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 March 31, 2003 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) 83 Halls Road, Old Lyme, Connecticut 06355 (Address of principal executive offices) (ZIP code) (860) 434-5535 (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 |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |_| No |X| At May 9, 2002, there were 107,995,089 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. The Company's products and services are based on its proprietary Store and Forward Video-on-Demand ("VoD"). USA Video's Store and Forward VoD is a patented technique for transmitting video over switched (telephone-like) networks and allowing the user to view the video using videocassette recorder (VCR)-like controls (play, pause, stop, etc.). Store and Forward VoD is the mechanism by which the delivery of compressed video is managed and, together with compression technology, facilitates 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; mediaClix(TM), a service that delivers content similar to Zmail but originating from an existing web presence; and 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. 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 Old Lyme, Connecticut, and its Canadian offices are located in Vancouver, British Columbia. BUSINESS OBJECTIVES: USVO has established the following near-term business objectives: 1. Leverage USVO's digital video patent for licensing fees and partnerships in the United States and internationally; 3 2. Patent and license new technology developed within the corporate research and development program; 3. Establish StreamHQ(TM)as the industry standard in the streaming video and rich media marketplace; 4. Attain industry recognition for the superior architectural, functional, and business differentiators of the StreamHQ(TM) architecture; 5. Develop at least one client per year for a complete StreamHQ(TM) system, including intellectual property licensing and operational support; 6. Expand StreamHQ(TM)functionality to provide enhanced support for corporate training and education markets. 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: - 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. 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. 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 2003, 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 as charged to income. 4 RESULTS OF OPERATIONS Sales Sales for the three-month period ended March 31, 2003 were $-0-, compared to revenue of $26,253 for the three-month period ended March 31, 2002. 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. Recently, due to the change in capital markets, plans to seek funding for an internal sales and marketing team was put on hold indefiniteloy. Since then the Company has focused on partnering relationships with other companies to complete the execution of it StreamHQ -based business plan. Cost of Sales The cost of sales for the three months ended March 31, 2003 was $-0-, as compared to $12,072 for the comparable period of 2002. The decrease in cost of sales is directly attributable to the decrease 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 March 31, 2003 decreased $231,683 to $119,545 from $351,228 for the three months ended March 31, 2002. The reduction was due to consolidation efforts of management. Depreciation and amortization expense for the three months ended March 31, 2003, decreased to $4,848 from $108,937 for the comparable period of 2002. The decrease was use to the impairment of long-lived assets in 2002. The Company has arranged for additional staff/consultants to engage 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 to $-0- for the three months ended March 31, 2003, from $218,145 for the comparable period in 2002. The reduction was due to consolidation efforts of management. Other Income The Company sold the fixed assets for the three months ended March 31, 2003 for $13,213 net of $95,000 basis. 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 of the three month period ended March 31, 2003. 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 $25,000 during the three month period ended March 31, 2003, to reduce the carrying value of these assets to its estimated fair value. 5 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 2003. The Company's net loss for the three months ended March 31, 2003 was $140,690 as compared with a net loss of $676,780 for the three months ended March 31, 2002. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2003, the Company's had a cash position of $36,304, compared to $48,708 at December 31, 2002. The Company will require additional financing to fund current operations through the remainder of 2003. The Company has historically satisfied its capital needs primarily by issuing equity securities. The Company will require an additional $1.0 million to $1.5 million to finance operations through fiscal 2003 and intends to seek such financing through sales of its equity securities. Assuming the aforementioned $1.0 million to $1.5 million in financing is obtained, the Company believes that continuing operations for the longer term will be supported through anticipated licensing 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 $1.0 million to $1.5 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 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 three months ended March 31, 2003, USA Video had a net loss of $140,690. As of March 31, 2003, the Company had an accumulated deficit of $31,317,131 and a working capital deficit of $909,921. 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. 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 2003. 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. 6 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 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 On April 10, 2003, the Registrant announced that its subsidiary, USA Video Technology Corporation, had filed a lawsuit in the U.S. District Court for the 7 District of Delaware against Movielink, LLC. The Registrant alleges that Movielink, a Delaware company, has infringed and continues to infringe on the Registrant's patented online movie delivery system. Item 2. Changes in Securities and Use of Proceeds During the quarter ended March 31, 2003, the Company completed an offering of 2,750,000 units at a price of $0.0657 per unit for total proceeds of $180,675. Each unit consisted of one share of common stock and one warrant to acquire one additional share at $0.0657 per share, exercisable on or before February 14, 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, 2 additional unaffiliated non-accredited investors, and 8 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. 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 May 7, 2003, the Registrant filed a report on Form 8-K announcing that Maurice Loverso had been appointed to the Board of Directors and Robert D. Smith had resigned as a director to pursue other employment opportunities. (ii) On April 10, 2003, the Registrant filed a report on Form 8-K announcing that its subsidiary, USA Video Technology Corporation, had filed a lawsuit in the U.S. District Court for the District of Delaware against Movielink, LLC. The Registrant alleges that Movielink, a Delaware company, has infringed and continues to infringe on the Registrant's patented online movie delivery system. (iii) On March 4, 2003, the Registrant filed a report on Form 8-K announcing that it had entered into an agreement with Engle Group LLC to undertake investor and media relations services for the registrant and to assist the Registrant in developing and implementing a strategic communications plan. 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: May 9, 2003 By: /s/ Anton J. Drescher -------------------------------- Name: Anton J. Drescher Title: Chief Financial Officer 8 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: May 9, 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: May 9, 2003 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; 9 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: May 9, 2003 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: May 9, 2003 F1 USA VIDEO INTERACTIVE CORP. CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2003 (UNAUDITED) (STATED IN US DOLLARS) -------------------- F2 USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (STATED IN US DOLLARS)
MARCH 31, DECEMBER 31, 2003 2002 (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 36,304 $ 48,708 Accounts receivable. . . . . . . . . . . . . . . . . . . . . . 1,400 1,400 Prepaid expenses and other current assets. . . . . . . . . . . 23,167 10,573 ------------- -------------- TOTAL CURRENT ASSETS .. . . . . . . . . . . . . . . . . . . . 60,871 60,681 Property and Equipment - at cost, net of accumulated depreciation of $4,017 and $-0-, respectively . . . . . . . . 87,052 211,314 Other Assets, net of accumulated amortization of $12,170 and $11,339, respectively . . . . . . . . . . . . . . . . . . . 44,319 45,149 Deferred Tax Assets, net of valuation allowance of $7,999,000 and $7,950,000, respectively . . . . . . . . . . - - ------------- -------------- TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . $ 192,242 $ 317,144 ============= ============== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities: Accounts payable and accrued expenses. . . . . . . . . . . . . $ 928,330 $ 1,082,499 Due to related parties . . . . . . . . . . . . . . . . . . . . 42,462 53,180 ------------- -------------- TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . 970,792 1,135,679 ------------- -------------- Commitments and Contingencies Stockholders' Deficiency: Preferred stock - no par value; authorized 250,000,000 shares, none issued Common stock and additional paid-in capital - no par value; authorized 250,000,000 shares, issued and outstanding 106,495,088 and 103,745,088, respectively. . . . . . . . . . . . . . . . . . . 30,538,581 30,357,906 Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . (31,317,131) (31,176,441) ------------- -------------- STOCKHOLDERS' DEFICIENCY . . . . . . . . . . . . . . . . . . (778,550) (818,535) TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY. . .. . . . . $ 192,242 $ 317,144 ============= ==============
SEE ACCOMPANYING NOTES F3 USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (STATED IN US DOLLARS)
THREE MONTHS ENDED MARCH 31, 2003 2002 (UNAUDITED) Revenue . . . . . . . . . . . . . . . . . $ - $ 26,253 ------------- ------------ Expenses: Cost of sales . . . . . . . . . . . . - 12,072 Research and development. . . . . . . - 218,145 Selling, general and administrative . 119,545 351,228 Depreciation and amortization . . . . 4,848 108,937 Impairment loss on long-lived assets. 25,246 - Noncash compensation charges. . . . . - 12,718 ------------- ------------ Total expenses. . . . . . . . . . . . . . 149,639 703,100 ------------- ------------ Loss from operations. . . . . . . . . . . (149,639) (676,847) ------------- ------------ Other income (expense) Interest income (expense) . . . . . . (6,347) 67 Other . . . . . . . . . . . . . . . . 15,296 - ------------- ------------ 8,949 67 ------------- ------------ Net loss. . . . . . . . . . . . . . . . . $ (140,690) $ (676,780) ============= ============ Net loss per share - basic and diluted. . $ (.00) $ (.01) ============= ============ Weighted-average number of common shares outstanding - basic and diluted . 105,120,088 91,745,088 ============= ============
SEE ACCOMPANYING NOTES F4 USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (STATED IN US DOLLARS)
THREE MONTHS ENDED MARCH 31, 2003 2002 (UNAUDITED) Net loss . . . . . . . . . . . . . . . . . . . $(140,690) $(676,780) Other comprehensive loss: Change in unrealized loss on investments 4,676 ---------- ---------- Comprehensive loss . . . . . . . . . . . . . . $(140,690) $(672,104) ========== ==========
SEE ACCOMPANYING NOTES F5 USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (STATED IN US DOLLARS) (UNAUDITED) COMMON STOCK
ACCUMULATED STOCKHOLDERS' SHARES AMOUNT DEFICIT DEFICIENCY Balance at December 31, 2002. . . . 103,745,088 $30,357,906 $(31,176,441) $ (818,535) Issuance of common stock and common stock warrants for cash . . . . . . 2,750,000 $ 180,675 - 180,675 Net loss. . . . . . . . . . . . . . - - (140,690) (140,690) ----------- ----------- ------------- --------------- Balance at March 31, 2003 . . . . . 106,495,088 $30,538,581 $(31,317,131) $ (778,550) =========== =========== ============= ===============
SEE ACCOMPANYING NOTES F6 USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (STATED IN US DOLLARS)
THREE MONTHS ENDED MARCH 31, 2003 2002 (UNAUDITED) Cash flows from operating activities: Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(140,690) $(676,780) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 4,847 108,936 Impairment loss on long-lived assets. . . . . . . . . . . . . . . . . 25,245 - Noncash compensation charge . . . . . . . . . . . . . . . . . . . . . - 12,718 Changes in operating assets and liabilities: Decrease in accounts receivable . . . . . . . . . . . . . . . . . - 2,744 Decrease (increase) in prepaid expenses and other current assets. (12,594) 5,577 Increase (decrease) in accounts payable and accrued expenses. . . (154,169) 151,037 Increase (decrease) in due to related parties . . . . . . . . . . (10,718) 362,052 ---------- ---------- NET CASH USED IN OPERATING ACTIVITIES .. . . . . . . . . . . . (288,079) (33,716) ---------- ---------- Cash flows from investing activities: Proceeds from equipment sales . . . . . . . . . . . . . . . . . . . . . 95,000 - ---------- ---------- NET CASH PROVIDED BY INVESTING ACTIVITIES . . . . . . . . . . 95,000 - ---------- ---------- Cash flows from financing activities: Proceeds from the issuance of common stock and warrants . . . . . . . . 180,675 - ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . 180,675 - ---------- ---------- Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . (12,404) (33,716) Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . 48,708 104,238 ---------- ---------- Cash and cash equivalents at end of period. . . . . . . . . . . . . . . . . $ 36,304 $ 70,522 ========== ==========
SEE ACCOMPANYING NOTES F7 USA VIDEO INTERACTIVE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2003 (UNAUDITED) (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, 2002. 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 $140,690 for the three month period ended March 31, 2003 and $2,113,138, $3,760,821 and $4,661,652 for the years ended December 31, 2002, 2001 and 2000, 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. 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 March 31, 2003 and 2002. F8 USA VIDEO INTERACTIVE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2003 (UNAUDITED) (STATED IN US DOLLARS) -------------------- NOTE C - COMMON STOCK On February 14, 2003, the Company issued 2,2000,000 units to 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. On February 14, 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. NOTE D 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 E - 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 three month period ended March 31, 2003. 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 $25,000 during the three month period ended March 31, 2003, to reduce the carrying value of these assets to its estimated fair value. NOTE F - PRO FORMA CALCULATION The Company has elected to apply APB Opinion No. 25, Accounting for Stock Issued to Employees, 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 F9 USA VIDEO INTERACTIVE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2003 (UNAUDITED) (STATED IN US DOLLARS) -------------------- 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 three month periods ended March 31, 2003 and 2002 would have been as follows:
THREE MONTHS ENDED MARCH 31, 2003 2002 Net loss: As reported. . . . . . . . . . . . . $(140,690) $(676,780) Add: Stock-based compensation expense included in reported net loss. . . . - 12,718 Deduct: Total stock-based compensation expense determined under fair value based method for all awards. . . . . - (107,303) ---------- ---------- Pro forma. . . . . . . . . . . . . . . . $(140,690) $(771,365) ========== ========== Loss per common share-basic and diluted: As reported. . . . . . . . . . . . . $ (0.00) $ (0.01) ========== ========== Pro forma. . . . . . . . . . . . . . . . $ (0.00) $ (0.01) ========== ==========
NOTE G - SUBSEQUENT EVENTS In April 2003, the Company issued 1,200,000 units to investors at $.068 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.075 per share In April 2003, the Company issued 300,000 units to employees at $.068 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.075 per share. Gross proceeds for these issuances amounted to $102,000.