cost of equipment and the ease of installation. Narrowband Narrowband services typically come in the form of dial-up access or low-end DSL. Actual transmission speed depends upon the service, with typical data rates including 56kbps, 115 kbps, 300 kbps, 500 kbps and 750 kbps. These data rates are typically too low to be of use in entertainment-quality VOD. ATM Standard twisted-pair specifications can be used as the access technology to provide a direct ATM access (Asynchronous Transfer Mode - systems which allow the switching of any reasonable bit rate to a single or multiple customers among a large number of connected customers.) This means that the old dial-up service is removed and the existing telephone cable is used to connect to the ATM switch and then the existing telephone cable is used as a twisted-pair ATM connection. In order to realize additional bandwidth over twisted-pair wires, network suppliers have to invest in some new infrastructure. If new high quality copper pairs are installed, bandwidths can be quite wide. According to ATM Forum specifications the following bitrates are available: 155 Mbps (UTP5), 51 Mbps (UTP3) and 25 Mbps (IBM standard). Cable Television (CATV) network The cable TV (CATV) distribution system is based on a tree-and-branch topology today and is migrating to a star topology in the future. The audio and video signals are transmitted via coaxial cables in the subscriber line area. The trunk lines are usually made by fiber. High penetration of the CATV is targeted in cities and large communities. Due to the high bandwidth, it has many channels available, which are multiplexed onto the cable using Frequency Division Multiplexing (FDM). Since the number of channels available on the cable for services is limited, services that require a large bandwidth must be considered carefully. Channel transmission on the cable is primarily unidirectional. Signals are inserted on the downstream channels by the head end. Signals from customer sites are only' allowed on certain upstream channels and they are only transmitted towards the head end. Although there is provision for upstream message transmission, many cable systems do not have the actual amplifiers and filters that are needed. In addition, signal regeneration and noise pose greater difficulty in the upstream direction as multiple noise sitsces are merged. Cable systems are very vulnerable to leakage due to physical damage such as aging, accidents and willful destruction. This leakage, in turn, translates to noise. Furthermore, one big minus for CATV connections is secrecy. If there is no AT M multiplexer in the center of the CATV star or root of the tree, all data is going in the ATM 'bus' which is available to all subscribers. This means more costs, because VoDUSA have to provide means to ensure privacy in the connections-and ATM does not provide encryption. Encryption has to be accomplished by other means, but such solutions typically only take place in the last hop. Modern cable networks can also be used for hybrid-fiber coaxial (HFC) in order to carry interactive digital services theoretically similar in capacity to DSL. This bandwidth, however, must be shared among several hundred subscribers using interactive services. This significantly reduces this technology's viability for consistent mid-to high-bandwidth entertainment services. VoDUSA 52 Confidential FTTC Fiber to the Curb (FTrC)-also known as "switch digital video", "switched broadband network" or "full service network"-calls for fiber-optic cable to be strung to a neighborhood and connected via a high-bandwidth conduit to the head end. These networks are often implemented with ATM. Non-terrestrial systems 1. Wireless Hybrid fiber and wireless distribution networks can be used not some much for mobility, but to reduce the installation and maintenance costs within a neighborhood. Such a system could be useful in an area where the copper wires are in bad condition or physical connection between a local distribution point and the customer residents is limited or costs too much. One such example might be a circumstance where the service provider owns a fiber infrastructure but not the copper lines to the homes. One important emerging wireless technology is Multichannel Multipoint Video Distribution Service (MMDS). MMDS employs multiple local terrestrial microwave transmitters located in metropolitan areas to deliver a signal to homes. There are yet several problems to be solved, such as the signal structure in the transition from fiber to wireless and a wireless reverse channel. Nevertheless, there are some trials for wireless TV distribution networks. First, British Telecom's Millimeter-wave MMDS worked at 29 GHz. The second is the Cellular Visions commercial offering in the New York area under a U.S. FCC pioneer license in the 27.5 to 29.5 GHz band. 2. Satellite Satellite represents an excellent means of delivering content in situations where terrestrial means are difficult to implement, such as communities with old infrastructure or isolated locations with little or high-speed connectivity. Satellites are ideally suited for a one-to-many model of delivering content. As such, they have traditionally been utilized primarily for one-way mass broadcasts such as network television or DBS (digital broadcast satellite) subscription services such as DirecTV. Two way communication has been much more expensive, with the uplink typically restricted in bandwidth (with the exception of head-end facilities). The need to transmit digital video at high data rates requires a low propagation delay. For this reason, low Earth orbit satellites (LEO) are the technology of choice for VOD and similar applications. The next generation of satellites operate primarily operate in the higher frequencies provided by the Ku band, thus providing the bandwidth necessary to deliver more demanding programming such as digital video and two-way communication. Many of these satellites are taking the form of constellations that serve as a global network. While there is much rhetoric and marketing hype in the marketplace, this generation will gradually come into place between now and 2003. Via Satellite's third annual Global Satellite Survey is included in Appendix B for further information on trends in the satellite market. Signaling VOD systems make use of a wide array of equipment, depending upon the configuration. This includes set-top boxes, community networks, switching office, head end, VDT gateway, video servers and backbone networks. This section elaborates on these components in greater detail. Set-top box The user interacts with VOD services via a set-top unit in the subscriber premises. Along with the television and the remote control, it provides a method of browsing, navigating, selecting and viewing programming available to the system. Most analysts concur that the market for set-top 53 VoDUSA Confidential boxes and related services will be tremendous. Companies are rushing set-top products to market at prices averaging between $200 to $300. Many of today's set-top boxes offer more than a multitude of TV channels; they're flexible platforms that connect to various computers, networking architectures and consumer-electronics gear. The Interactive Multimedia Association defines six types of set-top boxes: Class 1 and 2 boxes Class 1 and 2 boxes are low-end, analog-based units built around a CISC microprocessor unit (MPU), usually a 386 or a 68020/30. These boxes have little or no capacity for transmitting, but they support cable channels and pay-per-view TV. Class 3 and 4 boxes Class 3 and 4 boxes also employ CISC MPUs. They provide more functionality by retaining some return-channel bandwidth capabilities while splitting the download channel between analog and encoded video. Class 4 units offer more digital interactive services. Class 5 and 6 boxes Class 5 and 6 boxes are all-digital units that support a full range of interactive TV services. Class 5 units have a downstream path that's wider than the upstream path, while Class 6 units have equal bandwidth for sending and receiving. Class 5 and 6 boxes use embedded RISC CPUs, such as LSI Logic chips or Motorola's PowerPC and IBM's R4000 variants. Many RISC MPUs integrate the CPU core, analog descrambler, and network-security interface. Like Class 3 and 4 units, the high-end boxes use MPEG-2 for audio/video compression. Many MPEG-2 chips enable PAL-format video, with a full-screen, 16-color on-screen menu display and only 16 MB of DRAM. In order to provide VOD services, a set-top box requires specific components that are more typically found in Class 5 and 6 products. These include a CPU, an MPEG-2 audio/video decoder, a real-time OS, main and graphics memory for use in displaying menus and/or bitmapped images, modulation/demodulation chips, forward-error-correction ICs, and a NIM (network interface module). (NIMs support a bevy of connectivity protocols including ADSL, HFC, and FTTC on terrestrial boxes, and DBS and MMDS on wireless boxes.) Vendors of real-time operating systems include Integrated Systems' pSOS, Microware's OS-9, and the Thomson-Sun Interactive Alliance's OpenTV. Other companies, including Apple and Microsoft, are racing to develop the graphical user interfaces for the VOD system. In what appears to be a collision-or conversion-course between PCs and TVs, some real-time OSes run Java applets that allow the boxes to bring Internet access such as web surfing to the living room. Follow-up products will contain a slot for a smart card, which will give users a secure way to conduct transactions over cable networks. Some set-top boxes are also available with on-board storage, thus allowing VOD programming to be downloaded for viewing at a later time. This storage capacity is typically about 4GB-enough for one or two movies depending upon the length and visual complexity of the movie. Open and interoperable systems that allow users to subscribe to several different services are highly preferred. In the case of the system VoDUSA recommend, the set-top can also access standard TV, cable and modem. Community Network The communications infrastructure between the customer premises and the local switching office is called the community or subscriber network. It connects the video server and the set-top device. A VOD system will require the transfer of huge volumes of data at very high speed. Many communication protocols and network architectures have been proposed to connect the various components. However, ATM is emerging as the most important technology. The interconnection includes both signaling and program data transfer, the latter in real-time, semi-permanent and on- 54 VoDUSA Confidential demand. ATM combines the advantages of packet and circuit switching schemes. Note that each access technology has its own service range, bandwidth, and environmental characteristics. Switching Office The switching office refers to both the telephone company's central office and the cable company s head-end. It is the place where services are fed and distributed to individual subscribers. It contains a head-end, video dial-tone gateway, switches, and video servers. Head-end In the head-end equipment, the video streams are formatted and organized to get them into the community network. IfADSL is used, it switches the video streams onto the subscriber loops like it does today with telephone calls. When coaxial cable is used, the head-end is basically the same as CATV providers use today, except that the digital channels need digital modulators. VDT Gateway The video dial tone (VDT) is an asymmetric switched video service in which the customer chooses among a wide selection of video material and receives real time response. The VDT or terrestrial gateway, typically incorporating a satellite dish, is the entry point for an information provider to a carrier's VDT network. It should create and manage the connection between the information provider and the set-top device. Standardization of the interfaces and functions of the VDT gateway is under way. Video servers The video server is the network equipment providing the storage for video program material that is available on demand to customers. It has to perform many functions, such as admission control, request handling, data retrieval, guaranteed stream transmission, stream encryption, and support of functions found in VCRs including pause, rewind, and fast forward. Video servers are often defined by specialized operating systems and/or server software optimized for this task. The video material can be stored on a combination of magnetic or magneto-optic disks, and magnetic tape devices. Different storage media offer different memory bandwidth for VOD services. The more popular movies are stored on RAM, the less popular ones on hard disk and the least popular on tertiary storage. An optical storage system like a CD-ROM and a magnetic system like a tape drive will be possible. For inexpensive tertiary storage for archival purposes, this kind of storage system reduces operating costs and can offer a wide selection of programs to customers. A metadata server is a database system that manages the metadata information. It contains abstract information about the location and characteristics of the data to be retrieved. The user can look for the information summary and select the program to get it to the home. A tiered-server model is often employed in VOD. In these designs, the most popular or current movies are available on a local server such as those used in LBVOD. Less-frequently requested content resides on a larger server in a more centralized office. Backbone Network Outside of the local switching office, the backbone network connects it to the other video servers that are not in the local switching office and provide some national or specialized information. Currently, the high-speed backbone network uses fiber cable and SDH/PDH-based transmission system (part of the backbone protocol). In the future, ATM technology will come to the backbone network and then probably also to the community networks to simplify the interface requirements. 55 VoDUSA Confidential APPENDIX 2 MEDIA TECHNOLOGIES AS THEY RELATE TO VoDUSA Digital Media System VOD Network has developed the expertise to provide the service of integrating the components of digital media systems (DMSs). Those components are a backbone network, community network, video server(s) and set-top box. DMSs vary in complexity and specifications dependent of the type of infrastructure used. The two main infrastructure types are closed systems and open systems. Backbone Network The backbone network connects a local video server to other video servers, which are not in the local switching office and provide some national or specialized information. The high-speed backbone network can be one of many access technologies including ATM (asynchronous transfer mode), HFC (hybrid fiber coax), OC3, Tl, T3 and wireless. Some companies such as Qwest Communications, Level 3 and Enron have created backbone networks and outsource the use of those networks to other companies. Some cable and telephone companies have established proprietary backbone networks. Companies controlling these access technologies are all vying for position to provide bandwidth to the services providers for services such as VOD. Community Network The communications infrastructure between the customer premises and the local switching office is called the community or subscriber network. It connects the video server and the set-top box device. A VOD system requires the transfer of huge volumes of data at very high speed. Many communication protocols and network architectures have been proposed to connect the various components. However, DSL; cable, satellite and fixed wireless are emerging the most important technologies. Video Server(s)Video Servers The video server is the computer (server) that provides the storage for video program material, and the ability to send that stored information to a requesting consumer on a real time basis. Its software has to perform many functions, such as admission control, request handling, data retrieval, guaranteed stream transmission, stream encryption, and support of functions found in VCRs including pause, rewind, and fast forward. The Set Top Box The user interacts with the services by the set-top unit in the subscriber premises. Along with the television and the remote control, it gives the consumers opportunity to be connected to a video server and browse through a selection of movies or content such as news or games. The key components of the set-top device are the line transceiver, demodulator, decompression unit, backchannel interface, remote control, and display driver. Infrastructure Types Closed systems include those that have a direct link (wire line or wireless) to a specific user/consumer base. They range in size from few user systems to large cable and telephony systems. The differentiation between these systems and the Internet (as cable and telephone systems provide Internet access) is that in a closed digital media system the service provider has a direct link to the consumer. In the case of telephone, cable and DSL providers there is a wire line connection from the local switching station or cable plant to the home of each subscriber. In the case of open digital media systems the system providers merely provide access to the Internet cloud. VOD Network currently concentrates on corporate closed systems and telephony based 56 VoDUSA Confidential jt_ I I closed systems. It is also working with the technology and Intemet protocols to provide a solution for the streaming of high quality digital media over the Intemet. Closed Systems Local Based Video on Demand (LBVOD): These systems are designed to stream media over a fixed size infrastructure usually located in the location of the end user. Hotels, cruise ships, corporations, governments, educational institutions and health care institutions most commonly utilize them. VOD Network, through its alliances, provides, installs and maintains all of the components (hardware and software) and network support for LBVOD systems. Telephone Based Systems: Increased bandwidth capability has provided the opportunity for telephone companies (Telcos) and High Speed Internet Access/DSL Providers such as AT&T, Covad Communications, Bell Atlantic and NorthPoint Communications with the opportunity to compete with cable and satellite companies in providing movies and other digital media to the consumer. The most used form of DSL in use today is asymmetrical DSL (ADSL), which has downstream speeds, which can reach up to 6 mbps, and upstream speeds that can reach up to approximately 1.5 mbps depending of the length and condition of the existing copper wires. Recently the International Telecom Union approved the use of G.Lite. G.Lite is an emerging standard that defines a specific type of ADSL that is slower than ADSL but does not require a plain old telephone services (POTS) splitter to be installed at the subscriber site to allow data and POTS voice service on the same line. G.Lite is a cost-effective delivery system for residential customers because of the low cost of equipment and the ease of installation. VOD Network, through its alliances, provides the service of selling and integrating digital media systems components (hardware and software) into backbone and community networks and other telephony-based infrastructures. Open Systems Digital Media Integration: The Company through the provision of its other products and services has determined that there is an opportunity to become an integrator of digital media content, value added digital authoring (adding interactive elements) and digital media systems. Most of the components that are currently being used for VOD systems are made by different manufacturers and must be configured and maintained differently for each system. Often movies and other media content have to be digitized to meet the specific hardware and software requirements of the system. VOD Network is positioning itself as a supplier of turnkey digital media packages. The Company believes that the focus by technology companies and manufacturers on individual pieces,of the technology package required to compose a digital media system and the absence of foresight regarding digital media content has left a serious gap in the integration ability of those various pieces. VOD Network has amassed the expertise through its work with the individual components to provide the service of combining, configuring and maintaining the components into a complete package designed for the particular type of infrastructure being used. 57 VoDUSA Confidential APPENDIX 3 Advisory Board Biographies Robert Sklar, is a film historian and critic, and is a Professor of Cinema in the Department of Cinema Studies, Tisch School of the Arts, New York University. He is author of the prize winning film history books Movie Made America: A Cultural History of American Movies and Film: An International History of the Medium, as well as several other books. He is film critic for the weekly newspaper Forward. In March 2000 he was elected to membership in the National Society of Film Critics. Mr. Sklar is a member of the National Film Preservation Board, which advises the Librarian of Congress on annual selections to the National Film Registry. From 1996 to 1999 he was a member of the selection committee for the New York Film Festival. MovieMade America (Random House, 1975; revised and updated edition, Vintage, 1994) won the TLA Award of the Theater Library Association for the best book on film published in 1975. Film: An International History (Harry N. Abrams, 1993) in 1996 won the Kraszna-Krausz Book Prize, awarded by the Kraszna-Krausz Foundation in London, England, as the best book on the art, history, and culture of moving images published in the period 1993-1995. His other books include City Boys: Cagney, Bogart, Garfield (Princeton Univ., Press, 1992), a study of the three actors through their performance styles, cultural roles, and political activities; Prime-Time America: Life on and Behind the Television Screen (Oxford Univ. Press, 1980), a collection of essays and articles on television; and a critical study, F.Scott Fitzgerald." The Last Laocoon (Oxford, 1967). He edited The Plastic Age: 1917-1930 (Braziller, 1970), an anthology on American culture in the 1920's, and was co-editor (with Charles Musser) of Resisting Images: Essays on Cinema and History (Temple Univ. Press, 1990) and ( with Vito Zagarrio) of Frank Capra: Authorship and the Studio System (Temple, 1998). He is consulting editor for a book series, Culture and the Moving Image, Published by Temple University Press. Before joining NYU, Mr. Sklar taught at the University of Michigan and held visiting appointments at Bard College, University of New Mexico, Tokyo University, and Auckland University, New Zealand. He was President (1979 1981) of the Society for Cinema Studies, and was a contributing editor of American Film magazine and an editor of the film quarterly, Cinesaste. He has received a John Simon Guggenheim Foundation fellowship and a Rockefeller Foundation Humanities Fellowship. His articles and essays on film, television, and cultural subjects have been widely published. Earlier in his career he also worked as a staff writer at the Los Angeles Times. He graduated summa cure laude from Princeton University and holds a Ph.D in the History of American Civilization from Harvard University. Mr. Skylar is a member of the National Writers Union and the Authors Guild. Harold L. Vogel, CFA, is presently CEO of Vogel Capital Management, LLC, a company specializing in sector hedge fund and early-stage venture capital funding of Internet-related media and aviation companies. Prior to founding Vogel Capital he spent 30 years as an entertainment industry analyst holding the positions of Managing Director, Senior Entertainment Industry Analyst at SG Cowen, First Vice President, Senior Entertainment Industry Analyst at Merrill Lynch & Co. and Vice President, Entertainment Industry Analyst at Paine Webber Inc. Mr. Vogel is an Adjunct Professor, Media Economics at Columbia University Graduate School of Business and has authored several textbooks including Entertainment Industry Economics and Travel Industry Economics. He holds an M.B.A. (finance) from Columbia University Graduate School of Business, an M.A. (economics) from New York University Graduate School of Arts & Science and a B.S. (physics) from City College of New York. Mr. Vogel also holds a Chartered Financial Analyst (CFA) designation and Series 7 & 63 licenses. He is a member of the New York State Governor's Advisory Committee for Motion Pictures and Television and Chevalier des Arts et des Lettres (France). 58 VoDUSA Confidential William O'Brien is a cofounder of FARGOS Development, LLP., and acts in the capacity of the company's Executive Vice President. Mr.O'Brien's main responsibilities include directing the company's sales, marketing and business development efforts. He has over twenty years of experience in the Information Systems industry and possesses a diverse background ranging from Internet, Telecommunications and Operations management to Software Engineering, Business Process Reengineering and Distributed Computing. Most recently, he worked for Exodus Communications, Inc., a highly successful Internet Data Center company where, as a Business Development Manager, he was instrumental in branding his company's name in the New York City market. Additionally, Mr. O'Brien was responsible for launching Exodus's New York Alliance Partner initiative and was successful in forging a great number of lucrative strategic alliances for the company. Mr. O'Brien's partnership activities have resulted in an overwhelming 45% revenue contribution to total company revenues. Mr. O'Brien has the distinction of achieving the company's "Club Excellence" award for three consecutive years; one of only ten employees to achieve that distinction for surpassing established sales quotas. Mr. O'Brien spent a number of years as an independent Information Systems consultant to senior I.T. management, focusing on establishing software engineering methodologies, Business Process Reengineering, Client/Server Implementations and movement to Object-Oriented thinking and development. As the Managing Director of Systems Architecture and Software Development for a small systems integration firm, he worked closely with clients in the analysis and design of distributed computing applications. Prior to his consulting practice, Mr. O'Brien spend six years with Prodigy Services Company as Program Manager of Architecture for administrative systems, and as the Manager of Systems Programming. Before joining Prodigy, Mr. O'Brien was the Manager of Technical Development for International Paper Company. Mr. O'Brien holds a BS degree in Management Information Systems from Nyack College. He holds certifications from New York University in the fields of Systems Analysis and Design and in Systems Programming, and has been a frequent guest lecturer at the New York University Stern School of Business on topics ranging from Internet infrastructure to distributed computing. Mr. O'Brien views his tenure at Exodus Communications as critical to understanding the Internet community. His three and one half years of networking with those working in all aspects of startup initiatives have provided an invaluable intellectual asset, possessed by few. Mr. O'Brien has solid experience in selling to the Internet community. Dan Rayburn is Worldwide Product Manager of Streaming Media for the Globix Corporation (NASDAQ: GBIX) - a worldwide provider of sophisticated Internet-based solutions, co-location and dedicated Internet connectivity, to large- and medium-sized businesses. Mr. Raybum came to Globix to start this unique division that would address the growing needs for streaming media solutions - the hottest new format for distributing video over the Web - on the Internet. Mr. Rayburn has been producing Webcasts since the inception of streaming media technology in 1995 and was involved in producing some of the first cybercasts on the Internet. Mr. Rayburn is considered a leading authority in his field and has given numerous lectures worldwide on streaming media technologies and has been featured on CNN and CBS. Prior to Globix, Mr. Rayburn co-founded a New York-based Webcasting production company where he produced hundreds of live streaming events for high-profile entertainment clients. Previously, Mr. Rayburn worked as a systems engineer for Apple Computers after having served in the U.S. Air Force. Dan is one of the founding board members of the IWA (International Webcasting Association) and writes for many publications on streaming media trends and technology. 59 VoDUSA Confidential