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
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
- - 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,
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.
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.
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.
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.
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.
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
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,
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
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.
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
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
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.
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 $1,780.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
USA Video is not a party to any material pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is a limited public market for the common shares of the Company. The common shares trade on the TSX Venture Exchange, Inc. formerly Canada Venture Exchange (under the symbol "US"), and on the NASD OTC Bulletin Board (under the symbol "USVO").
The following table shows the high and low sales prices (in Canadian dollars) of the common shares as reported by the TSX Venture Exchange, Inc. formerly the Canadian Venture Exchange (the "TSX") , for the periods indicated.
TSX Venture Exchange (Symbol "US")
Quarter High Low - ------- ---- --- ($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.
ITEM 6.
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."
ITEM 7.
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
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
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
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.
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.
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 through of this Report and are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10.
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:
(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.
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.
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.
(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
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.
(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
(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.
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.
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.
(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.
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
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.
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.
(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
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
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
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
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
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------
INDEPENDENT AUDITOR'S REPORT
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets Statements of Operations Statements of Comprehensive Operations Statements of Stockholders' Equity (Deficiency) Statements of Cash Flows Notes to Consolidated Financial Statements -
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
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes and independent auditor's report should be read in conjunction with the consolidated financial statements.
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes and independent auditor's report should be read in conjunction with the consolidated financial statements.
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
The accompanying notes and independent auditor's report should be read in conjunction with the consolidated financial statements.
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
The accompanying notes and independent auditor's report should be read in conjunction with the consolidated financial statements.
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes and independent auditor's report should be read in conjunction with the consolidated financial statements.
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.
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.
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:
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:
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:
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY AND Property and equipment, at cost, consists of the following: EQUIPMENT:
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.
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. OTHER Other assets consist of the following amortized intangible ASSETS: assets:
8. ACCOUNTS Accounts payable and accrued expenses consist of the PAYABLE AND following: ACCRUED EXPENSES:
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.
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.
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.
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:
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:
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.
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants to purchase shares of common stock are as follows:
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:
The reconciliation of the effective income tax rate to the federal statutory rate is as follows:
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:
15. QUARTERLY The following table summarizes selected quarterly data for FINANCIAL the years ended December 31, 2002 and 2001: INFORMATION (UNAUDITED):
(continued)
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.