UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______ to ___________.
Commission file number 0-29651
USA VIDEO INTERACTIVE CORP.
(Exact name of registrant as specified in its charter)
WYOMING 06-1576391
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation of Organization)
83 Halls Road, Old Lyme, Connecticut 06371
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, included area code: (860) 434-5535
------------------------
Securities registered pursuant to Section 12(b) None
of the Act: -----------------------
Securities registered pursuant to Section 12(g) Common Shares, no par value
of the Act: --------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant as required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
2
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at March 26, 2003 (computed by reference to
average of the bid and asked price on the NASD OTC Bulletin Board of the common
shares on such date): $9,052,083. Number of common shares outstanding at March
24, 2003: 106,495,089.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
PART I
ITEM 1. BUSINESS.
Certain statements contained in this Annual Report on Form 10-K ("Report"),
including, without limitation, statements containing the words "believes,"
"anticipates," "estimates," "expects," and words of similar import, constitute
"forward-looking statements." Readers should not place undue reliance on these
forward-looking statements. USA Video's actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including risks described in this Report, including the "Risk Factors" section
contained in this Item 1, and the other documents USA Video files with the
Securities and Exchange Commission ("SEC").
INTRODUCTION
USA Video Interactive Corp. ("USA Video" or the "Company") designs and markets
to business customers streaming video and video-on-demand systems, services and
source-to-destination digital media delivery solutions that allow live or
recorded digitized and compressed video to be transmitted through Internet,
intranet, satellite or wireless connectivity. The Company's systems, services
and delivery solutions include video content production, content encoding, media
asset management, media and application hosting, multi-mode content
distribution, transaction data capture and reporting, e-commerce, specialized
engineering services, and Internet streaming hardware.
The Company's products and services are based on its proprietary rich media
delivery infrastructure and software and its Store and Forward Video-on-Demand
("VOD") patent. These technologies, together with video compression technology,
facilitate the delivery of video to an end user in a timely and interactive
fashion.
USA Video has developed a number of specific products and services based on
these technologies. These include StreamHQ(TM) , a collection of
source-to-destination media delivery services marketed to businesses;
EncodeHQ(TM), a service that digitizes and compresses analog-source video;
hardware server and encoder system applications under the brand name Hurricane
Mediacaster(TM); ZMail(TM), a service that delivers web and rich media content
to targeted audiences, and mediaClix(TM), a service that delivers content
similar to Zmail(TM) but originating from an existing web presence.
The Company was incorporated on April 18, 1986, as First Commercial Financial
Group Inc. in the Province of Alberta, Canada. In 1989, its name was changed to
"Micron Metals Canada Corp.", which purchased 100% of the outstanding shares of
USA Video Inc., a Texas corporation, in order to focus on the digital media
business. In 1995, the Company changed its name to "USA Video Interactive Corp."
and continued its corporate existence in the State of Wyoming. The Company has
five wholly-owned subsidiaries: USA Video (California) Corp., USA Video
3
Corporation, USA Video Productions Inc., USA Video Technology Corporation and
USVO Inc. USA Video's executive and corporate offices are located in Old Lyme,
Connecticut, and its Canadian offices are located in Vancouver, British
Columbia.
BUSINESS ENVIRONMENT
The cost of bandwidth and supporting equipment, such as cable modems and other
broadband connectivity to homes and businesses, is expected to continue to
decrease over the next several years, bringing expanded use of high bandwidth
applications for video transmission to the general market. Meanwhile,
compression technologies continue to improve, allowing delivery of higher
quality content using existing connectivity.
USA Video believes that market conditions are favorable for continued acceptance
of mainstream VOD services. In published highlights of its 14th annual
Communications Industry Forecast, industry merchant bank Veronis Suhler notes
that per-person daily use of all forms of media continues to increase and is
expected to pass 10 hours per day by 2004. In addition, Veronis Suhler forecasts
that Internet advertising will more than quadruple to $24.4 billion by 2004,
surpassing cable, network television and consumer magazines, as total
advertising spending grows 8.6% yearly through 2004. Total U.S. spending on
media is expected to reach $663.3 billion by 2003. The 7.5% combined annual
growth rate will make communications the second fastest-growing industry (behind
telecommunications) among the top 12 U.S. industries.
USA Video believes its source-to-destination streaming media delivery services
hold significant potential for the on-line advertising and other industries.
According to Arbitron/Edison Media Research's Internet VI Study released on
February 7, 2001, streaming media usage had increased in the previous year. As
of January 2001, 13% of Americans (more than 30 million people) use Internet
audio or video each month, compared to 10 % in January 2000. More than
one-quarter (27%) of Americans (more than 61 million people) have used Internet
audio or video while 6%, over 13 million people, use streaming media each week,
according to the Internet VI study. USA Video's streaming media delivery
services are designed to be highly functional, cost-effective and easily
implemented for advertisers targeting specific demographic groups.
STRATEGIC PLAN
USA Video believes that the expected substantial increases in bandwidth
capacity, accompanying decreases in bandwidth cost, increases in consumer
computer and video appliance storage capacity, and the proliferation of fast
video file transfer techniques will result in an industry focus on downloading
as an alternative to streaming as a content delivery mechanism. To position the
Company to take advantage of this anticipated shift, USA Video has focused its
immediate plans on aggressively protecting its technology ownership rights,
including pursuing licensing arrangements and other forms of enforcement.
USA Video discontinued the sale of select services from its prototype
StreamHQ(TM) after customers' satisfaction and proof of concept. The Company no
longer sells its individual functions of StreamHQ(TM). USA Video intends to
continue to develop and expand its StreamHQ(TM) services business, while
pursuing opportunities to sell replicated StreamHQ(TM) systems to corporations
and organizations that prefer systems solutions to services solutions. To this
end, USA Video's future plans include:
- - Continuing StreamHQ(TM) functionality development, particularly the
automation of processes and client account management, which allows more
efficient delivery of services and expansion of the services client base;
- - Scaling the StreamHQ(TM) infrastructure in modular fashion as necessary to
support an increasing number and size of Zmail(TM) and mediaClix(TM)
campaigns;
- - Eventually establishing multiple marketing and distribution channels,
particularly in the form of alliances with third parties, including some of
the Company's product and service suppliers; and
4
- - Ultimately expanding and enabling the organic sales and marketing team, to
support increased direct marketing to various markets, including
advertising, corporate communications, customer service, entertainment, and
education.
PROPRIETARY TECHNOLOGIES
USA Video's proprietary technologies include its (1) VOD patent, and (2)
Digital fingerprinting piracy deterrence technology; and (3) StreamHQ(TM)
infrastructure, software, and service delivery processes.
- - USA Video's VOD Patent (#5,130,792) (the "Patent") explicitly covers the
rich media delivery model that is becoming more widely accepted as a means
of delivering content for education, training, and entertainment; that is,
faster-than-real-time download to computer and set-top box hard drives for
subsequent content viewing without quality limitations resulting from
insufficient or variable bandwidth. The impact of this Patent becomes more
significant as content owners and those that facilitate content delivery
adopt this model.
- - The objective of USA Video's patent-pending Digital Fingerprinting, a
Digital Rights Management ("DRM") technology, is to deter digital video
piracy once a user has been authorized to view a video. This is one of the
major concerns preventing content owners from committing more of their
content to the digital medium. Digital fingerprinting augments traditional
DRM techniques, which primarily focus on encrypted video delivery and
authorization to view. The digital fingerprint is rendered at the player as
part of an authorized video stream and contains sufficient data to track a
specific streaming event should the content be pirated and distributed.
- - The ability of StreamHQ(TM) to deliver services to clients with
market-specific value propositions stems from its scalable,
streaming-enabled web infrastructure, the software functionality that
resides on this infrastructure (such as innovative asset management and
user transaction data capture and reporting), and the processes developed
for delivering media campaigns to clients. By delivering features unique to
individual markets, such as advertising, corporate communications and
customer service, StreamHQ(TM) services are differentiated from the generic
services delivered by competitors.
PRODUCTS AND SERVICES
USA Video's principal products and services are its proprietary rich media
delivery infrastructure and software and the Patent. These technologies,
together with video compression technology, facilitate the delivery of video to
end users in a timely and interactive fashion.
USA Video has developed a number of specific products and services based on
these technologies. These include:
- - StreamHQ(TM) , a collection of source-to-destination media delivery
services marketed to businesses;
- - EncodeHQ(TM) , a service that digitizes and compresses analog-source video;
hardware server and encoder system applications under the brand name
Hurricane Mediacaster(TM);
- - Zmail(TM), a service that delivers web and rich media content to targeted
audiences;
- - mediaClix(TM), a service that delivers content similar to Zmail(TM), but
originating from an existing web presence;
- - Digital Fingerprinting, a Digital Rights Management ("DRM") technology used
to deter piracy of digital content.
USA Video proposes to grant licenses to use its patented VOD technology on terms
comparable to the "reasonable royalty" provided for by U.S. patent laws. Upon
successfully licensing its patent, USA Video could earn per-use royalties,
5
meaning that each time a licensed event occurs (e.g. each time a consumer
receives a VOD transmission) a specified royalty will be paid to the Company.
Upon suitable negotiated terms, USA Video may also consider bulk-fee licensing
agreements, either apart from or in addition to per-use royalties.
When USA Video's patent-pending DRM technology matures into an enforceable
patent, USA Video intends to pursue a similar strategy as that it will use for
its VOD technology with regard to the rights related to the DRM technology.
USA Video's future plans include the marketing and selling of its StreamHQ(TM)
systems, whereby a customer would purchase an entire system, comprised of
hardware assembled by USA Video and software developed and installed by USA
Video. After sale and delivery of the system to a customer, USA Video's services
to the customer would then include updates of software and service and
maintenance of hardware, as necessary, for additional compensation. The services
of Zmail(TM) and mediaClix(TM) are available to a customer only through the
purchase of a StreamHQ(TM) system.
As a cost cutting measure, USA Video terminated the operation of its
StreamHQ(TM) infrastructure, which provided individual functionality of
StreamHQ(TM) for small customers, as this service was no longer cost effective
or deemed necessary at this time.
STATUS OF PRODUCTS AND SERVICES
With regard to its international VOD patent rights, USA Video has been closely
monitoring advances in this wide-ranging industry over recent years and has
commenced taking the necessary steps to translate this progress into a
sustainable stream of royalty revenue. What USA Video originally demonstrated
to be technologically feasible in the early 1990s has now become commercially
feasible as well, with the continually increasing availability of consumer
broadband access and steadily improving data compression technologies.
In view of these developments, USA Video is taking aggressive steps to advance
its patent-protected intellectual property rights, which include its
patent-pending DRM technology. These steps include active licensing initiatives
and, potentially, litigation when necessary as a final resort if companies
infringing on USA Video's patent rights refuse to negotiate in good faith. USA
Video has retained leading national legal counsel to advance these patent
enforcement initiatives.
Although it is currently focused on protecting its technology ownership rights,
including licensing arrangements and other forms of enforcement, USA Video will
continue to offer its other products and services, which are all existing,
functional, and available.
USA Video has identified an emerging market for global media streaming services,
which the Company developed under the brand "StreamHQ(TM) ". StreamHQ(TM) allows
corporate, education, entertainment, and other types of business or
institutional customers to use the Internet or an intranet to deliver rich media
content to target audiences by purchasing a StreamHQ(TM) system. By offering
customers a complete source-to-destination service that consolidates web,
streaming, and data management functionalities, StreamHQ(TM) eliminates the need
for customers to deal with multiple service providers.
A key service differentiator is user transaction data management, which consists
of capture, analysis, and reporting of statistical data that enables the content
owner to obtain important feedback on the effectiveness of campaigns. This data
includes network performance and utilization statistics, including bandwidth
utilization, number of streaming sessions, streaming rates, video quality and
packets lost; total number of times the video was viewed; distribution of users
who viewed various portions of the video; information on times of media access,
length of time media was viewed, and actions taken during viewing (pause, stop,
rewind, etc.). Additional StreamHQ(TM) features include the ability to analyze
usage by location; the percentage of users who forwarded the video to other
people; the percentage of users who received and viewed the forwarded video
email; and categorization of users by operating system, browser type, and
connection speed. Additional functionality can be customized to meet specific
customer requirements.
6
Aside from quality streaming, USA Video's overriding goal in its StreamHQ(TM)
development and deployment has been to give customers media asset management
features, tools, and information that provide accountability for their streaming
expenditures. To that end, the Company has developed and is offering for sale
products that provide such a return on the customer's investment. Zmail(TM) is a
rich media email tool that allows businesses, institutions, and organizations to
communicate multi-media messages to targeted audiences via the Internet and to
receive prompt, valuable feedback on the effectiveness of their communication
campaigns. Zmail(TM) is an opt-in communication method, whereby the recipient is
directed to a web-landing page containing an embedded media player and links to
amplifying information about the media subject. All user actions within the page
are captured, aggregated, and provided to the customer as intuitive statistical
and trend reports. Similar to Zmail(TM), mediaClix(TM) offers a similar landing
page and media content; however, access is from a client's existing web presence
rather than an opt-in email. Hurricane Mediacaster(TM) is a hardware server and
encoder system developed by USA Video. An additional encoding service available
for customers is EncodeHQ(TM), a service that digitizes and compresses
analog-source video.
CUSTOMERS AND MARKETS
The principal market for the Company's services is the business-to-business
sector, rather than the individual consumer sector. USA Video's patent rights
potentially have broad application to the VOD marketplace. USA Video
anticipates that it will conduct licensing negotiations with:
- - companies involved in providing and promoting VOD content, such as film
content, video advertisements, online gaming video and subscription video;
- - companies providing network and other physical infrastructure to enable
various VOD applications;
- - companies providing VOD-enabling software, including advanced data
compression schemes; and
- - companies providing VOD-enabling hardware, including consumer hardware such
as digital video recording devices.
The market for DRM will to some extent overlap the market for VOD, but the two
are not identical. For example, DRM technology may be required by
copyright-owning content providers who have concerns about the potential for
digital piracy of their material; whereas hardware manufacturers may be less
concerned about such issues. Nevertheless, protocols may develop which will
require participants in the video industry to embrace some form of DRM. USA
Video will follow those developments closely, and, if necessary, take steps to
promote and protect its DRM technology.
Additionally, companies within the business-to-business sector, rather than the
individual consumer, generally possess the greater financial wherewithal and
purpose for purchasing StreamHQ(TM) systems. The Company's focus is on companies
that can benefit from an engaging rich media and web presentation directed at a
target audience. The Company's customers for these services have included film
companies, event promoters, ministries, travel companies, sports entertainment
centers and political candidates.
USA Video's customers for StreamHQ(TM) systems may also be businesses or
organizations that are dissatisfied with response rates from traditional email
campaigns, or who have in the past been unable to track the response rate to
such traditional email campaigns. Additionally, any business that wishes to
increase brand or product awareness in a more cost effective manner than
television advertising would be an appropriate candidate for the StreamHQ(TM)
services.
SOURCES AND AVAILABILITY OF RAW MATERIALS
USA Video assembles its hardware systems from components manufactured by others.
The Company specifies, procures, assembles, tests and deploys the various system
components according to a precisely developed set of procedures. The Company
consults on an as-needed basis, with companies that supply the major materials
needed to build its systems. Systems are programmed and configured to meet a
wide variety of individual customer requirements.
7
USA Video procures the materials and hardware to assemble systems and their
components from various companies, as needed, and in sufficient quantities to
preclude any danger of significant sourcing problems in the immediate future.
There are no seasonal limitations on the Company's operations.
COMPETITIVE CONDITIONS
The streaming media market is new, rapidly evolving and extremely competitive
and the Company expects that competition will intensify in the future. USA
Video competes with other companies that provide all or certain aspects of the
Company's services, including other streaming media providers, content encoders,
video production companies, Internet data management companies, and others, and
expects that additional competition in the future will be provided by those
types of providers. The Company's current market share is insignificant.
Other companies may also claim to own intellectual property rights relating to
the VOD technology space. For example, USA Video is aware of another company
which claims to own what could potentially be considered competing VOD patent
rights. In this case, however, the U.S. Patent and Trademark Office issued the
competitor's first such patent after USA Video's key VOD Patent was issued.
Management believes that USA Video's VOD technology is superior in that USA
Video's VOD technology has chronological priority over certain patents rights
that have been procured by such company; that is, USA Video owns patent rights
that are "prior art" to the other company's under U.S. patent law.
Real Networks, Microsoft, and other companies large and small are active in the
field of DRM technologies. The video streaming market is currently dominated by
a small number of larger companies, including Real Networks, Microsoft, Yahoo
and several others, some of which offer source-to-destination streaming media
solutions. Most of USA Video's current and potential competitors have longer
operating histories, larger customer bases, greater name recognition and
significantly greater financial, marketing and other resources than the Company.
In addition, larger, well-established and well-financed entities may acquire,
invest in or form joint ventures with online competitors as the use of the
Internet and other online services increases. In addition, new technologies and
the expansion of existing technologies are expected to result in additional
competition.
USA Video is, and will continue to be dependent on vendors and other providers
to supply the hardware, software and co-location resources that comprise the
Company's products and services. Further, USA Video currently competes with,
and expects to compete with in the future, providers of some of its technology
or system components. Competition is expected in all areas of business,
including pricing, service, product performance, and the Company's ability to
keep up with rapidly improving technology, changing market conditions, evolving
industry standards and changing customer demands.
RESEARCH AND DEVELOPMENT
Prior to 1999, USA Video conducted seven years of research and development of
its proprietary VOD technology. In 1999, USA Video's focus shifted to marketing
and sales of its products and services, with research and development directed
primarily at supporting sales and development of Wavelet compression technology.
In 2000, the Company devoted substantial resources to development of its
StreamHQ(TM) services and began development of its proprietary still and motion
Wavelet technology, which has been completed as mathematical processes. In 2001,
the Company redirected the Wavelet development effort toward the invention of a
content protection technology that is grounded in similar science as Wavelet
compression. The result is the Company's patent pending DRM technology for
piracy deterrence. During 2002, as a result of cost cutting measures
necessitated by the state of the market, the Company cut back on its marketing,
sales and technical staff. Should the need arise, the Company intends to retain
a number of those employees as consultants, if they are available.
In fiscal 2001 and 2000, the Company's research and development expenditures
were approximately $999,000 and $620,000, respectively. During fiscal 2002, the
Company's research and development expenditures were $277,000.
8
INTELLECTUAL PROPERTY
USA Video's success is dependent, in part, upon its proprietary technology. The
Company generally relies upon patents, trademarks, and trade secret laws to
establish and maintain its proprietary rights in its technology products and
services.
USA Video applied for a U.S. patent for its VOD technology on February 1, 1990.
Corresponding overseas applications were filed in several countries in 1992.
USA Video was granted the US Patent #5,130,792 in July 1992. In June 2000, the
U.S. Patent Office reinstated the patent, which had expired because of an
administrative oversight that led to late payment of fees due in 1995.
In 1999, USA Video was granted patents on its VOD technology in five European
countries: England, France, Germany, Italy and Spain. In 2001 and 2002, USA
Video was granted a patent in Canada and a patent is pending in Japan,
respectively, on its VOD technology. The technological characteristics of the
European Patents are based on the U.S. Patent, covering systems for transmitting
video programs to remote locations over a switched telephone network, and are
similar in scope to the U.S. Patent claims.
On June 19, 2001, United States Patent Application No. 09/884,787, Method and
Apparatus for Digitally Fingerprinting Videos, was officially filed with the
U.S. Patent and Trademark Office.
EMPLOYEES
As of March 26, 2003, the Company employed four people, including its two senior
executive officers, one technology and one administrative employee. The Company
considers the relationships with its employees to be good.
Competition for technical personnel in the industry that USA Video competes is
intense. The Company's future success will depend, in part, on its continued
ability to contract or hire, assimilate, and retain qualified personnel. To
date, USA Video believes it has been successful in recruiting qualified
contractors or employees, but there is no assurance that the Company will
continue to do so in the future.
CRITICAL ACCOUNTING POLICIES
USA Video's discussion and analysis of its financial condition and results of
operations are based upon its financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, USA Video evaluates these estimates,
including those related to customer programs and incentives, bad debts,
inventories, investments, intangible assets, income taxes, warranty obligations,
impairment or disposal of long-lived assets, contingencies and litigation. USA
Video bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
USA Video considers the following accounting policies to be both those most
important to the portrayal of its financial condition and that require the most
subjective judgment:
- Revenue recognition;
- Accounting for marketable securities;
- Impairment or disposal of long-lived assets;
- Inventory valuation and related reserves; and
- Deferred taxes.
9
REVENUE RECOGNITION. Software revenue and other services are recognized in
accordance with the terms of the specific agreement, which is generally upon
delivery. Maintenance, support and service revenue are recognized ratably over
the term of the related agreement.
ACCOUNTING FOR MARKETABLE SECURITIES. The Company classifies its investments in
marketable securities as "available for sale." The Company carries these
investments at fair value, based on quoted market prices, and unrealized gains
and losses are included in accumulated other comprehensive income (loss), which
is reflected upon the sale of its marketable securities in the statements of
operations.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. Long-lived assets are reviewed in
accordance with Statement of Financial Accounting Standard ("SFAS") 144.
Impairment or disposal of long-lived assets losses are recognized in the period
the impairment or disposal occurs. Long-lived assets are reduced to their
estimated fair value.
INVENTORY VALUATION AND RELATED RESERVES. Inventories are valued at the lower
of cost or market on a first-in, first-out basis. USA Video uses a standard
cost system for purposes of determining cost; the standards are adjusted as
necessary to ensure they approximate actual costs. The Company writes down or
reserves for estimated obsolete or excess inventory based upon assumptions about
future demand and market conditions. USA Video compares current inventory
levels on a product basis to its current sales forecast in order to assess its
inventory reserve balance. The sales forecasts are based on economic conditions
and trends (both current and projected), anticipated customer demand and
acceptance of the products, current products, expected future products and
various other assumptions. If actual market conditions are less favorable than
those projected by management, additional write-downs may be required.
DEFERRED TAXES. We record a valuation allowance to reduce deferred tax assets
when it is more likely than not that some portion of the amount may not be
realized. During 2002, we determined that it was no longer more likely than not
that we would be able to realize all or part of our net deferred tax asset in
the future, and an adjustment to provide a valuation allowance against the
deferred tax asset that was charged to income.
RISK FACTORS
Set forth below and elsewhere in this Report are risks and uncertainties that
could cause actual results to differ materially from the results contemplated by
the forward-looking statements contained in this Report.
THE COMPANY'S LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE ITS
BUSINESS AND PROSPECTS.
USA Video has a very limited operating history. The Company has made only very
limited sales of its products and services and was in the development stage
through December 31, 1999. USA Video's business and prospects must be considered
in light of the risks encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets such as
streaming media. Some of these risks relate to the Company's ability to:
- - maintain or develop relationships with suppliers and marketing partners;
- - establish a customer base;
- - continue to develop and upgrade its technology, products and services;
- - provide superior customer service;
- - respond to competitive developments; and
- - retain and motivate qualified personnel.
10
THE COMPANY HAS INCURRED SUBSTANTIAL LOSSES; IT EXPECTS TO INCUR LOSSES IN THE
FUTURE, AND MAY NEVER ACHIEVE PROFITABILITY.
To date, USA Video has not been profitable, has not generated significant
revenue from operations, and has incurred substantial losses. For the year ended
December 31, 2002, USA Video had a net loss of $2,113,138. As of December 31,
2002, the Company had an accumulated deficit of $31,176,441 and a working
capital deficit of $1,074,998. The Company intends to continue to expend
significant financial and management resources on the development of its
proposed products and services, and other aspects of its business. As a result,
the Company expects operating losses and negative cash flows to increase for the
foreseeable future. Consequently, USA Video will need to generate significant
revenues to achieve and maintain profitability. The Company may be unable to do
so. If USA Video's revenues grow more slowly than anticipated or if operating
expenses increase more than expected, or are not reduced sufficiently, it may
never achieve profitability. Because of factors discussed in this paragraph, USA
Video's auditors, in their report on the Company's financial statements, have
expressed substantial doubt concerning the Company's ability to continue as a
going concern.
IF USA VIDEO IS UNABLE TO OBTAIN SUBSTANTIAL ADDITIONAL FINANCING IT MAY NOT BE
ABLE TO REMAIN IN BUSINESS.
USA Video requires substantial working capital to fund its business. The Company
has had significant operating losses and negative cash flow from operations
since inception of its current business and expects to continue to do so for the
foreseeable future. The Company's capital requirements will depend on several
factors, including the rate of market acceptance of its products and services,
the ability to establish and expand a client base and the growth and
effectiveness of its sales and marketing efforts. USA Video estimates it will
require approximately $1 Million to $1.5 Million in financing to meet its
working capital needs over the remainder of 2003 and substantial additional
financing thereafter. Further, if capital requirements vary materially from
those currently planned, the Company may require additional financing. The
Company has no arrangements or commitments for any financing. Financing may not
be available when needed on terms favorable to the Company, or at all. If
adequate funds are not available or are not available on acceptable terms, the
Company may be unable to further develop or enhance its products and services,
take advantage of future opportunities or respond to competitive pressures, or
ultimately, to continue in business.
THE COMPANY'S OPERATING RESULTS IN FUTURE PERIODS ARE EXPECTED TO BE SUBJECT TO
SIGNIFICANT FLUCTUATIONS, WHICH WOULD LIKELY AFFECT THE TRADING PRICE OF ITS
COMMON SHARES.
USA Video's quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, many of which are
outside of its control. Some of these factors include:
- - its ability to attract and retain customers;
- - the introduction of new video transmission services or products by others;
- - price competition;
- - the continued development of and changes in the streaming media market;
- - its ability to remain competitive in its product and service offerings;
- - its ability to attract new personnel; and
- - U.S. and foreign regulations relating to the Internet.
As a result of the factors listed above, and others, period-to-period
11
comparisons of USA Video's operating results may not be meaningful in predicting
its future performance. It is possible that the Company's operating results will
not meet market expectations in some future quarter or quarters, which would
likely result in a significant decline in its stock price.
THE STREAMING MEDIA BUSINESS IS HIGHLY COMPETITIVE, AND USA VIDEO'S FAILURE TO
COMPETE SUCCESSFULLY WOULD LIMIT ITS ABILITY TO RETAIN AND INCREASE ITS MARKET
SHARE.
The streaming media market is new, rapidly evolving and extremely competitive.
The Company expects competition to intensify in the future. The Company competes
with companies that provide all or certain aspects of the Company's services,
including other streaming media providers, content encoders, video production
companies, Internet data management companies, and others, and expects that
additional competition in the future will be provided by those types of
providers and others. The Company's current market share is insignificant.
The video streaming market is currently dominated by a small number of larger
companies, including Real Networks, Microsoft, Yahoo and several others, some of
which offer source-to-destination streaming media solutions. Most of USA Video's
current and potential competitors have longer operating histories, larger
customer bases, greater name recognition and significantly greater financial,
marketing and other resources than the Company. In addition, larger,
well-established and well-financed entities may acquire, invest in or form joint
ventures with online competitors as the use of the Internet and other online
services increases. In addition, new technologies and the expansion of existing
technologies are expected to result in additional competition.
USA Video may not be able to compete successfully against current and future
competitors, and any inability to do so could decrease its revenues, contribute
to the Company not achieving profitability and adversely affect is ability to
establish, maintain and increase its market share.
THE MARKET FOR USA VIDEO'S PRODUCTS AND SERVICES IS RELATIVELY NEW AND IS
EVOLVING, AND THE COMPANY'S SUCCESS WILL DEPEND ON ITS ABILITY TO ADAPT TO
CHANGING MARKET CONDITIONS.
USA Video's future financial performance will depend in large part on the growth
in demand for its streaming media services and products. This market is new and
emerging, is rapidly evolving, is characterized by an increasing number of
market entrants and will be subject to frequent and continuing changes in
customer preferences and technology. As is typical in new and evolving markets,
demand and market acceptance for the Company's products and services is subject
to a high level of uncertainty. Because the market for the Company's products is
evolving, it is difficult to assess or predict with any assurance the size or
growth rate, if any, of this market. There can be no assurance that a
significant market for the Company's products will develop, or that it will
develop at an acceptable rate or that new competitors will not enter the market.
In addition, even if a significant market develops for such products, there can
be no assurance that the Company's products will be successful in such market.
If a significant market fails to develop, develops more slowly than expected or
attracts new competitors, or if USA Video's products do not achieve market
acceptance, the Company's business prospects, financial condition and results of
operations will be materially adversely affected.
USA VIDEO IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, WHICH COULD RENDER THE
COMPANY'S PRODUCTS AND SERVICES OBSOLETE.
USA Video's future success will depend in part on its ability to offer products
and services that incorporate leading technology and address the increasingly
sophisticated and varied needs of its current and prospective customers. The
Company's market is characterized by rapidly changing and unproven technology,
evolving industry standards, changes in customer needs, emerging competition and
frequent new service introductions. Future advances in technology may not be
beneficial to or compatible with USA Video's business. In addition, the Company
may not be able to incorporate technological advances into its products and
services in a cost-effective and timely basis. Keeping pace with the
technological advances may require substantial expenditures and lead time,
12
particularly with respect to acquiring updated hardware and infrastructure
components of its systems. The Company may require additional financing to fund
such acquisitions. Any such financing may not be available on commercially
reasonably terms, if at all, when needed.
USA VIDEO IS DEPENDENT UPON VENDORS AND OTHER THIRD PARTY SERVICE PROVIDERS, AND
WILL BE COMPETING WITH SOME OF THESE COMPANIES.
USA Video is, and will continue to be dependent on vendors and other providers
to supply the hardware, software and co-location resources that comprise the
Company's products and services. The Company has no long-term or exclusive
contracts or arrangements with any of these vendors or providers. The Company
cannot be certain that its current and proposed vendors and service providers
will continue to do business with the Company, or that it will be able to
establish relationships with new vendors and service providers, if necessary. If
the Company is unable to establish and maintain satisfactory relationships and
arrangements with these third parties, the Company's business could be harmed.
In addition, USA Video will be dependent upon its third party vendors and other
suppliers to adequately test their products before release, and to provide
support for the products after delivery. The failure of any of these third party
providers to do so could have a material adverse effect on USA Video's business.
Further, USA Video currently competes with, and expects to compete with in the
future, providers of some of its technology or system components. USA Video's
inability to, at the same time, effectively cooperate and compete with these
companies could harm its business.
IF USA VIDEO DOES NOT CONTINUOUSLY IMPROVE ITS TECHNOLOGY IN A TIMELY MANNER,
ITS PRODUCTS COULD BE RENDERED OBSOLETE.
The markets for USA Video products and services are characterized by:
- - rapidly changing technology;
- - evolving industry standards;
- - frequent new product and service introductions; and
- - changing customer demands.
These changes and developments may render the Company's products and
technologies obsolete in the future. As a result, the Company's success depends
on its ability to adapt to these changes, particularly to develop or adapt
products and services or to acquire new products and services that can compete
successfully. There can be no assurance that USA Video will be successful in
these efforts.
USA VIDEO'S SERVICES ARE COMPLEX AND THE COMPANY MAY NOT BE ABLE TO PREVENT
DEFECTS THAT COULD DECREASE THEIR MARKET ACCEPTANCE, RESULT IN PRODUCT LIABILITY
OR HARM ITS REPUTATION.
USA Video's streaming media products services are complex, and the steps the
Company takes to ensure that they are free of errors or defects, particularly
when first introduced or when new versions or enhancements are released, may not
be successful. USA Video cannot guarantee that current versions or enhanced
versions or its products will be free of significant software defects or bugs.
Despite the Company's testing, and testing by its third-party vendors and
providers, current or future products may contain serious defects. Serious
defects or errors could result in lost revenue or a delay in market acceptance
of the Company's products and could seriously harm its business and operating
results. Errors in its products may be caused by defects in third-party hardware
or software incorporated into its products. If so, the Company may be unable to
fix these defects without the cooperation of these third-party providers.
Because these defects may not be as significant to these providers as they are
to USA Video, the Company may not receive the rapid co-operation that it may
require. Errors, defects or other performance problems with the Company's
13
products could also harm its customers' businesses or result in potential
product liability claims. Even if unsuccessful, a product liability claim
brought against USA Video would likely be time-consuming, costly and harmful to
its reputation. Nor can there be any assurance that the Company's product
liability insurance coverage will be sufficient to satisfy any successful claim.
ANY LOSS OF THE COMPANY'S PERSONNEL OR INABILITY TO ADD NEW PERSONNEL COULD HARM
THE COMPANY'S BUSINESS.
USA Video's future success depends significantly on the continued services and
performance of its senior management. The Company's performance also depends on
its ability to retain and motivate its other key personnel. The loss of the
services of any member of USA Video's senior management team or other key
employees could cause significant disruption in the Company's business. USA
Video has no long-term employment agreements with senior management and does not
currently maintain any "key person" life insurance. The Company's future success
also depends on its ability to identify, attract, hire, train, retain and
motivate other highly skilled technical, managerial, operations, sales and
marketing and customer service personnel. Competition for such personnel is
intense, and USA Video may not successfully attract, assimilate or retain
sufficiently qualified personnel. The failure to retain and attract the
necessary personnel could impede the Company's future success.
BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PORTION OF USA
VIDEO'S REVENUE, IF IT LOSES A MAJOR CUSTOMER, ITS REVENUE COULD SUFFER.
Three customers accounted for approximately 36%, 32% and 12% of USA Video's
revenue for the year ended December 31, 2002. The Company expects a small number
of customers will continue to account for a substantial portion of its revenue
for the foreseeable future. USA Video's inability to increase the number of its
customers or the loss of any one major customer could limit the Company's
ability to maintain or increase its market share, or could cause revenue to drop
quickly and unexpectedly.
USA VIDEO'S BUSINESS MAY SUFFER IF IT CANNOT PROTECT ITS INTELLECTUAL PROPERTY.
USA Video seeks to protect its proprietary rights through a combination of
patents, trade secret and trademark laws, confidentiality procedures and
contractual provisions with employees and third parties. Despite its efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or obtain and use information that it considers as
proprietary. Litigation may be necessary to enforce USA Video's intellectual
property rights, to protect its trade secrets and to determine the validity and
scope of the proprietary rights of others. Any litigation could result in
substantial costs and diversion of management and other resources with no
assurance of success and could seriously harm USA Video's business and operating
results.
NO ASSURANCE THAT USA VIDEO'S PATENTS WON'T BE CHALLENGED, INVALIDATED OR
CIRCUMVENTED
There can be no assurance that USA Video's current or future patents, if any,
will not be challenged, invalidated, or circumvented, or that any rights granted
thereunder will provide competitive advantages to the Company. In addition,
there can be no assurance that patents will be issued from pending applications,
or that claims allowed on any future patents will be sufficiently broad to
protect USA Video's technology. In addition, the laws of some foreign countries
may not permit the protection of USA Video's proprietary rights to the same
extent as do the laws of the United States. USA Video intends to enforce its
proprietary rights through the use of licensing agreements and, when necessary,
litigation. Although USA Video believes the protection afforded by its patents,
patent applications, and trademarks has value, the rapidly changing technology
in the video transmission industry makes the Company's future success dependent
primarily on the innovative skills, technological expertise, and management
abilities of its employees rather than on patent and trademark protection.
14
USA VIDEO'S PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
CAUSE IT TO INCUR SIGNIFICANT COSTS OR PREVENT IT FROM LICENSING ITS PRODUCTS.
Other companies, including USA Video's competitors, may have or obtain patents
or other proprietary rights that would prevent, limit or interfere with the
Company's ability to make, use or license its products. The Company cannot be
certain that its products do not and will not infringe patents or other
proprietary rights of others. USA Video may be subject to legal proceedings,
including claims of alleged infringement by it of the intellectual property
rights of third parties. If a successful claim of infringement is brought
against USA Video and it fails to or is unable to license the infringed
technology on commercially reasonable terms, the Company's business and
operating results could be significantly harmed. Companies in the technology
market are increasingly bringing suits alleging infringement of their
proprietary rights, particularly patent rights. Although USA Video is not
currently subject to any litigation or claims, any future claims, whether or not
valid, could result in substantial costs and diversion of resources with no
assurance of success. Intellectual property litigation or claims could force USA
Video to do one or more of the following:
- - cease selling, incorporating or using products or services that incorporate
the challenged intellectual property;
- - obtain a license from the holder of the infringed intellectual property
right, which license may not be available on commercially reasonable terms,
or at all; or
- - redesign it products or services.
If USA Video is forced to take any of these actions, its business could be
substantially harmed.
USA VIDEO'S SUCCESS DEPENDS ON THE CONTINUED GROWTH IN DEMAND FOR E-BUSINESS
APPLICATIONS.
USA Video's primary business strategy involves the development of products and
services that enable users to transmit video over the Internet. As a result, its
future sales and any future profits will be substantially dependent upon the
widespread acceptance and use of the Internet as an effective medium of business
by consumers and businesses. To be successful, consumers and businesses that
historically have used traditional means of commerce to transact business must
continue to accept and utilize the Internet as a medium for conducting business
and exchanging information. Consumers and businesses may reject the Internet as
a viable commercial medium for a number of reasons, including potentially
inadequate network infrastructure, slow development of enabling technologies,
insufficient commercial support and privacy concerns. In addition, delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity or increased government regulation could
cause the Internet to lose its viability as a commercial medium. If the demand
for e-business applications does not grow or grows more slowly than expected,
demand for USA Video's products and services would be reduced and its revenue
would suffer.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS AND
RISKS TO DOING BUSINESS ON THE INTERNET AND COULD HARM THE COMPANY'S BUSINESS.
USA Video is not currently subject to direct regulation by any governmental
agency, other than regulations applicable to businesses generally, export
control laws and laws or regulations directly applicable to electronic commerce.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet covering issues such as: user privacy, pricing, content,
copyrights, distribution, and characteristics and quality of products and
services.
Furthermore, the growth and development of the market for electronic commerce
may prompt calls for more stringent consumer protection laws that may impose
15
additional burdens on those companies conducting business online. The adoption
of additional laws or regulations may decrease the growth of the Internet or
other online services, which could, in turn, decrease the demand for the
Company's products and services and increase its cost of doing business.
The applicability to the Internet of existing laws governing issues such as
property ownership, copyrights, encryption and other intellectual property
issues, taxation, libel, export or import matters, obscenity and personal
privacy is uncertain. The vast majority of such laws were adopted prior to the
advent of the Internet and related technologies. As a result, they do not
contemplate or address the unique issues of the Internet and related
technologies. Changes to such laws intended to address these issues, including
some recently proposed changes, could create uncertainty in the Internet
marketplace. Such uncertainty could reduce demand for the Company's products and
services or increase the cost of doing business due to increased costs of
litigation or increased service delivery costs.
THE COMPANY'S SHARE PRICE HAS BEEN AND COULD BE HIGHLY VOLATILE, WHICH COULD
RESULT IN SUBSTANTIAL LOSSES TO INVESTORS.
The trading price of the Company's common shares has been and is likely to
continue to be highly volatile and could be subject to wide fluctuations in
response to a number of factors including: variations in quarterly operating
results; new products or services offered by the Company or its competitors;
conditions or trends in the Internet and online commerce industries; changes in
the economic performance and/or market valuations of other Internet and online
service companies; and other events or factors, many of which are beyond the
Company's control. In addition, the stock market in general, and the market for
Internet-related and technology companies in particular, has experienced extreme
price and volume fluctuations, including large price drops in 2002, 2001 and
2000, that have often been unrelated or disproportionate to the operating
performance of such companies. These broad market and industry factors may
materially adversely affect the market price of the Company's common shares,
regardless of the Company's actual operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against such companies. Such
litigation, if instituted, could result in substantial costs and a diversion of
management's attention and resources.
ANTI-TAKEOVER PROVISIONS IN USA VIDEO'S CHARTER DOCUMENTS COULD PREVENT OR DELAY
A CHANGE IN CONTROL OF THE COMPANY.
USA Video's Articles of Continuance and bylaws contain anti-takeover provisions
that could discourage, delay or even prevent an acquisition of the Company at a
premium price or at all. Any of these provisions might prevent the market price
of the USA Video common shares from increasing in response to takeover attempts,
and could prevent the Company's shareholders from realizing a premium over the
then-prevailing market price for the common shares.
USA VIDEO INTENDS TO ISSUE ADDITIONAL EQUITY SECURITIES, WHICH MAY DILUTE THE
INTERESTS OF CURRENT SHAREHOLDERS OR CARRY RIGHTS OR PREFERENCES SENIOR TO THE
COMMON SHARES.
USA Video intends to issue additional equity securities in order to raise
working capital. Accordingly, existing shareholders may experience additional
dilution of their percentage ownership interest in the Company. In addition, the
new equity securities may have rights, preferences or privileges senior to those
of existing holders of the Company's common shares.
LIMITED LIABILITY OF EXECUTIVE OFFICERS AND DIRECTORS MAY DISCOURAGE
SHAREHOLDERS FROM BRINGING A LAWSUIT AGAINST THEM.
USA Video's bylaws contain provisions that limit the liability of directors for
monetary damages and provide for indemnification of officers and directors.
These provisions may discourage shareholders from bringing a lawsuit against
officers and directors for breaches of fiduciary duty and may also reduce the
likelihood of derivative litigation against officers and directors even though
such action, if successful, might otherwise have benefited the shareholders. In
16
addition, a shareholder's investment in USA Video may be adversely affected to
the extent that costs of settlement and damage awards against officers or
directors are paid by USA Video pursuant to the indemnification provisions of
the bylaws.
REQUIREMENTS OF THE SEC WITH REGARD TO LOW-PRICED "PENNY STOCKS" MAY ADVERSELY
AFFECT THE ABILITY OF SHAREHOLDERS TO SELL THEIR SHARES IN THE SECONDARY MARKET.
"Penny stocks" are low-priced, and usually highly speculative, stock selling at
less than $5.00 per share. USA Video's securities are subject to Rule 15g-9
under the Securities Exchange Act of 1934, which imposes additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and "accredited investors" (generally, an
individual with a net worth in excess of $1,000,000 or an annual income
exceeding $200,000, or $300,000 together with his or her spouse). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. The rule also requires the
delivery, prior to the transaction, of a risk disclosure document mandated by
the SEC relating to the penny stock market. The broker-dealer must also disclose
the commissions payable for the transaction, current quotations for the stock,
and, if applicable, the fact that it is the sole market maker in the stock.
Consequently, the rule may adversely affect the ability of broker-dealers to
sell USA Video's securities and may adversely affect the ability of shareholders
to sell their shares in the secondary market.
USA VIDEO DOES NOT ANTICIPATE PAYING DIVIDENDS TO SHAREHOLDERS IN THE
FORESEEABLE FUTURE.
USA Video has not paid dividends on its common shares and intends, for the
foreseeable future, to invest any earnings in the further development of its
business. Accordingly, shareholders should not expect to receive any dividends
on their shares.
ITEM 2. PROPERTIES.
USA Video headquarters and executive offices are located in Old Lyme,
Connecticut. USA Video leases 1,250 square feet for an annual base rent of
$13,992. The lease expires November 30, 2003.
USA Video also leases 800 square feet of office space located in Vancouver,
British Columbia, on a month-to-month basis, at a monthly rent of $1,780.
ITEM 3. LEGAL PROCEEDINGS.
USA Video is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is a limited public market for the common shares of the Company. The
common shares trade on the TSX Venture Exchange, Inc. formerly Canada Venture
Exchange (under the symbol "US"), and on the NASD OTC Bulletin Board (under the
symbol "USVO").
The following table shows the high and low sales prices (in Canadian dollars) of
the common shares as reported by the TSX Venture Exchange, Inc. formerly the
Canadian Venture Exchange (the "TSX") , for the periods indicated.
17
TSX Venture Exchange
(Symbol "US")
Quarter High Low
- ------- ---- ---
($CAN) ($CAN)
First Quarter 2001 2.60 0.70
Second Quarter 2001 1.19 0.62
Third Quarter 2001 0.85 0.35
Fourth Quarter 2001 0.67 0.33
First Quarter 2002 0.87 0.36
Second Quarter 2002 0.45 0.10
Third Quarter 2002 0.18 0.10
Fourth Quarter 2002 0.12 0.06
The following table shows the high and low prices of the common shares on the
NASD OTC Bulletin Board. The following quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions:
OTC Bulletin Board
(Symbol "USVO")
Period High Low
- ------ ---- ---
($US) ($US)
First Quarter 2001 1.74 0.47
Second Quarter 2001 0.77 0.38
Third Quarter 2001 0.60 0.22
Fourth Quarter 2001 0.4125 0.21
First Quarter 2002 0.55 0.22
Second Quarter 2002 0.28 0.066
Third Quarter 2002 0.13 0.06
Fourth Quarter 2002 0.08 0.041
As of March 26, 2003, there were 106,495,089 common shares outstanding, held by
1,434 shareholders of record.
To date, the Company has not paid any dividends on its common shares and does
not expect to declare or pay any dividends on such common shares in the
foreseeable future. Payment of any dividends will depend upon future earnings,
if any, the financial condition of the Company, and other factors as deemed
relevant by the Company's Board of Directors.
All sales of securities made by USA Video during the year ended December 31,
2002 that were not registered under the Securities Act have been disclosed in
USA Video's report on Form 10-Q for the period ended June 30, 2002 and in this
Form 10-K for the year ended December 31, 2002. The sales did not involve the
use of an underwriter and no commissions were paid in connection with the sale
of any of these securities.
18
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected historical financial data. The
consolidated statement of operations data for the years ended December 31, 2000,
2001 and 2002, and the balance sheet data as of December 31, 2001 and 2002 are
derived from USA Video's consolidated financial statements included elsewhere in
this report, which have been audited by Goldstein Golub Kessler LLP independent
auditors. The selected financial data should be read in conjunction with USA
Video's consolidated financial statements, including the related notes, and the
information in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
December 31,
Item 2002 2001 2000 1999 1998
Revenue $156,976 $124,006 $638,592 $20,500 --
Net loss (2,113,138) ($3,760,821) ($4,661,652) ($1,684,468) ($981,598)
Loss per share ($0.02) ($0.04) ($0.06) ($0.03) ($0.02)
Total assets $ 317,144 $1,382,178 $1,744,071 $995,351 $435,232
Long-term obligations -- -- -- -- --
Cash dividends per share -- -- -- -- --
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATION.
OVERVIEW OF THE COMPANY
USA Video was a development-stage company from January 1, 1992 to December 31,
1999, during which time it engaged primarily in the development of its
end-to-end hardware systems and proprietary Video-on-Demand and Wavelet
compression technologies, and had very limited sales. In 2000, the Company made
the first substantial sales of its end-to-end systems, and invested heavily in
further development of its StreamHQ(TM) streaming media system. Due to current
market conditions, management has implemented consolidation procedures to reduce
the expense of operations.
As more fully discussed below, in this Management's Discussion section of this
Report, the Company has not been profitable, and has not had significant
revenues. USA Video cannot predict its revenue levels for the next 12 months, or
thereafter, nor when, or if, its operations will become profitable. The
Company's expenses will continue to decrease as it consolidates selling, general
and administrative expenses. USA Video will require additional financing, both
for the remainder of fiscal 2003 and thereafter, to continue to operate and
expand its business. There is no assurance that such financing will be available
on commercially reasonable terms, if at all.
RESULTS OF OPERATIONS
REVENUES
Revenues for the year ended December 31, 2002 ("fiscal 2002") were $156,976,
compared with $124,006 for the year ended December 31, 2001 ("fiscal 2001"). The
Company had revenues of $638,592 for the year ended December 31, 2000 ("fiscal
2000"). Approximately 27% of revenues for fiscal 2001 were derived from sales of
the Company's hardware and software systems and approximately 57% were from
19
provision of engineering services. The Company had three major customers who, in
the aggregate, accounted for 80% of total revenues in 2002, and one major
customer who accounted for 61% of total revenues in fiscal 2001, and three major
customers who, in the aggregate, accounted for 82% of total revenues in fiscal
2000.
EXPENSES
Total expenses for fiscal 2002 were $2,156,764, compared with $3,892,845 for
fiscal 2001 and $5,291,663 for fiscal 2000. For fiscal 2002, cost of sales was
$88,377, as compared with $66,770 for fiscal 2001 and $393,496 for fiscal 2000.
Research and development costs for fiscal 2002 were $277,149, as compared to
$999,058 for fiscal 2001 and $620,212 for 2000. The decrease in fiscal 2002 and
2001 was due primarily to consolidation efforts of management.
Selling, general and administrative expenses were $859,736 for fiscal 2002, as
compared with $1,833,440 for fiscal 2001, and $2,599,591 for fiscal 2000.
Selling, general and administrative expenses consisted of marketing expenses,
consulting fees, office, professional fees, and other expenses to execute the
Company's business plan and for day-to-day operations. The decreases resulted
from the consolidation efforts of management. The primary components of the
decreases from fiscal 2001 to fiscal 2002 were:
- - a $480,496 decrease in fiscal 2002 in marketing expenses as the Company
terminated the day-to-day operation of it's StreamHQ(TM) services which
resulted in the termination of marketing staff and programs for the sale of
functions of StreamHQ(TM) at the start of the second quarter;
- - a decrease of $154,018 (fiscal 2002) for administrative wages and salaries
and other office expenses due to consolidation efforts of management; and
- - a $153,102 decrease in professional fees in fiscal 2001, as the Company
utilized its staff to perform tasks previously outsourced.
Selling, general and administrative expenses consisted of marketing expenses,
consulting fees, office, professional fees, and other expenses to execute the
Company's business plan and for day-to-day operations. The substantial
year-to-year increases resulted from the Company's increased efforts to bring
products to market. The primary components of the increases fiscal 2001 to
fiscal 2000 were:
- - a $284,911 decrease in fiscal 2001 in marketing expenses, as the Company
revamped marketing objectives and strategies to isolate on the release of
StreamHQ(TM) late in the third quarter. The marketing staff continues to
identify and assess appropriate market segments, develop business
arrangements with prospective partners, create awareness of new products
and services, and communicate to the industry and potential customers;
- - a decrease of $236,458 from fiscal 2001 for administrative wages and
salaries and other office expenses; and
- - an $81,203 decrease in advertising in fiscal 2001, as the Company, replaced
media advertising with an increased sales force.
Additional expenses included depreciation and amortization of $439,516 for
fiscal 2002, compared to $407,880 for fiscal 2001 and $224,581 for fiscal 2000,
as the Company added machinery and equipment necessary for the development of
new products and services. Non-cash compensation charges for fiscal 2002 were
$38,154, 2001 were $ 585,697 and fiscal 2000 were $1,453,783, due mostly to
issuance of common shares and common share warrants to the Company's officers,
directors and employees and at a price or exercise price below the market price
of the common shares at the time of issuance and stock options to contractors.
Because the rules of the TSX require that the offering price for privately
placed securities of listed companies be set when the offering is first
20
announced, rather than upon closing, the sale price of the common shares and the
exercise price of the warrants were below the market price of the common shares
on the date of issuance.
Other decreases in expenses included rent, utilities and telephone, travel and
promotion, insurance and public relations due to consolidation efforts of
management.
Impairment Loss on Long-Lived Assets are the result of the Company's inability
to raise revenues in accordance with the corporate business plan, the Company
continued operating at a loss for the year ended December 31, 2002. As a
result, the Company commenced an impairment review of its long-lived assets in
accordance with Statement of Financial Accounting Standard ("SFAS")144
"Accounting of the Impairment or Disposal of Long-Lived Assets". As a result of
this impairment review, the Company recorded an impairment loss of approximately
$453,832 during the six month period ended December 31, 2002, to reduce the
carrying value of these assets to its estimated fair value.
The Company sold the stock of related registered companies for a loss of $93,319
in 2002. For the year ended December 31, 2002, the Company reported a change in
unrealized loss on investments for $86,487.
NET LOSSES
To date, the Company has not achieved profitability and expects to incur
substantial losses for the foreseeable future. The Company's net loss for fiscal
2002 was $2,113,138, compared with a net loss of $3,760,821 for fiscal 2001, and
$4,661,652 for fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company's cash position was $48,708, a decrease of
$55,530 from December 31, 2001. The Company had a working capital deficit of
$1,074,998 and an accumulated deficit of $31,176,441 at December 31, 2002.
The Company's principal source of cash during fiscal 2002 was proceeds of
$827,681 received from private placements of equity securities and $35,784 from
proceeds from the sale of investments. This was offset by $918,995 of cash used
in operating activities.
The Company has historically satisfied its capital needs primarily by issuing
equity securities to its officers, directors, employees and a small group of
investors, and from short-term bridge loans from members of management. During
fiscal 2002, the Company completed two private placements, resulting in gross
proceeds to the Company of $827,681.
In the first offering completed in June 2002, the Company sold 10,000,000 units,
each consisting of one common share and one share purchase warrant to acquire an
additional share at $0.085 per share by June 28, 2004, at a price $0.07 per
unit, for total proceeds of $700,000. Each unit consisted of one share of
common stock and one warrant to acquire an additional share at $0.085 per share
($0.13 CN) by June 2004.
In the second offering completed on December 31, 2002, the Company sold
2,000,000 units at a price of $0.064 per unit for total proceeds of $128,000.
Each unit consisted of one common share and one share purchase warrant to
purchase one additional common share at $0.064 per share, exercisable until
December 31, 2004. The offer and sale of the units were exempt from
registration under Rule 506 of Regulation D of the Securities Act. The Company
limited the manner of the offering and provided disclosure regarding the
offering and the Company to the investors. Two officers and directors of the
Company, six additional unaffiliated non-accredited investors, and seven
additional unaffiliated accredited investors purchased the securities. The
Company believes that a portion of these sales were also exempt under Regulation
S under the Securities Act, as the sales were made in offshore transactions to
non-U.S. persons.
Subsequent to the year end, the Company completed on February 25, 2003 a private
placement of 2,750,000 units at a price of $0.0657 per unit for total proceeds
of $180,675. Each unit consisted of one common share and one share purchase
21
warrant to purchase one additional common share at $0.0657 per share,
exercisable until February 25, 2005. The offer and sale of the units were exempt
from registration under Rule 506 of Regulation D of the Securities Act. The
Company limited the manner of the offering and provided disclosure regarding the
offering and the Company to the investors. Two officers and directors of the
Company, one employee of the Company, two additional unaffiliated non-accredited
investors, and eight additional unaffiliated accredited investors purchased the
securities. The Company believes that a portion of these sales were also exempt
under Regulation S under the Securities Act, as the sales were made in offshore
transactions to non-U.S. persons.
The Company's independent accountants, in their report accompanying the
Company's audited financial statements at and for the year ended December 31,
2002, have stated that there is substantial doubt about the Company's ability to
continue as a going concern. As of December 31, 2002, the Company had $48,708 in
cash. The Company will require an additional $1.0 million to $1.5 million to
finance operations for the fiscal 2003 and intends to obtain such financing
through sales of its equity securities. The threat to the Company's ability to
continue as a going concern will be removed only when revenues have reached a
level that sustains the Company's business operations.
Assuming the aforementioned $1.0 million to $1.5 million in financing is
obtained, continuing operations for the longer-term will be supported through
anticipated growth in revenues and through additional sales of the Company's
securities. Although longer-term financing requirements may vary depending upon
the Company's sales performance, management expects that the Company will
require additional financing of $2.0 million to $3.0 million for fiscal 2004.
The Company has no binding commitments or arrangements for additional financing,
and there is no assurance that management will be able to obtain any additional
financing on terms acceptable to the Company, if at all.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
USA Video believes its exposure to overall foreign currency risk is not
material. USA Video does not manage or maintain market risk sensitive
instruments for trading or other purposes and is not exposed to the effects of
interest rate fluctuations as it does not carry any long-term debt.
USA Video reports its operations in US dollars and its currency exposure,
although considered by USA Video as immaterial, is primarily between the US and
Canadian dollars. Exposure to other currency risks is also not material as
international transactions are settled in US dollars. Any future financing
undertaken by USA Video will be denominated in US dollars. As USA Video
increases its marketing efforts, the related expenses will be primarily in US
dollars. In addition, 90% of USA Video's bank deposits are maintained in U.S.
dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary financial information required to be
filed under this item are presented on pages F-1 through F-19 of this Report and
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the name, age, position, and period of service in
his present position of each director and executive officer of USA Video:
22
Name Age Position Period of Service
Edwin Molina 47 Director, Chief Executive Officer and President Since 1998
Anton J. Drescher (1) 46 Director, Chief Financial Officer and Secretary Since 1994
Robert D. Smith Jr. (1) 52 Director and Chief Operating Officer Since 2000
Kent Norton 43 Chief Information/Chief Technical Officer Since 2000
Daniel E. Kinnaman (2) 46 Senior Vice President, Sales and Marketing Since 2001
(1) Member of the Audit Committee
(2) Resigned as an officer effective May 17, 2002
Anton Drescher, Edwin Molina, and Robert D. Smith were elected directors of USA
Video in June 2002.
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY:
EDWIN MOLINA - PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Mr. Molina served as a Senior Administrator with USA Video from June 1992 to
June 30, 1998, when he was appointed President, Chief Executive Officer and a
director. Mr. Molina was also a Senior Administrator with Adnet USA LLC, a
private California company involved in Internet advertising, from May 1996 to
June 1998.
ANTON J. DRESCHER - CHIEF FINANCIAL OFFICER, SECRETARY AND DIRECTOR
Mr. Drescher has been Chief Financial Officer of USA Video since December 1994.
He has also been a director and Secretary/ Treasurer of Cal-Star, Inc. (formerly
Future Link Systems Inc.) a public company listed for trading on the TSX, which
company was previously involved in the development of compression technology and
is now deemed an inactive company by the TSX; a director and Secretary/Treasurer
of iQuest Networks Inc. (formerly "Interlink Systems Inc." and "Glassmaster
Industries, Inc."), a public company listed on the TSX, involved in digital
audio distribution since 1996; President of Westpoint Management Consultants
Limited, a private company engaged in tax and accounting consulting for business
reorganizations since 1979; President of Harbour Pacific Capital Corp., a
private British Columbia company involved in regulatory filings for businesses
in Canada, since 1998; and, since 1991, a director and President of
International Tower Hill Mines Limited, a public British Columbia company listed
on the TSX and involved in mineral exploration, since February 2003, a director
and Secretary of StorageFlow Systems Corp., a public company listed on the TSX,
which company is involved in electronic data storage. Mr. Drescher has been a
Certified Management Accountant since 1981.
ROBERT D. SMITH, JR. - CHIEF OPERATING OFFICER AND DIRECTOR
Mr. Smith joined USA Video in August 2000 as Chief Operating Officer. Mr. Smith
was formerly a Vice President at Sonalysts Inc., of Waterford, Connecticut,
where, for 22 years, he helped build the company into a $50 million, nearly
500-person international e-business, multimedia, software and engineering
corporation. Mr. Smith graduated with distinction from the U.S. Naval Academy,
where he was a Trident Scholar and earned a B.S. degree in oceanography and
engineering. He served in a variety of officer positions in the nuclear
submarine Navy prior to leaving active duty. Concurrent with his employment at
Sonalysts, Inc. he continued to serve in the Naval Reserve, having recently
retired with the rank of Captain.
23
KENT NORTON - CHIEF INFORMATION/CHIEF TECHNICAL OFFICER
Mr. Norton joined USA Video in May 2000 as Chief Information Officer, and in
addition, was appointed Chief Technical Officer in September 2000. From January
2000 to June 2000, Mr. Norton was Director of Technology and Information Systems
with beenz.com, which was creating a universal, incentive-based currency for
on-line merchants. Mr. Norton was employed by Computer Sciences Corporation
from 1996 to January 2000, and from 1991 to 1994. His last position at Computer
Sciences Corporation was senior manager, where he was responsible for the design
of a global technical support infrastructure for the company's "help desks"
around the world. From 1994 to 1996, Mr. Norton held a senior technology
position with Sonalysts, Inc. Mr. Norton holds a Bachelor of Science degree in
Civil & Structural Engineering from the University of Cincinnati.
DANIEL E. KINNAMAN - SENIOR VICE PRESIDENT, SALES AND MARKETING
Mr. Kinnaman joined USA Video in October 2001 as Senior Vice President of Sales
and Marketing and resigned as an officer as of May 17, 2002. Mr. Kinnaman was
the Executive Vice President and Group Publisher for Professional Media Group
LLC. In this position, he was responsible for the publication of two nationally
circulated technology and education magazines and directed the advertising
sales, editorial content, and overall business direction of these publications.
For the past fifteen years, Mr. Kinnaman has been a prominent speaker, writer,
and independent advisor specializing in the business and education opportunities
presented by emerging computer and networking technologies. He was instrumental
in guiding the marketing strategy of Compaq Computer Corporation's education
Division during a three-year period during which the division's sales grew
considerably. Mr. Kinnaman holds a Bachelor of Science degree in Marketing from
The University of Connecticut and a Master of Arts in Education from The
University of Connecticut.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities Exchange Act of 1934, as amended ("Section 16"),
requires that reports of beneficial ownership of capital stock and changes in
such ownership be filed with the Securities and Exchange Commission (the "SEC")
by Section 16 "reporting persons," including directors, certain officers, and
holders of more than 10% of the outstanding common shares. The Company is
required to disclose in this Annual Report on Form 10-K each reporting person
whom it knows to have failed to file any required reports under Section 16 on a
timely basis during the fiscal year ended December 31, 2001.
To the Company's knowledge, based solely on a review of copies of Forms 3, 4 and
5 furnished to it and written representations that no other reports were
required, during the fiscal year ended December 31, 2002, the Company's
officers, directors and 10% shareholders complied with all Section 16(a) filing
requirements applicable to them except as follows:
None
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth compensation awarded to, earned by or paid to USA
Video's Chief Executive Officer (CEO), and to other persons serving as executive
officers of the Company as of December 31, 2002, whose salary and bonus for such
year exceeded $100,000 (collectively, the "Named Executive Officers") for the
last three completed fiscal years.
24
Long-Term Compensation
--------------------------------------------------
Summary Compensation Table Awards Payouts
Annual Compensation ----------------------------------
- ---------------------
Name and ------------------------------------------------ Restricted Securities
Principal Other Annual Stock Underlying LTIP All Other
Position Year Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation
--------- ------ -------- ---------- ------------- --------- ------------- ------- ------------
$ $ $ $ $ $ $
------------------------------------------------------------------------------------------
Molina, 2002 $84 415 -0- $ -0- -0- 900,000(9) -0- -0-
Edwin 2001 $124,910 -0- $125,000(2) -0- -0- -0- -0-
(CEO) 2000 $128,361 -0- $500,000(3) -0- -0- -0- -0-
Drescher 2002 $81,311(1) -0- $ -0- -0- 750,000(9) -0- -0-
Anton, 2001 $120,000(1) -0- $200,000(4) -0- -0- -0- -0-
(CFO) 2000 $120,000(1) -0- $500,000(5) -0- 200,000(10) -0- -0-
Smith, 2002 $27,139 -0- $ -0- -0- 500,000(11) -0- -0-
Robert 2001 $89,412 -0- $ 22,900(6-8) -0- -0- -0- -0-
(COO)
(1) Represents consulting fees paid to Mr. Drescher through Harbour Pacific
Capital Corp., a consulting firm wholly-owned by him, for his services as
an executive officer of the Company.
(2) In March 2001, Mr. Molina purchased 250,000 units (each comprised of one
common share and one warrant to acquire one common share at $0.66 per
share) at $0.54 per unit. This compensation resulted from the difference
between the $0.54 purchase price and the $0.66 warrant exercise price and
the fair market price of $0.84 of the common shares on the date of issuance
of the units.
(3) In July 2000, Mr. Molina purchased 200,000 units (each comprised of one
common share and one warrant to acquire one common share at $1.50 per
share) at $1.50 per unit. This compensation resulted from the difference
between the $1.50 purchase price and the $1.50 warrant exercise price and
the fair market price of $2.75 of the common shares on the date of issuance
of the units.
(4) In March 2001, Mr. Drescher purchased 400,000 units (each comprised of one
common share and one warrant to acquire one common share at $0.66 per
share) at $0.54 per unit. This compensation resulted from the difference
between the $0.54 purchase price and the $0.66 warrant exercise price and
the fair market price of $0.84 of the common shares on the date of issuance
of the units.
(5) In July 2000, Mr. Drescher purchased 200,000 units (each comprised of one
common share and one warrant to acquire one common share at $1.50 per
share) at $1.50 per unit. This compensation resulted from the difference
between the $1.50 purchase price and the $1.50 warrant exercise price and
the fair market price of $2.75 of the common shares on the date of issuance
of the units.
(6) In March 2001, Mr. Smith purchased 40,000 units (each comprised of one
common share and one warrant to acquire one common share at $0.66 per
share) at $0.54 per unit. This compensation resulted from the difference
between the $0.54 purchase price and the $0.66 warrant exercise price and
the fair market price of $0.84 of the common shares on the date of issuance
of the units.
(7) In September 2001, Mr. Smith purchased 45,000 units (each comprised of one
common share and one warrant to acquire one common share at $0.35 per
share) at $0.27 per unit. This compensation resulted from the difference
between the $0.27 purchase price and the fair market price of $0.29 of the
common shares on the date of issuance of the units.
(8) In December 2001, Mr. Smith purchased 100,000 units (each comprised of one
common share and one warrant to acquire one common share at $0.26 per
25
share) at $0.20 per unit. This compensation resulted from the difference
between the $0.20 purchase price and the fair market price of $0.22 of the
common shares on the date of issuance of the units.
(9) In December 2002, Mr. Molina cancelled 900,000 stock options granted to him
in February 2002.
(10) In December 2002, Mr. Drescher cancelled 750,000 stock options granted to
him in February 2002 and cancelled 200,000 stock options granted to him in
December 2000.
(11) In December 2002, Mr. Smith cancelled 500,000 stock options granted to him
in February 2002.
The following table sets forth certain information concerning grants of stock
options to the Named Executive Officers during the year ended December 31, 2002.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Assumed Annual Rate of Stock
Individual Grants Price Appreciation for Option Term
--------------------------------------------------------------------------------------
Number of % of Total Market
Securities Options/SARs Price on
Underlying Granted to Exercise Date of
Options/ SARs Employees in Price Grant Expiration 0% 5% 10%
Granted Fiscal Year(1) ($/Share) ($/Share) Date ($) ($) ($)
-----------------------------------------------------------------------------------------------
Molina, Edwin -0- -0- -0- -0- -0- -0- -0- -0-
Drescher, Anton -0- -0- -0- -0- -0- -0- -0- -0-
Smith, Robert -0- -0- -0- -0- -0- -0- -0- -0-
(1) A total of 5,605,000 stock options were granted to employees and
consultants in 2002.
The following table sets forth certain information concerning exercises of stock
options by the Named Executive Officers during the year ended December 31, 2002
and stock options held at year end.
Aggregated Option / SAR Exercises in Last Fiscal Year and FY-End Option / SAR
Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options / SARs Options / SARs
at FY-End (#) At FY-End ($)-
- --------------------------------------------------------------------------------------------------------------------
Shares Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable(1)
- --------------------------------------------------------------------------------------------------------------------
Molina, Edwin -0- -0- 0 / 0 N/A / $0
Drescher, Anton -0- -0- 0 / 0 N/A / $0
Smith, Robert -0- -0- 0 / 0 N/A / $0
(1) On December 31, 2002, the average of the high and low bid prices of the
common shares on the OTC BB was $0.07.
26
COMPENSATION OF DIRECTORS
Directors receive no compensation for their service as such.
EMPLOYMENT CONTRACTS
USA Video does not have an employment contract with Mr. Molina and the other
Named Executive Officer. The Company has no obligation to provide any
compensation to Mr. Molina or any other Named Executive Officer in the event of
his resignation, retirement or termination, or a change in control of the
Company, or a change in any Named Executive Officers' responsibilities following
a change in control.
USA Video may in the future create retirement, pension, profit sharing and
medical reimbursement plans covering its Executive Officers and Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of March 26, 2003, the number of outstanding
common shares of USA Video beneficially owned by (i) each person known to USA
Video to beneficially own more than 5% of its outstanding common shares, (ii)
each director, (iii) each Named Executive Officer, and (iv) all officers and
directors as a group.
Name Shares Owned Percentage of Class
- ------------------------------------------------------------------------------------------
Edwin Molina 6,924,424 (1) 6.52%
Anton J. Drescher 7,581,885 (2) 7.14%
Robert D. Smith 1,160,000 (3) 1.09%
All Executive Officers & Directors
as a Group [four persons] 15,841,309 (4) 14.91%
(1) Includes 1,725,000 common shares underlying warrants that are currently
exercisable. Mr. Molina's address is 83 Halls Road, Old Lyme, Connecticut.
(2) Includes 1,725,000 common shares underlying warrants that are currently
exercisable. Mr. Drescher's address is 83 Halls Road, Old Lyme,
Connecticut.
(3) Includes 360,000 shares underlying warrants. Mr. Smith's address is 83
Halls Road, Old Lyme, Connecticut.
(4) Includes 75,000 common shares underlying warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In 2002, the Company paid consulting fees of $81,311 to Harbour Pacific Capital
Corp., a company controlled by Anton J. Drescher, in consideration of Mr.
Drescher's services as an executive officer of the Company.
In June 2002, USA Video completed a private placement of 10,000,000 units (each
unit consisting of one common share and one warrant to purchase an additional
common share at $0.085 per share) at a price of $0.07 per unit, of which
27
7,085,000 units were sold to outside investors and 2,915,000 units were sold to
officers, directors, and employees of the Company. Because the rules of the TSX
require that the offering price for privately placed securities of listed
companies be set when the offering is first announced rather than upon closing,
the sale price of the units and the exercise price of the warrants were below
the market price of $0.075 of the common shares on the date of issuance. Units
were sold to the following officers and directors of the Company, in the amounts
indicated: Edwin Molina (1,200,000 units), Anton J. Drescher (1,200,000 units)
and Robert Smith (215,000 units).
In December 2002, USA Video completed a private placement of 2,000,000 units
(each unit consisting of one common share and one warrant to purchase an
additional common share at $0.064 per share) at a price of $0.064 per unit, of
which 1,450,000 units were sold to outside investors and 550,000 units were sold
to officers, directors, and employees of the Company. Because the rules of the
TSX require that the offering price for privately placed securities of listed
companies be set when the offering is first announced rather than upon closing,
the sale price of the units and the exercise price of the warrants were above
the market price of $0.053 of the common shares on the date of issuance. Units
were sold to the following officers and directors of the Company, in the amounts
indicated: Edwin Molina (275,000 units) and Anton J. Drescher (275,000 units).
In February 2003, USA Video completed a private placement of 2,750,000 units
(each unit consisting of one common share and one warrant to purchase an
additional common share at $0.0657 per share) at a price of $0.0657 per unit, of
which 2,200,000 units were sold to outside investors and 550,000 units were sold
to officers, directors, and employees of the Company. Because the rules of the
TSX require that the offering price for privately placed securities of listed
companies be set when the offering is first announced rather than upon closing,
the sale price of the units and the exercise price of the warrants were below
the market price of $0.075 of the common shares on the date of issuance. Units
were sold to the following officers and directors of the Company, in the amounts
indicated: Edwin Molina (250,000 units) and Anton J. Drescher (250,000 units).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS TO SHAREHOLDERS AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements Independent Auditors' Reports Consolidated Balance
Sheets Consolidated Statements of Operations Consolidated Statements of
Comprehensive Operations Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows Notes to Consolidated Financial
Statements
(a)(2) All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto
included in this Report.
(b) Reports on Form 8-K
During the last quarter of the fiscal year covered by this Report, the
registrant filed the filing reports on Form 8-K:
(i) On November 25, 2002 the registrant filed a report on Form 8-K wherein
the registrant provided an update on its status and the market for its
services, explaining why the registrant's business had taken such a
dramatic downturn, due to the nature of the market, and the
registrant's reactions to the downturn, such as aggressively cutting
back on expenses, which resulted in the regrettable staff reduction;
as well as the registrant's future plans, which entail maintaining the
VOD Patent and retention of counsel to represent it aggressively, with
a focus on licensing the VOD Patent and other intellectual properties
such as the patent-pending DRM and motion wavelet compression
technologies.
28
(ii) On December 3, 2002, the registrant filed a report on Form 8-K wherein
the registrant reported that it had relocated its corporate head
office to 83 Halls Road, Old Lyme, Connecticut, 06371-1469.
(iii) On March 11, 2003, the registrant filed a report on Form 8-K wherein
the registrant reported that had entered into an agreement with Engle
Group LLC to undertake investor and media relations services and to
assist the registrant in developing and implementing a strategic
communications plan, at remuneration of US$2,500 per month and to
advise that the registrant and Maurice Loverso had mutually agreed to
terminate the consulting agreement and that Mr. Loverso would no
longer be providing investor relations services to the registrant.
(c) Exhibits
3.1 Articles of Continuance (Wyoming) filed February 16, 1995 (incorporated by
reference from Exhibit 3.1 to the registrant's Form 10).
3.2 Articles of Amendment (Alberta) filed January 3, 1995 (incorporated by
reference from Exhibit 3.2 to the registrant's Form 10).
3.3 Articles of Amendment (Alberta) filed June 28, 1993 (incorporated by
reference from Exhibit 3.3 to the registrant's Form 10).
3.4 Articles of Amendment (Alberta) filed April 6, 1992 (incorporated by
reference from Exhibit 3.3 to the registrant's Form 10).
3.5 Articles of Amendment (Alberta) filed September 1, 1989 (incorporated by
reference from Exhibit 3.5 to the registrant's Form 10).
3.6 Articles of Incorporation (Alberta) filed April 18, 1986 (incorporated by
reference from Exhibit 3.6 to the registrant's Form 10).
3.7 Bylaws (incorporated by reference from Exhibit 3.7 to the registrant's Form
10).
4.3 Share Option Plan (incorporated by reference from Exhibit 4.3 to the
registrant's Form 10).
10.4 Alliance Partner Agreement dated November 11, 1999, between Exodus
Communications, Inc. and registrant (incorporated by reference from Exhibit
10.4 to the registrant's Form 10).
21. Subsidiaries of the registrant:
Name State of Incorporation
------ ----------------------
USA Video (California) Corporation Nevada
USA Video Corporation Texas
USA Video Productions Inc. Wyoming
USA Video Technology Corporation Wyoming
USVO, Inc. Connecticut
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
USA VIDEO INTERACTIVE CORP.
By: /s/ Edwin Molina
--------------------------------
Date: March 26, 2003 Edwin Molina
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- ----------------------- ---------------------------------- ---------
/s/ Edwin Molina Chief Executive Officer, Director March 26, 2003
- -----------------------
Edwin Molina
/s/ Anton J. Drescher Chief Financial Officer, (principal March 26, 2003
- ----------------------- financial officer and principal
Anton J. Drescher accounting officer), Director
/s/ Robert D. Smith Director March 26, 2003
- -----------------------
Robert D. Smith
30
Exhibit 1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
SECTION 906 CERTIFICATION BY EDWIN MOLINA
Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002,
Edwin Molina, hereby certifies that:
1. This report fully complies with the requirements of Sections 13(a) or 15(d)
of the 1934 Act, and
2. The information contained in this report fairly presents, in all material
respects, the registrant's financial condition and results of operations of
the registrant.
By: /s/ Edwin Molina
-----------------------------------
Name: Edwin Molina
Title: President and Chief Executive
Officer
Date: March 26, 2003
SECTION 906 CERTIFICATION BY ANTON J. DRESCHER
Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002,
Anton J. Drescher, hereby certifies that:
1. This report fully complies with the requirements of Sections 13(a) or 15(d)
of the 1934 Act, and
2. The information contained in this report fairly presents, in all material
respects, the registrant's financial condition and results of operations of
the registrant.
By: /s/ Anton J. Drescher
------------------------------------
Name: Anton J. Drescher
Title: Secretary and Chief Financial
Officer
Date: March 26, 2003
31
CERTIFICATIONS
I, Edwin Molina, certify that:
1. I have reviewed this annual report on Form 10-K of USA Video Interactive
Corp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entitles, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ Edwin Molina
-----------------------------------
Name: Edwin Molina
Title: President and Chief Executive
Officer
Date: March 26, 2003
32
I, Anton J. Drescher, certify that:
1. I have reviewed this annual report on Form 10-K of USA Video Interactive
Corp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entitles, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ Anton J. Drescher
------------------------------------
Name: Anton J. Drescher
Title: Secretary and Chief Financial
Officer
Date: March 26, 2003
USA VIDEO INTERACTIVE CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
F-1
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets F-3
Statements of Operations F-4
Statements of Comprehensive Operations F-5
Statements of Stockholders' Equity (Deficiency) F-6
Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-19
F-2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
USA Video Interactive Corp.
We have audited the accompanying consolidated balance sheets of USA Video
Interactive Corp. and Subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, comprehensive operations,
stockholders' equity (deficiency), and cash flows for each of the three years in
the period ended December 31, 2002. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of USA Video
Interactive Corp. and Subsidiaries as of December 31, 2002 and 2001 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations,
has not generated significant revenue from operations and has a net working
capital deficiency and a stockholders' deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plan in regard
to these matters is also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
February 3, 2003
F-3
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 2001
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,708 $ 104,238
Marketable securities - related parties. . . . . . . . . . . . . . . . . . . . - 42,616
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400 30,900
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12,000
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . 10,573 21,613
------------- -------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,681 211,367
Property and Equipment - at cost, net of accumulated depreciation of $- 0 -
and $573,015, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211,314 1,100,339
Other Assets, net of accumulated amortization of $11,339 and $8,016, respectively . 45,149 70,472
Deferred Tax Assets, net of valuation allowance of $7,950,000 and
$7,215,000, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
------------- -------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 317,144 $ 1,382,178
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . $ 1,082,499 $ 948,417
Due to related parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,180 91,480
------------- -------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 1,135,679 1,039,897
------------- -------------
Commitments and Contingencies
Stockholders' Equity (Deficiency):
Preferred stock - no par value; authorized 250,000,000 shares, none issued
Common stock and additional paid-in capital - no par value; authorized 250,000,000
shares, issued and outstanding 103,745,088 and 91,745,088 shares, respectively . . 30,357,906 29,492,071
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . - (86,487)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,176,441) (29,063,303)
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIENCY) . . . . . . . . . . . . . . . . . . . . . (818,535) 342,281
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) . . . . . . . . . . $ 317,144 $ 1,382,178
============= =============
The accompanying notes and independent auditor's report
should be read in conjunction with the consolidated
financial statements.
F-4
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 2001 2000
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 156,976 $ 124,006 $ 638,592
------------ ------------ ------------
Expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 88,377 66,770 393,496
Research and development. . . . . . . . . . . . . . . . . . . . . 277,149 999,058 620,212
Selling, general and administrative (includes $37,758 to related. 859,736 1,833,440 2,599,591
parties in 2000)
Depreciation and amortization . . . . . . . . . . . . . . . . . . 439,516 407,880 224,581
Impairment loss on long-lived assets. . . . . . . . . . . . . . . 453,832
Noncash compensation charges. . . . . . . . . . . . . . . . . . . 38,154 585,697 1,453,783
------------ ------------ ------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,156,764 3,892,845 5,291,663
------------ ------------ ------------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . (1,999,788) (3,768,839) (4,653,071)
------------ ------------ ------------
Other income (expense), net:
Interest income (expense) (net of interest
income of $149, $5,173 and $26,231, respectively). . . . . . . (20,031) 4,903 26,231
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (93,319) 3,115 (34,812)
------------ ------------ ------------
(113,350) 8,018 (8,581)
------------ ------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,113,138) $(3,760,821) $(4,661,652)
============ ============ ============
Net loss per share - basic and diluted . . . . . . . . . . . . . . . . $ (.02) $ (.04) $ (.06)
============ ============ ============
Weighted-average number of common shares outstanding - basic
and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,873,855 84,946,199 76,700,723
============ ============ ============
The accompanying notes and independent auditor's report
should be read in conjunction with the consolidated
financial statements.
F-5
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
YEAR ENDED DECEMBER 31, 2002 2001 2000
Net loss. . . . . . . . . . . . . . . . . . . . . $(2,113,138) $(3,760,821) $(4,661,652)
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments 86,487 (160,210) 73,723
------------ ------------ ------------
Comprehensive loss. . . . . . . . . . . . . . . . $(2,026,651) $(3,921,031) $(4,587,929)
============ ============ ============
The accompanying notes and independent auditor's report
should be read in conjunction with the consolidated
financial statements.
F-6
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
ACCUMULATED
COMMON STOCK AND OTHER STOCKHOLDERS'
ADDITIONAL PAID-IN CAPITAL COMPREHENSIVE ACCUMULATED EQUITY
SHARES AMOUNT INCOME (LOSS) DEFICIT (DEFICIENCY)
Balance at January 1, 2000 . . . . . 72,982,088 $ 20,950,152 - $(20,640,830) $ 309,322
Issuance of common stock and common
stock warrants for cash. . . . . . 1,190,000 2,260,000 - - 2,260,000
Issuance of common stock upon. . . . 2,383,000 602,074 - - 602,074
exercise of options
Issuance of common stock upon. . . . 5,145,000 500,062 - - 500,062
exercise of warrants
Noncash compensation charges . . . . - 1,453,783 - - 1,453,783
Change in unrealized gains (loss). . - - $ 73,723 - 73,723
on investments
Net loss . . . . . . . . . . . . . . - - - (4,661,652) (4,661,652)
------------ ---------------- --------------- ------------- ---------------
Balance at December 31, 2000 . . . . 81,700,088 25,766,071 73,723 (25,302,482) 537,312
Issuance of common stock and common
stock warrants for cash . . . . . . 9,800,000 3,067,391 - - 3,067,391
Issuance of common stock upon. . . . 245,000 72,912 - - 72,912
exercise of warrants
Noncash compensation charges . . . . - 585,697 - - 585,697
Change in unrealized gains . . . . . - - (160,210) - (160,210)
(loss) on investments
Net loss . . . . . . . . . . . . . . - - - (3,760,821) (3,760,821)
------------ ---------------- --------------- ------------- ---------------
Balance at December 31, 2001 . . . . 91,745,088 29,492,071 (86,487) (29,063,303) 342,281
Issuance of common stock and common
stock warrants for cash. . . . . . 12,000,000 827,681 - - 827,681
Noncash compensation charges . . . . - 38,154 - - 38,154
Change in unrealized gains . . . . . - - 86,487 - 86,487
(loss) on investments
Net loss . . . . . . . . . . . . . . - - - (2,113,138) (2,113,138)
------------ ---------------- --------------- ------------- ---------------
Balance at December 31, 2002 . . . . 103,745,088 $ 30,357,906 $ - 0 - $(31,176,441) $ (818,535)
============ ================ =============== ============= ===============
The accompanying notes and independent auditor's report
should be read in conjunction with the consolidated
financial statements.
F-7
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002 2001 2000
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,113,138) $(3,760,821) $(4,661,652)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 439,516 407,880 224,581
Impairment loss on long-lived assets . . . . . . . . . . . . . . . 452,833 - 33,122
Noncash compensation charge. . . . . . . . . . . . . . . . . . . . 38,154 585,697 1,453,783
Loss on sale of investments - related parties. . . . . . . . . . . 93,319 - -
Loss on disposal of property and equipment . . . . . . . . . . . . - 18,299 -
Bad debts (recovery) . . . . . . . . . . . . . . . . . . . . . . . 17,753 (7,000) (108,403)
Write-down of inventory 76,481
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable . . . . . . . . . . . 11,747 98,913 (109,515)
(Increase) decrease in inventory . . . . . . . . . . . . . . . . 12,000 (12,000) (145,911)
(Increase) decrease in prepaid expenses. . . . . . . . . . . . . 33,039 77,755 (51,164)
and other current assets
Increase in other assets . . . . . . . . . . . . . . . . . . . . - (26,000) (14,187)
(Decrease) increase in accounts payable. . . . . . . . . . . . . 134,082 (161,616) 624,462
and accrued expenses
(Decrease) increase in accounts payable and
accrued expenses - related parties. . . . . . . . . . . . . . . - (20,830) 9,238
(Decrease) increase in due to related parties . . . . . . . . . . . . . (38,300) 15,584 (112,970)
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES . . . . . . . . . . . . (918,995) (2,707,658) (2,858,616)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of investments - related parties . . . . . . . . 35,784 - -
Purchases of property and equipment . . . . . . . . . . . . . . . . - (559,604) (689,989)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . . . . . 35,784 (559,604) (689,989)
------------ ------------ ------------
Cash flows from financing activity - proceeds from the
issuance of common stock and warrants. . . . . . . . . . . . . . . . . 827,681 3,140,303 3,362,136
------------ ------------ ------------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . (55,530) (126,959) (186,469)
Cash and cash equivalents at beginning of year. . . . . . . . . . . . . 104,238 231,197 417,666
------------ ------------ ------------
Cash and cash equivalents at end of year. . . . . . . . . . . . . . . . $ 48,708 $ 104,238 $ 231,197
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest. . . . . . . . . . . . . . . $ 20,180 $ - $ 12,965
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Marketable securities received for settlement of amounts
previously written off as bad debt . . . . . . . . . . . . . . . . $ - $ - $ 108,403
============ ============ ============
Inventory originally purchased for resale reclassified to property
and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 69,430 $ -
============ ============ ============
The accompanying notes and independent auditor's report
should be read in conjunction with the consolidated
financial statements.
F-8
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS: USA Video Interactive Corp. (the "Company") is a designer of
high-tech Internet streaming video-on-demand systems,
services and solutions. At December 31, 2002 and for the
three-year period then ended, substantially all of the
Company's assets and substantially all its operations are
located and conducted in the United States.
2. SUMMARY OF The accompanying consolidated financial statements have been
SIGNIFICANT prepared assuming the Company will continue as a going
ACCOUNTING concern. As shown in the financial statements, the Company
POLICIES: has incurred losses of $2,113,138, $3,760,821 and $4,661,652
for the years ended December 31, 2002, 2001 and 2000,
respectively. In addition, the Company has a working capital
deficiency of approximately $1,075,000 and a stockholders'
deficiency of approximately $819,000 at December 31, 2002.
These conditions raise doubt about the Company's ability to
continue as a going concern. The Company's ability to
continue as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations as
they come due, which management believes it will be able to
do. To date, the Company has funded operations primarily
through the issuance of common stock and warrants to outside
investors and the Company's management. The Company believes
that its operations will generate additional funds and that
additional funding from outside investors and the Company's
management will continue to be available to the Company when
needed. The financial statements do not include any
adjustments relating to the recoverability and
classification of recorded assets, or the amounts and
classifications of liabilities that might be necessary in
the event the Company cannot continue as a going concern.
The accompanying consolidated financial statements include
the accounts of the Company and its wholly owned
subsidiaries. All intercompany accounts and transactions
have been eliminated.
The Company maintains cash in bank deposit accounts which,
at times, may exceed federally insured limits. The Company
has not experienced any losses on these accounts.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
The Company considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents.
The Company had classified its investments in marketable
securities as available-for-sale securities. These
securities were carried at fair value with any unrealized
gain or loss recorded as a component of stockholders'
equity. The fair value of marketable securities was
determined based on the quoted market prices for those
instruments. At December 31, 2001, the marketable securities
consisted of common stock.
F-9
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventory, which consists of computer equipment, is stated
at the lower of cost or market using the
specific-identification method.
Property and equipment is stated at cost. Maintenance and
repairs are expensed as incurred. When property is retired
or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting
gain or loss is recognized in operations. Depreciation is
computed on the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are
amortized over the estimated useful lives of the
improvements or the terms of the related lease, whichever is
shorter.
Other assets consist of patents and patents pending owned by
the Company for the Store and Forward Video System. The
patents and patents pending are recorded at cost and are
being amortized on a straight-line basis over 17 years.
The Company tests the carrying amount of long-lived assets,
including intangible assets, whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable, based on the undiscounted cash flows expected
from the use and eventual disposition of the asset.
Revenue from hardware product sales is recognized when the
product has been shipped and collectibility is reasonably
assured. Revenue recognized from these sales is net of
applicable provisions for refunds, discounts and allowances.
Engineering services sales are recognized upon the service
having been provided.
Revenue from software sales is recognized when the product
has been delivered. Revenue from multiple element contracts
(hardware, software and engineering) is allocated to the
various elements based on fair value. If objective evidence
of fair value is not available, revenue from these contracts
is deferred until the earlier of when objective evidence of
fair value does exist or all elements of the contract have
been delivered. Discounts will be applied to each element on
a proportionate basis. No portion of the revenue will be
recognized if the portion of the revenue allocable to
delivered elements is subject to forfeiture, refund or other
concession.
Research and development costs are expensed as incurred.
Advertising costs are expensed when incurred. Advertising
expense for the years ended December 31, 2001 and 2000 was
approximately $16,000 and $97,000, respectively.
Income taxes are accounted for under the liability method.
Under this method, deferred tax assets and liabilities are
recorded based on the temporary differences between the
financial statement and the tax bases of assets and
liabilities and for operating loss carryforwards measured
using the enacted tax rates in effect for the year in which
the differences are expected to reverse. The Company
periodically evaluates the realizability of its net deferred
tax assets and records a valuation allowance if, based on
the weight of available evidence, it is more likely than not
that some or all of the deferred tax assets will not be
realized.
The assets and liabilities of the Company's foreign
subsidiaries are translated into U.S. dollars at current
exchange rates, and revenue and expenses are translated at
average rates of exchange prevailing during the period. The
aggregate effect of translation adjustments is immaterial at
December 31, 2002 and 2001.
F-10
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic loss per common share ("EPS") is computed as net loss
divided by the weighted-average number of common shares
outstanding during the period. Diluted EPS includes the
impact of common stock potentially issuable upon the
exercise of options and warrants. Potential common stock has
been excluded from the computation of diluted net loss per
share as their inclusion would be antidilutive.
The Company has elected to apply APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB Opinion No.
25"), and related interpretations in accounting for its
stock options and has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards ("SFAS") No.
123, Accounting for Stock-Based Compensation. If the Company
had elected to recognize compensation cost based on the fair
value of the options granted at the grant date as prescribed
by SFAS No. 123, the Company's net loss and net loss per
common share for the years ended December 31, 2002, 2001 and
2000 would have been as follows:
Year ended December 31, 2002 2001 2000
- ----------------------- ------------ ------------ ------------
Net loss:
As reported . . . . . . . . . . $(2,113,138) $(3,760,821) $(4,661,652)
============ ============ ============
Add: Stock-based compen-
sation expense included in
reported net loss. . . . . . . . 38,154 - -
------------ ------------ ------------
Deduct: Total stock-based
compensation expense
determined under fair value
based method for all awards. . . . (378,338) (75,000) (4,763,418)
------------ ------------ ------------
Pro forma . . . . . . . . . . . $(2,453,322) $(3,835,821) $(9,425,070)
============ ============ ============
Loss per common share -
basic and diluted:
As reported . . . . . . . . . . . $ (0.02) $ (0.04) $ (0.06)
============ ============ ============
Pro forma . . . . . . . . . . . . $ (0.03) $ (0.05) $ (0.12)
============ ============ ============
The fair value of each option grant was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
Year ended December 31, . . . 2002 2001 2000
- ----------------------- ------------ ------------ ------------
Expected dividend yield . . . . . - 0 - - 0 - - 0 -
Risk-free interest rate . . . . . 3.03% 4.80% 6.37%
Volatility. . . . . . . . . . . . 1.37% 1.43% 1.43%
Expected life (years) . . . . . . 2 2 2
------------ ------------ ------------
F-11
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management does not believe that any recently issued, but
not yet effective, accounting standards if currently adopted
would have a material effect on the accompanying financial
statements.
3. MAJOR During the year ended December 31, 2002, three customers
CUSTOMERS: accounted for approximately 36%, 32% and 12% of total
revenue. During the year ended December 31, 2001, one
customer accounted for approximately 61% of total revenue.
During the year ended December 31, 2000, three customers
accounted for approximately 26%, 44% and 12% of total
revenue.
4. MARKETABLE
SECURITIES: Marketable securities consist of the following:
December 31, 2001
- ------------------------------------- ---------
Available-for-sale equity securities:
Cost. . . . . . . . . . . . . . . . $129,103
Unrealized loss . . . . . . . . . . (86,487)
---------
$ 42,616
=========
The investments in marketable securities were with companies
that have a board member who is a board member of the
Company.
Included in other in the accompanying consolidated statement
of operations for the year ended December 31, 2002 is a loss
of $93,319 on the disposition of the securities.
5. PREPAID Prepaid expenses and other current assets consist of the
EXPENSES AND following:
OTHER CURRENT
ASSETS:
December 31, 2002 2001
- ---------------------------------------------- ------- -------
Refundable security deposits . . . . . . . . . $ 5,398 $ -0-
Other (none in excess of 5% of current assets) 5,175 21,613
------- -------
$10,573 $21,613
======= =======
F-12
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY AND Property and equipment, at cost, consists of the following:
EQUIPMENT:
Estimated
December 31, 2002 2001 Useful Life
Office equipment. . . . . . . $ 16,069 $ 139,200 5 years
Computer equipment. . . . . . 195,245 1,504,771 3 years
Leasehold improvements. . . . - 29,383 5 years
-------- ---------- -----------
211,314 1,673,354
Less accumulated depreciation - 573,015
-------- ----------
$211,314 $1,100,339
======== ==========
Depreciation and amortization expense amounted to $435,193,
$383,940 and $219,740 for the years ended December 31, 2002,
2001 and 2000, respectively.
During the year ended December 31, 2002, the Company
recorded impairment losses of approximately $454,000 (see
Note 13).
As the result of the Company's inability to raise revenue in
accordance with the corporate business plan, the Company
continued operating at a loss for the year ended December
31, 2002. As a result, the Company commenced an impairment
review of its long-lived assets in accordance with SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived
Assets. As a result of this impairment review, the Company
recorded impairment losses of approximately $453,000 to
reduce the carrying value of these assets to its estimated
fair value. Approximately $350,000 was recorded during the
third quarter and approximately $103,000 was recorded during
the fourth quarter.
At December 31, 2002, as a result of the Company recording
an impairment loss, the cost of the property and equipment
has been adjusted to reflect the new carrying amount. This
new cost will be depreciated over the remaining useful lives
of the assets.
F-13
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. OTHER Other assets consist of the following amortized intangible
ASSETS: assets:
Gross
Carrying Accumulated
Amount Amortization
Patents. . . . . . . . . . . . . $ 56,488 $ (11,339)
========= ==============
AGGREGATE AMORTIZATION EXPENSE:
- --------------------------------
For year ended December 31, 2002 $ 3,323
ESTIMATED AMORTIZATION EXPENSE:
- --------------------------------
For year ended December 31,
- --------------------------------
2003 $ 3,323
2004 3,323
2005 3,323
2006 3,323
2007 3,323
8. ACCOUNTS Accounts payable and accrued expenses consist of the
PAYABLE AND following:
ACCRUED
EXPENSES:
December 31, 2002 2001
Accounts payable . . . . . . . . . . . . . . $ 260,454 $189,702
Accrued professional fees. . . . . . . . . . 93,062 77,164
Accrued payroll and related tax withholdings 564,413 455,374
Amounts due for purchased computer equipment 164,570 226,177
---------- --------
$1,082,499 $948,417
========== ========
9. COMMITMENTS The Company leases its office space under a noncancelable
AND operating lease expiring in November 2003. The minimum
CONTINGENCIES: rental commitment of this lease is approximately $14,000.
Rent expense amounted to $56,535, $79,481 and $73,521 for
the years ended December 31, 2002, 2001 and 2000,
respectively.
The Company is party to a default judgment entered against
one of the Company's subsidiaries. During the year ended
December 31, 1995, a claim was made to the Company for the
total amount payable under the terms of the lease with one
of the Company's subsidiaries for office space in Dallas,
Texas through 2002. The Company's management is of the
opinion that the amount payable under the terms of this
judgment is not estimable or determinable at this time and
may be substantially mitigated by the landlords renting the
property to another party. The range of possible loss is
from $-0- to approximately $500,000. Any settlement
resulting from the resolution of this contingency will be
accounted for in the period of settlement when such amounts
are estimable or determinable.
F-14
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' On April 10, 2000, the Company issued 190,000 units to
EQUITY: officers of the Company at $4.00 per unit. Each unit
consisted of one share of common stock and one warrant to
purchase an additional share of common stock at $4.00 per
share.
On July 20, 2000, the Company issued 430,301 units to
investors at $1.50 per unit. Each unit consisted of one
share of common stock and one warrant to purchase an
additional share of common stock at $1.50 per share.
On July 20, 2000, the Company issued 569,699 units to
employees at $1.50 per unit. Each unit consisted of one
share of common stock and one warrant to purchase an
additional share of common stock at $1.50 per share. The
Company charged operations for approximately $712,000
representing the differential between the fair value and the
purchase price of the common stock and for approximately
$712,000 representing the differential between the fair
value of the underlying common stock and the exercise price
of the warrants.
From January 1, 2000 to December 31, 2000, the Company
issued 2,383,000 shares of common stock upon the exercising
of options with exercise prices ranging from $.06 to $1.00
per common share.
From January 1, 2000 to December 31, 2000, the Company
issued 5,145,000 shares of common stock upon the exercising
of warrants with exercise prices ranging from $.06 to $.49
per common share.
On March 12, 2001, the Company issued 1,585,000 units to
investors at $.54 per unit. Each unit consisted of one share
of common stock and one warrant to purchase an additional
share of common stock at $.66 per share.
On March 12, 2001, the Company issued 915,000 units to
employees at $.54 per unit. Each unit consisted of one share
of common stock and one warrant to purchase an additional
share of common stock at $.66 per share. The Company charged
operations for approximately $294,000 representing the
differential between the fair value and the purchase price
of the common stock and for approximately $168,000
representing the differential between the fair value of the
underlying common stock and the exercise price of the
warrants.
On September 28, 2001, the Company issued 3,512,500 units to
investors at $.27 per unit. Each unit consisted of one share
of common stock and one warrant to purchase an additional
share of common stock at $.35 per share.
On September 28, 2001, the Company issued 487,500 units to
employees at $.27 per unit. Each unit consisted of one share
of common stock and one warrant to purchase an additional
share of common stock at $.35 per share. The Company charged
operations for approximately $10,000 representing the
differential between the fair value and the purchase price
of the common stock.
On December 31, 2001, the Company issued 2,782,500 units to
investors at $.20 per unit. Each unit consisted of one share
of common stock and one warrant to purchase an additional
share of common stock at $.26 per share.
F-15
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 31, 2001, the Company issued 517,500 units to
employees at $.20 per unit. Each unit consisted of one share
of common stock and one warrant to purchase an additional
share of common stock at $.26 per share. The Company charged
operations for approximately $10,000 representing the
differential between the fair value and the purchase price
of the common stock.
From January 1, 2001 to December 31, 2001, the Company
issued 245,000 shares of common stock upon the exercising of
warrants with exercise prices ranging from $.12 to $.49 per
common share.
On June 28, 2002, the Company issued 7,085,000 units to
investors at $.07 per unit. Each unit consisted of one share
of common stock and one warrant to purchase an additional
share of common stock at $.085 per share.
On June 28, 2002, the Company issued 2,915,000 units to
employees at $.07 per unit. Each unit consisted of one share
of common stock and one warrant to purchase an additional
share of common stock at $.085 per share.
On December 31, 2002, the Company issued 1,275,000 units to
investors at $.064 per unit. Each unit consisted of one
share of common stock and one warrant to purchase an
additional share of common stock at $.064 per share.
On December 31, 2002, the Company issued 725,000 units to
employees at $.064 per unit. Each unit consisted of one
share of common stock and one warrant to purchase an
additional share of common stock at $.064 per share.
11. STOCK OPTIONS The Company has a stock option plan under which options to
AND STOCK purchase shares of common stock may be granted to certain
WARRANTS: officers, directors and service providers.
In June 2001, the Company adopted a new Stock Option Plan
(the "2001 Plan"). The 2001 Plan authorizes the issuance of
up to 8,400,000 of the Company's common shares, subject to
adjustment under certain circumstances. The Company is
listed on the Canadian Venture Exchange ("CDNX") and is
subject to a limitation on the number of options a company
may have. The 2001 Plan provides for the issuance of both
incentive stock options and nonqualified options as those
terms are defined in the Internal Revenue Code of 1986, as
amended (the "Code"). The Company's previous option plan
will remain in effect until all granted stock options are
exercised, expired or canceled.
F-16
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's options and changes
during the years is presented below:
Year ended December 31, 2002 2001 2000
Weighted- Weighted- Weighted-
average average average
Number Exercise Number Exercise Number of Exercise
of Shares Price of Shares Price of Shares Price
Outstanding at
beginning of year . . . 3,560,000 $ 2.18 6,957,000 $ 0.69 6,329,000 $ 0.81
Granted. . . . . . . . . 5,605,000 $ 0.50 250,000 $ 1.00 4,360,000 $ 2.27
Exercised. . . . . . . . -0- $ 0.00 -0- $ 0.00 (2,383,000) $ 0.25
Canceled/expired . . . . (9,140,000) $ 1.15 (3,647,000) $ 1.11 (1,349,000) $ 2.13
----------- ---------- ----------- ---------- ------------ ------------
OUTSTANDING AT
END OF YEAR. . . . . 25,000 $ 0.50 3,560,000 $ 2.18 6,957,000 $ 0.69
=========== ========== =========== ========== ============ ============
Options exercisable
at year-end . . . . . . 25,000 3,560,000 6,957,000
=========== =========== ============
Weighted-average fair
value of options
granted during the
Year $ 0.17 $ 0.75 $ 1.05
========== ========== ============
In October and December 2002, the Company cancelled
substantially all the outstanding options.
The following table summarizes information about fixed stock
options outstanding at December 31, 2002:
Options Outstanding Options Exercisable
-------------------- ---------------------
Weighted-
average Weighted- Weighted
Remaining average average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
$0.50. . . . . 25,000 1.1 years $ 0.50 25,000 $ 0.50
================ =========== =========== ========== =========== =========
In January 2002, the Company issued 925,000 options to
nonemployee consultants, having a fair value of
approximately $153,000, determined using the Black-Scholes
option pricing model. The options were subsequently
cancelled. The fair value of the options which vested,
amounting to approximately $38,000, was recorded as
compensation expense.
F-17
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants to purchase shares of common stock are as follows:
Year ended December 31, 2002 2001 2000
Range Range Range
Number of Number of Number of
of Exercise of Exercise of Exercise
Warrants Price Warrants Price Warrants Price
Outstanding at
beginning of year. . . 10,990,000 $ 0.26 - $4.00 2,295,000 $0.13 - $4.00 6,250,000 $0.07 - $1.10
Issued. . . . . . . . . 12,000,000 $0.064 - $0.085 9,800,000 $0.26 - $0.80 1,190,000 $1.50 - $4.00
Exercised . . . . . . . -0- $ 0.00 (245,000) $ 0.30 (5,145,000) $0.07 - $1.28
Expired . . . . . . . . (1,190,000) $ 1.50 - $4.00 (860,000) $ 0.58-$1.10 -0- $ 0.00
OUTSTANDING AT
END OF YEAR . . 21,800,000 $ 0.064- $0.80 10,990,000 $0.26 - $4.00 2,295,000 $0.13 - $4.00
=========== =============== =========== ============= =========== =============
12. INCOME As of December 31, 2002, the Company had deferred tax assets
TAXES: resulting primarily from net operating loss carryforwards of
approximately $23,000,000, which are available to offset
future taxable income, if any, through 2022. As utilization
of the net operating loss carryforwards is not assured, a
100% valuation allowance has been provided.
The components of the net deferred tax assets are as
follows:
December 31, 2002 2001
Deferred tax assets:
Net operating loss carryforwards . . . . $ 7,916,000 $ 7,211,000
Allowance for doubtful accounts. . . . . 34,000 34,000
Unrealized gains (losses) on investments - (30,000)
Valuation allowance. . . . . . . . . . . (7,950,000) (7,215,000)
------------ ------------
NET DEFERRED TAX ASSETS. . . . . . $ - 0 - $ - 0 -
============ ============
The reconciliation of the effective income tax rate to the
federal statutory rate is as follows:
Year ended December 31, 2002 2001
Federal statutory tax rate . . . . . 34 % 34 %
Valuation allowance on net operating
Carryforwards . . . . . . . . . . . (34) (34)
------ ------
EFFECTIVE INCOME TAX RATE. . - 0 -% - 0 -%
====== ======
F-18
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTY Due to related parties at December 31, 2002 and 2001 of
TRANSACTIONS: $53,180 and $91,480, respectively, primarily consist of
advances made from officers of the Company that accrue
interest at 1.25% per month and amounts due to directors for
services which are noninterest-bearing and are due on
demand. The estimated fair value of the amounts payable
approximates the carrying amount based on rates available
for similar loans.
Included in selling, general and administrative expenses for
the year ended December 31, 2000 was $37,758 of expenses
incurred consisting primarily of product marketing expenses,
office expenses and professional services provided to the
Company by entities owned or controlled by officers and
directors of the Company.
14. VALUATION AND
QUALIFYING
ACCOUNTS:
Allowance for
Doubtful Accounts
Balance at December 31, 2000 $ 7,000
Additions. . . . . . . . . . -
Deductions . . . . . . . . . 7,000
------------------
Balance at December 31, 2001 -
Additions. . . . . . . . . . -
Deductions . . . . . . . . . -
------------------
Balance at December 31, 2002 $ - 0 -
==================
15. QUARTERLY The following table summarizes selected quarterly data for
FINANCIAL the years ended December 31, 2002 and 2001:
INFORMATION
(UNAUDITED):
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
2002:
- -----
Revenue. . . . $ 26,253 $ 63,323 $ 57,125 $ 10,275 $ 156,976
Expenses . . . (703,100) (534,815) (703,007) (255,904) (2,196,826)
Net loss . . . (676,780) (564,757) (641,336) (230,265) (2,113,138)
Net loss per
common share:
Basic and
diluted . . $ (0.01) $ (0.01) $ (0.01) $ (0.00) $ (0.02)
---------- ---------- ---------- ---------- ------------
(continued)
F-19
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Second Third Forth
Quarter Quarter Quarter Quarter
2001:
- -------
Revenue. . . . $ 1,060 $ 33,175 $ 67,626 $ 22,145 $ 124,006
Expenses . . . (1,304,608) (954,137) (823,380) (810,720) (3,892,845)
Net loss . . . (1,298,068) (919,808) (753,999) (788,946) (3,760,821)
------------ ---------- ---------- ---------- ------------
Net loss per
common share:
Basic and
diluted . . $ (0.02) $ (0.01) $ (0.01) $ (0.01) $ (0.04)
------------ ---------- ---------- ---------- ------------
16. SUBSEQUENT In February 2003, the Company issued 2,200,000 units to
EVENTS: investors at $.0657 per unit. Each unit consisted of one
share of common stock and one warrant to purchase an
additional share of common stock at $.0657 per share.
In February 2003, the Company issued 550,000 units to
employees at $.0657 per unit. Each unit consisted of one
share of common stock and one warrant to purchase an
additional share of common stock at $.0657 per share.