-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CvriqCZvAg0tPNgi7O+f6lF+e2s47o53WQ89fp8LnKVL/4Fz/GDunIcKmUgi+ByM V1D/mxdkIqUZBDARCxfU8Q== 0001163238-02-000081.txt : 20021114 0001163238-02-000081.hdr.sgml : 20021114 20021114134227 ACCESSION NUMBER: 0001163238-02-000081 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USA VIDEO INTERACTIVE CORP CENTRAL INDEX KEY: 0001107280 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 954370725 STATE OF INCORPORATION: WY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29651 FILM NUMBER: 02823834 BUSINESS ADDRESS: STREET 1: 837 WEST HASTINGS STREET #507 STREET 2: VANCOUVER BRITISH COLUMBIA CANADA V6C 3 BUSINESS PHONE: 6046851017 MAIL ADDRESS: STREET 1: 837 WEST HASTINGS STREET #507 STREET 2: VANCOUVER BRITISH COLUMBIA CANADA V6C 3 10-Q 1 doc1.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 Commission file number: 0-29651 USA VIDEO INTERACTIVE CORP. (Exact name of registrant as specified in its charter) WYOMING 06-1576391 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 70 Essex Street, Mystic, Connecticut 06355 (Address of principal executive offices) (ZIP code) 1-800-321-8564 (Registrant's Telephone Number, including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| At October 14, 2002, there were 101,745,089 shares of the registrant's common stock outstanding. PART I. FINANCIAL INFORMATION Item 1. Financial Statements 2 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT Certain statements contained in this Quarterly Report on Form 10-Q ("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 and uncertainties set forth in USA Video Interactive Corp.'s Annual Report on Form 10-K, the most important of which are summarized below under Factors Which May Affect Future Results of Operations, as well as in other documents USA Video files with the Securities and Exchange Commission ("SEC"). The following information has not been audited. You should read this information in conjunction with the unaudited financial statements and related notes to financial statements included in this report. OVERVIEW OF THE COMPANY 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. USVO holds the patent for Store-and-Forward Video-on-Demand (#5,130,792), filed in 1990 and issued by the United States Patent and Trademark Office on July 14, 1992. It has been cited by at least 145 subsequent patents. USVO holds similar patents in England, France, Spain, Italy, Germany, and Canada, and has a patent pending in Japan. USVO anticipates actively engaging in licensing this patent. MARKETS AND PRODUCTS: As an outgrowth of its video streaming systems business and specialized engineering services, USVO has identified emerging markets for global media streaming applications and has developed a unique solution to provide a wide range of business customers with value-added streaming media solutions. With this approach, called StreamHQ , customers can leverage USVO's infrastructure and technical expertise, while focusing on their own core business competencies. StreamHQ facilitates the transmission of digitized and compressed video to the user's desktop via multiple streaming modes that take advantage of the available connectivity. While competitive services take a "one-size-fits-all" streaming approach, StreamHQ brings unique value propositions to individual vertical markets with functionality designed specifically for those markets. Beyond quality streaming, USVO's overriding goal has been to give customers media asset management tools and information that provide a basis for them to achieve a return on investment in streaming media expenditures. StreamHQ encompasses an end-to-end process from source to viewing, including content encoding, asset management and protection, media and application hosting, multi-mode content distribution, and transaction data capture and reporting. TECHNOLOGY APPROACH: USVO is approaching the global media streaming services market with a Tier 1 media-streaming infrastructure that the Company has attempted to differentiate from competitive products and services in terms of architectural, functional, and business features. Leveraging some of the industry's most prominent providers for data storage, networking, and data management, StreamHQ strives to compete based on service availability, an efficient streaming process, redundancy and fail-over features, and continuity in the event of power outages. 3 USVO has created a modular system that can be scaled to meet the requirements of a growing clientele. StreamHQ can also be rapidly replicated to provide a streaming utility in multiple Internet Data Centers or within corporate Intranets around the world. StreamHQ functionality is software driven, allowing USVO to create future system enhancements based on the needs of the marketplace. Additionally, USVO can customize the baseline features of StreamHQ and plans to expand the system features to support the specialized needs of additional types of customers. RESEARCH AND DEVELOPMENT: USVO has ongoing research and development (R&D) efforts that are aimed at improving the efficiency and security of media delivery to clients. Among these R&D efforts is the ongoing development of technology that will help protect the intellectual property of content owners. USVO also has a proprietary wavelet compression technology. BUSINESS OBJECTIVES: USVO has established the following near-term business objectives: 1. Establish StreamHQ as the industry standard in the streaming video and rich media marketplace; 2. Generate services- and systems-based revenues in accordance with the corporate business plan; 3. Attain industry recognition for the superior architectural, functional, and business differentiators of the StreamHQ architecture; 4. Leverage USVO's digital video patent for licensing fees and partnerships in the United States and internationally; 5. Develop at least one client per year for a complete StreamHQ system, including intellectual property licensing and operational support; 6. Expand StreamHQ functionality to provide enhanced support for corporate training and education markets; and 7. Patent and license new technology developed within the corporate R&D program. MARKET PERSPECTIVE: With its StreamHQ offering, USVO's goals are: 1) to become a market-leading streaming media solutions provider; 2) to establish itself as a leader in streaming technology innovation; 3) to capture revenue and market share from services and products in web and content delivery systems markets. Numerous published reports estimate the current value of these markets as in excess of 20 billion dollars. As a secondary objective, USVO intends to leverage its broad video-on-demand patent and other intellectual properties by licensing them to other companies. 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 to the State of Wyoming. The Company has five wholly-owned subsidiaries: USA Video (California) Corp., USA Video Corp., USA Video Productions Inc., USA Video Technologies, Inc., and USVO, Inc. USA Video's executive and corporate offices are located in Mystic, Connecticut, and its Canadian offices are located in Vancouver, British Columbia. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us 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, we evaluate 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. We base our 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. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and the require the most subjective judgment: 4 - - Revenue recognition; - - Accounting for marketable securities; - - Impairment or disposal of long-lived assets; and - - Inventory valuation and related reserves. 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. We classify our investments in marketable securities as "available for sale." We carry 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 our marketable securities in our 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. We use a standard cost system for purposes of determining cost; the standards are adjusted as necessary to ensure they approximate actual costs. We write down or reserve for estimated obsolete or excess inventory based upon assumptions about future demand and market conditions. We compare current inventory levels on a product basis to our current sales forecast in order to assess our inventory reserve balance. Our sales forecasts are based on economic conditions and trends (both current and projected), anticipated customer demand and acceptance of our 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. RESULTS OF OPERATIONS Sales Sales for the nine-month period ended September 30, 2002 were $146,701, compared to revenue of $101,861 for the nine-month period ended September 30, 2001. Sales for the three-month period ended September 30, 2002 were $57,125 compared to $67,626 three-month period ended September 30, 2001. The increase in revenue for the nine month period ended September 30, 2002 is attributable to software engineering services and service maintenance contracts on previous installed systems. Starting in the fourth quarter of 2000 and continuing during the next 30 months, the Company concentrated its managerial and technical efforts on the remaining critical stages of developing and refining its new web and content delivery infrastructure (StreamHQ ). Services and/or systems based on this infrastructure are intended to become the Company's core business in place of its custom-built systems for video encoding, decoding and streaming, the market for which has diminished significantly in the last 21 to 24 months. The Company believes the market declined for a number reasons, the most important of which is that customers no longer can afford to invest in single-purpose hardware systems of this type. As a result, profit margins on the Company's media systems have continued to decline, and the Company has lowered prices in the face of declining demand. A change in focus was necessary to capture the market for a more diverse multi-purpose infrastructure. This change in focus required shifting technical and managerial resources from sales of the old line of products to systems/services offerings based on the new infrastructure. Additionally, the Company was required to make a significant investment in the computer hardware and development of the software functionality that are at the core of this infrastructure. Recently, due to the change in capital markets, funding for an internal sales and marketing team was unable to be maintained. Therefore, the Company has focused on partnering relationships with other companies to complete the execution of it StreamHQ -based business plan. 5 Cost of Sales The cost of sales for the nine months ended September 30, 2002 was $96,205, as compared to $56,602 for the comparable period of 2001. For the three-month period ended September 30, 2002, the cost of sales was $38,663 as compared to $36,036 for the comparable period 2001. The increase in cost of sales is directly attributable to the increase in sales. Selling, General and Administrative Expenses Selling, General and Administrative expenses consisted of product marketing expenses, consulting fees, office, professional fees and other expenses to execute the business plan and for day-to-day operations of the Company. Due to market conditions, Management has implemented consolidation procedures to reduce the daily cost of Selling, General and Administrative expenses. Selling, General and Administrative expenses for the three months ended September 30, 2002 decreased $315,869 to $124,385 from $440,254 for the three months ended September 30, 2001. For the nine months ended September 30, 2002 these costs decreased by $725,934 to $775,316 from $1,501,250 for the comparable period. The reduction was due to consolidation efforts of management. Professional expense for the three months ended September 30, 2002, decreased to $8,414 from $38,161 for the comparable period of 2001. For the nine months ended September 30, 2002 these costs decreased to $80,218 from $213,295 for the comparable period. The Company utilized its staff to perform tasks previously outsourced. Product marketing expenses for the three months ended September 30, 2002, decreased to $6,199 from $175,366 for the comparable period of 2001. For the nine months ended September 30, 2002 these costs decreased to $99,336 from $489,458 for the comparable period. The reduction was due to consolidation efforts of management. Administrative/Office expenses for the three months ended September 30, 2002, decreased to $34,499 from $162,027 for the comparable period of 2001. For the nine months ended September 30, 2002 these costs decreased to $219,918 from $351,405 for the comparable period. The reduction was due to consolidation efforts of management. The Company has arranged for additional staff/consultants to engaged in marketing activities in an effort 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. Other components of Selling, General and Administrative expense did not change significantly. Research and Development Expenses Research and development expenses consisted primarily of compensation, hardware, software, licensing fees, and new product applications for the Company's proprietary StreamHQ . Research and development expenses decreased by 59% to $273,839 for the nine months ended September 30, 2002, from $672,304 for the comparable period in 2001 and by 84% to $38,258 for the three months ended September 30, 2002 from $232,695 for the comparable period in 2001. The reduction was due to consolidation efforts of management. As the Company consolidates its business, its product development, product marketing, and other general and administrative expenses will continue to decrease. Non-Cash Compensation Charges Non-cash compensation charges for the nine months ended September 30, 2002 reflected charges in the first quarter of 2002 of $12,718, the second quarter of 2002 of $19,077 and the third quarter of 2002 of $19,077 was due to the amortization of a portion of the options issued to consultants. In July 2002, $38,154 was vested. Non-cash compensation charges for the nine months ended September 30, 2001 reflected charges in the third and first quarter of 2001 of $575,347. Of this amount, $9,750 and $462,097, respectively, was due to the issuance of common shares and common share warrants to the Company's officers, directors and employees at a price or exercise price below the market price of the common shares at the time of issuance. Because the rules of the TSX Venture Exchange require that the offering price for privately placed securities of listed companies be set when the offering is first announced, rather than upon closing, and the market price of the common shares increased between announcement of the offering and closing, the sale price of the common shares and the exercise price of the warrants were below the market price of the common 6 shares on the date of issuance. In addition, the Company issued options to purchase 150,000 common shares to consultants, resulting in a $97,500 charge. The Company also incurred a charge of $6,000 for the issuance of employee stock options. Other Expense The Company sold the stock of related registered companies for the nine months ended September 30, 2002 for a loss of $93,319. As of December 31, 2001, the Company reported change in unrealized loss on investments for $86,487. Impairment Loss on Long-Lived Assets As 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 nine month period ended September 30, 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 an result of this impairment review, the Company recorded an impairment loss of approximately $350,000 during the three month period ended September 30, 2002, to reduce the carrying value of these assets to its estimated fair value. Net Losses To date, the Company has not achieved profitability and, in fact, expects to incur substantial net losses for at least the remainder of 2002. The Company's net loss for the nine months ended September 30, 2002 was $1,882,873 as compared with a net loss of $2,971,875 for the nine months ended September 30, 2001 and for the three months ended September 30, 2002 was $641,336 as compared to $753,999 for the comparable period. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2002, the Company had a cash position of $53,652, compared to $104,238 at December 31, 2001. The Company will require additional financing to fund current operations through the remained of 2002. The Company has historically satisfied its capital needs primarily by issuing equity securities. The Company will require an additional $1.5 million to $2.0 million to finance operations through fiscal 2003 and intends to seek such financing through sales of its equity securities. Assuming the aforementioned $1.5 million to $2.0 million in financing is obtained, the Company believes that 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 $1.5 million to $2.0 million through fiscal 2003. 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. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS Certain risks and uncertainties could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Report. Risks and uncertainties have been set forth in the Company's Annual Report on Form 10-K, as well as in other documents the Company files with the SEC. These risk factors include the following: THE COMPANY'S LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE ITS BUSINESS AND PROSPECTS. The Company'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. IF THE COMPANY IS UNABLE TO OBTAIN SUBSTANTIAL ADDITIONAL FINANCING IN THE NEXT FEW MONTHS IT MAY NOT BE ABLE TO MAINTAIN OPERATIONS AT CURRENT LEVELS. The Company requires substantial additional financing to maintain operations at current levels beyond the second quarter of 2002. 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 7 of future opportunities or respond to competitive pressures, or ultimately, to continue in business. CONTINUATION OF THE CURRENT SLUMP IN THE TECHNOLOGY SECTOR WILL ADVERSELY AFFECT DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES. The Company's sales have been adversely affected by the ongoing slump in the technology industry segment and the continuation of these market conditions can be expected to result in depressed demand for the Company's products and services. 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. Factors that could cause such fluctuations include the Company's 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 potential U.S. and foreign regulation of the Internet. THE COMPANY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, WHICH COULD RENDER THE COMPANY'S PRODUCTS AND SERVICES OBSOLETE. 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. IF THE COMPANY DOES NOT CONTINUOUSLY IMPROVE ITS TECHNOLOGY IN A TIMELY MANNER, ITS PRODUCTS COULD BE RENDERED OBSOLETE. 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 develop or adapt products and services or to acquire new products and services that can compete successfully. There can be no assurance that the Company will be successful in these efforts. THE COMPANY INTENDS TO ISSUE ADDITIONAL EQUITY SECURITIES, WHICH MAY DILUTE THE INTERESTS OF CURRENT SHAREHOLDERS OR CARRY RIGHTS OR PREFERENCES SENIOR TO THE COMMON SHARES. 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company believes its exposure to overall foreign currency risk is not material. The Company 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. The Company reports its operations in US dollars and its currency exposure, although considered by the Company 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 the Company will be denominated in US dollars. As the Company increases its marketing efforts, the related expenses will be primarily in US dollars. In addition, 90% of the Company's bank deposits are in US dollars. Item 4. Controls and Procedures Based on their evaluation of the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report, the undersigned officers of the Company have concluded that such disclosure controls and procedures are adequate. There were no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses, subsequent to the 8 date of the most recent evaluation by the undersigned officers of the Company of the design and operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is not a party to any other material pending legal proceedings. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit(s) 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. (b) Reports on Form 8-K (i) On September 27, 2002, the Registrant announced that four employees of its wholly owned subsidiary USVO Inc. have filed a complaint with the Connecticut Department of Labor with respect to outstanding wages. The Registrant has been in contact with the Connecticut Department of Labor. The Registrant intends to satisfy this obligation forthwith. (ii) Amendment - On September 27, 2002, the Registrant announced that four employees of its wholly owned subsidiary USVO Inc. have filed a complaint with the Connecticut Department of Labor with respect to outstanding wages. The Registrant has been in contact with the Connecticut Department of Labor and intends to satisfy this obligation forthwith. SIGNATURE Pursuant to the requirements 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. Dated: November 14, 2002 By: /s/ Anton J. Drescher -------------------------------- Name: Anton J. Drescher Title: Chief Financial Officer 9 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: November 14, 2002 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: November 14, 2002 CERTIFICATIONS I, Edwin Molina, certify that: 1. I have reviewed this quarterly report on Form 10-Q of USA Video Interactive Corp; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 10 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 quarterly 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: November 14, 2002 I, Anton J. Drescher, certify that: 1. I have reviewed this quarterly report on Form 10-Q of USA Video Interactive Corp; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) presented in this quarterly 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 quarterly 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: November 14, 2002 F1 USA VIDEO INTERACTIVE CORP. CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) (STATED IN US DOLLARS) -------------------- F2 USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (STATED IN US DOLLARS)
SEPTEMBER 30, DECEMBER 31, 2002 2001 --------------- -------------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 53,652 $ 104,238 Marketable securities - related parties. . . . . . . . . . . . . . . . . - 42,616 Accounts receivable, net of allowance for doubtful accounts $-0- . . . . 1,400 30,900 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12,000 Prepaid expenses and other current assets. . . . . . . . . . . . . . . . 10,805 21,613 --------------- -------------- TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,857 211,367 Property and Equipment - at cost, net of accumulated depreciation of $505,529 and $573,015, respectively. . . . . . . . . . . . 354,957 1,100,339 Other Assets, net of accumulated amortization of $10,508 and $8,016, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . 67,980 70,472 Deferred Tax Assets, net of valuation allowance of $7,749,000 and $7,215,000, respectively . . . . . . . . . . . . . . . . - - --------------- -------------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 488,794 $ 1,382,178 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current Liabilities: Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . $ 1,149,739 $ 948,417 Due to related parties . . . . . . . . . . . . . . . . . . . . . . . . . 55,006 91,480 --------------- -------------- TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . 1,204,745 1,039,897 --------------- -------------- Commitments and Contingencies Stockholders' Equity (Deficiency): Preferred stock - no par value; authorized 250,000,000 shares, none issued Common stock - no par value; authorized 250,000,000 shares, issued and outstanding 101,745,088 and 91,745,088 shares, respectively. 30,230,225 29,492,071 Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . - (86,487) Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (30,946,176) (29,063,303) --------------- -------------- STOCKHOLDERS' EQUITY (DEFICIENCY). . . . . . . . . . . . . . . . . . (715,951) 342,281 --------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY). . . . . . . $ 488,794 $ 1,382,178 =============== ==============
SEE ACCOMPANYING NOTES F3 USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (STATED IN US DOLLARS) (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2002 2001 --------------- --------------- --------------- --------------- Revenue . . . . . . . . . . . . . . . . . . . $ 57,125 $ 67,626 $ 146,701 $ 101,861 --------------- --------------- --------------- --------------- Expenses: Cost of sales . . . . . . . . . . . . 38,663 36,036 96,205 56,602 Research and development. . . . . . . 38,258 232,695 273,839 672,304 Selling, general and administrative . 124,385 440,254 775,316 1,501,250 Depreciation and amortization . . . . 132,624 104,645 397,874 276,622 Impairment loss on long-lived assets. 350,000 - 350,000 - Noncash compensation charges. . . . . 19,077 9,750 50,872 575,347 --------------- --------------- --------------- --------------- Total expenses. . . . . . . . . . . . . . . . 703,007 823,380 1,944,106 3,082,125 --------------- --------------- --------------- --------------- Loss from operations. . . . . . . . . . . . . (645,882) (755,754) (1,797,405) (2,980,264) --------------- --------------- --------------- --------------- Other income (expense) Interest income. . . . . . . . . . 22 98 143 5,132 Other. . . . . . . . . . . . . . . 4,524 1,657 (85,611) 3,257 --------------- --------------- --------------- --------------- 4,546 1,755 (85,468) 8,389 --------------- --------------- --------------- --------------- Net loss. . . . . . . . . . . . . . . . . . . $ (641,336) $ (753,999) $ (1,882,873) $ (2,971,875) =============== =============== =============== =============== Net loss per share - basic and diluted. . . . $ (.01) $ (.01) $ (.02) $ (.04) =============== =============== =============== =============== Weighted-average number of common shares outstanding - basic and diluted . . . 101,745,089 84,533,997 95,224,942 83,719,069 =============== =============== =============== ===============
SEE ACCOMPANYING NOTES F4 USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (STATED IN US DOLLARS) (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2002 2001 --------------- --------------- --------------- --------------- Net loss . . . . . . . . . . . . . . . . . . $ (641,336) $ (753,999) $ (1,882,873) $ (2,971,875) Other comprehensive income: Change in unrealized loss on marketable securities - (20,535) 86,487 (118,331) --------------- --------------- --------------- --------------- Comprehensive loss . . . . . . . . . . . . . $ (641,336) $ (774,534) $ (1,796,386) $ (3,090,206) - =============== =============== =============== ===============
SEE ACCOMPANYING NOTES F5 USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (STATED IN US DOLLARS) (UNAUDITED)
COMMON STOCK ACCUMULATED OTHER COMPREHENSIVE ACCUMULATED STOCKHOLDERS' SHARES AMOUNT LOSS DEFICIT EQUITY (DEFICIENCY) Balance at December 31, 2001. . . . . . 91,745,088 $29,492,071 $ (86,487) $(29,063,303) $ 342,281 Issuance of common stock and common stock warrants for cash . . . . 10,000,000 700,000 - - 700,000 Noncash compensation charges. . . . . . - 38,154 - - 38,154 Change in unrealized loss on marketable securities. . . . . . . . . . . . . . - - 86,487 - 86,487 Net loss. . . . . . . . . . . . . . . . - - - (1,882,873) (1,882,873) ---------- ----------- -------------- -------------- --------------------- Balance at September 30, 2002 . . . . . 101,745,088 $30,230,225 $ - $(30,946,176) $ (715,951) =========== =========== =============== ============= =====================
SEE ACCOMPANYING NOTES F6
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (STATED IN US DOLLARS) (UNAUDITED) FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2002 2001 --------------- --------------- --------------- --------------- Cash flows from operating activities: Net loss. . . . . . . . . . . . . . . . . . . . . $ (641,336) $ (753,999) $ (1,882,873) $ (2,971,875) Adjustments to reconcile net loss to net cash used in operating activities: Bad debts . . . . . . . . . . . . . . . . . . . 17,753 - 17,753 - Depreciation and amortization . . . . . . . . . 132,625 104,645 397,874 276,622 Impairment loss on long-lived assets. . . . . . 350,000 - 350,000 - Noncash compensation charge . . . . . . . . . . 19,077 9,750 50,872 575,347 Realized loss on sale of marketable securities - related parties. . . . . . . . . . . . . . . - - 93,319 - Changes in operating assets and liabilities: Decrease in accounts receivable. . . . . . . 3,518 11,079 11,747 113,832 Decrease in inventory. . . . . . . . . . . . 36,322 - 12,000 - (Increase) decrease in prepaid expenses and other current assets. . . . . . . . . . . . 2,317 (19,189) 10,808 63,148 Increase (decrease) in accounts payable and accrued expenses . . . . . . . . . . . . . 28,370 (34,130) 188,604 (149,716) Decrease in accounts payable and accrued expenses - related parties . . . . . . . . . - - - (20,830) Increase (decrease) in due to related parties. . (20,206) (337,097) (36,474) 5,167 --------------- --------------- --------------- --------------- NET CASH USED IN OPERATING ACTIVITIES . . . . . . . . (71,560) (1,018,941) (786,370) (2,108,305) --------------- --------------- --------------- --------------- Cash flows from investing activities: Purchases of property and equipment, net . . . . . - (63,628) - (486,120) Patent fees (4,000) Proceed from sale of marketable securities - related parties . . . . . . . . . . . . . . . . - - 35,784 - --------------- --------------- --------------- --------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . - (63,628) 35,784 (490,120) --------------- --------------- --------------- --------------- Cash flows from financing activities: Proceeds from the issuance of common stock . . . . - 1,074,131 700,000 2,407,391 Proceeds from the issuance of common stock upon exercise of warrants . . . . . . . . . . . - 12,053 - 72,912 --------------- --------------- --------------- --------------- NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . - 1,086,184 700,000 2,480,303 --------------- --------------- --------------- --------------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . (71,560) 3,615 (50,586) (118,122) Cash and cash equivalents at beginning of period. . . 125,212 109,460 104,238 231,197 --------------- --------------- --------------- --------------- Cash and cash equivalents at end of period. . . . . . $ 53,652 $ 113,075 $ 53,652 $ 113,075 =============== =============== =============== ===============
SEE ACCOMPANYING NOTES F7 USA VIDEO INTERACTIVE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNADITED) (STATED IN US DOLLARS) -------------------- NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01(a)(5) of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. The results for the interim periods are not necessarily indicative of the results that may be attained for an entire year or any future periods. For further information, refer to the Financial Statements and footnotes thereto in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2001. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the financial statements, the Company has incurred losses of $1,882,873 for the nine month period ended September 30, 2002 and $3,684,340, $4,661,652 and $1,684,468 for the years ended December 31, 2001, 2000 and 1999, respectively. 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. 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. Inventory, which consists of computer equipment, is stated at the lower of cost or market using the specific-identification method. 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 September 30, 2002 and 2001. F8 USA VIDEO INTERACTIVE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNADITED) (STATED IN US DOLLARS) -------------------- NOTE C - COMMON STOCK 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. NOTE D - STOCKHOLDERS' EQUITY (DEFICIENCY) During January 2002 the Company issued 925,000 options to purchase common stock to certain service providers of the Company under the 2001 Plan. The stock options are exercisable at a price of $0.50 (U.S.) per share for a term of two years from the date of grant. In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") 123, the Company has charged to operations for the nine-month and three-month periods ended September 30, 2002, respectively, approximately $51,000 and $19,000 which is based on the fair value of the stock options as services are provided. At September 30, 2002 since part of such options have not yet vested, $13,000 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet. NOTE E - CONTINGENT LIABILTIY The Company is party to a default judgement 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 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 judgement is not estimable or determinable at this time and may be substantially mitigated by the landlord 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. NOTE F - IMPAIRMENT OF LONG-LIVED ASSETS As 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 nine month period ended September 30, 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 $350,000 during the three month period ended September 30, 2002, to reduce the carrying value of these assets to its estimated fair value. -----END PRIVACY-ENHANCED MESSAGE-----