<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2000
-----------------------
[_] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________
Commission File number 0-29651
-----------------------
USA VIDEO INTERACTIVE CORP.
(Exact name of registrant as specified in its charter)
Wyoming 06-15763-91
---------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 Essex Street
Mystic, Connecticut, USA 06355
---------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
(800) 625 - 2200
------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 ___
---
Applicable only to corporate issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of June 30, 2000
-------------------------- -------------------------------
Common Stock 75,027,089
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements......................................................................... 3
Independent Accountants' Report.............................................................. 3
Consolidated Balance Sheets as at March 31, 2000 (unaudited) and December 31, 1999........... 4
Consolidated Statement of Operations for the three months ended March 31, 2000
and 1999 (unaudited)......................................................................... 5
Consolidated Statement of Stockholders' Equity (Deficiency) for the three
months ended March 31, 2000.................................................................. 6
Consolidated Statement of Cash Flows for the three months ended March 31, 2000
and 1999 (unaudited)......................................................................... 7
Notes to Consolidated Financial Statements (unaudited)....................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation......... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 17
Item 2. Changes in Securities and Use of Proceeds.................................................... 18
Item 6. Exhibits .................................................................................... 18
SIGNATURES................................................................................... 19
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
TERRY AMISANO LTD. AMISANO HANSON
--------------------------------------------------------------------------------
KEVIN HANSON, C.A. CHARTERED ACCOUNTANTS
--------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders,
USA Video Interactive Corp.
We have reviewed the accompanying consolidated balance sheet of USA Video
Interactive Corp. as of March 31, 2000, and the consolidated statements of
operations, stockholders' equity and cash flows for the three month period then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the Company's consolidated balance sheet as of December 31, 1999 (presented
herein), and the related consolidated statements of operations,
stockholders'equity and cash flows for the year then ended (not presented
herein). In our report dated March 13, 2000 we expressed an unqualified opinion
on those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet information as of December
31, 1999, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived. The comparative
figures for the three months ended March 31, 1999 were prepared by management
and were neither audited nor reviewed, and accordingly, we do not express an
opinion or any other form of assurance on them.
Vancouver, Canada "Amisano Hanson"
June 8, 2000 Chartered Accountants
Suite 604 - 750 West Pender Street, Vancouver B.C., Canada, V6C 2T7
TELEPHONE: (604) 689-0188
FACSIMILE: (604) 689-9773
EMAIL: [email protected]
3
<PAGE>
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31,1999
(Unaudited)
(Stated in US Dollars)
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 2000 1999
------ ------------- -------------
<S> <C> <C>
Current
Cash and cash equivalents $ 303,423 $ 417,666
Marketable securities 20,700 20,700
Accounts receivable 17,307 17,661
Inventory 17,500 -
Prepaid expenses 30,133 43,841
------------- -------------
389,063 499,868
Capital assets - Note 3 526,367 436,417
Patents 57,948 59,066
------------- -------------
$ 973,378 $ 995,351
============= =============
LIABILITIES
-----------
Current
Accounts payable $ 422,893 $ 497,163
Due to related parties 241,010 188,866
------------- -------------
663,903 686,029
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
---------------------------------
Common stock - Notes 2 and 4 21,089,842 20,950,152
Common stock subscribed - Note 2 383,617 -
Deficit (21,163,984) (20,640,830)
------------- -------------
309,475 309,322
------------- -------------
$ 973,378 $ 995,351
============= =============
Commitments - Notes 2 and 4
Subsequent events - Note 4
Contingencies - Note 5
</TABLE>
APPROVED BY THE DIRECTORS:
/s/ Anton J. Drescher , Director /s/ Edwin Molina , Director
------------------------- -------------------------
Anton J. Drescher Edwin Molina
SEE ACCOMPANYING NOTES
4
<PAGE>
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended March 31, 2000 and 1999
(Unaudited)
(Stated in US Dollars)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Sales $ 163,600 $ -
Cost of goods sold (101,942) -
----------- -----------
Gross Profit 61,658 -
General and Administrative Expenses (583,981) (215,527)
Provision for Doubtful Accounts (4,536) -
Non-operating Income
Interest income 4,145 -
Foreign exchange gain (loss) (440) 17,185
----------- -----------
Loss before Other Items (583,154) (198,342)
Cumulative effect on prior years of changing
to a different amortization method -- Note 3 - (27,390)
----------- -----------
Net loss $ (523,154) $ (225,732)
=========== ===========
Basic loss per share $ (0.007) (0.004)
=========== ===========
Weighted average shares outstanding 74,098,756 60,516,921
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
for the period ended December 31, 1998 to March 31, 2000
(Unaudited)
(Stated in US Dollars)
<TABLE>
<CAPTION>
Common Common
Date Number Stock Share
of Issuance of Shares Price Amount Subscriptions Deficit Total
------------- ---------- ------ ----------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 58,756,088 18,722,966 - (18,956,362) (233,396)
Issued for cash:
Private placement Feb. 24, 1999 2,000,000 $0.067 133,574 133,574
Private placement Apr. 17, 1999 1,000,000 $0.114 114,293 114,293
Private placement Jun. 28, 1999 500,000 $0.395 197,400 197,400
Private placement Sept. 1, 1999 750,000 $1.00 750,000 750,000
Stock purchase warrants Various 3,820,000 $0.067 255,940 225,940
Stock purchase warrants Jul. 12, 1999 25,000 $0.128 3,190 3,190
Stock purchase warrants Various 1,250,000 $0.294 366,894 366,894
Stock purchase options Various 4,265,000 $0.067 287,755 287,755
Stock purchase options Various 550,000 $0.095 52,140 52,140
Stock purchase options Various 66,000 $1.00 66,000 66,000
Net loss for the year (1,684,468) (1,684,468)
---------- ----------- ------------- ------------ ----------
Balance, December 31, 1999 72,982,088 20,950,152 - (20,640,830) 309,322
Issued for cash:
Stock purchase warrants Various 825,000 $0.069 56,484 56,484
Stock purchase options Jan. 10, 2000 50,000 $0.096 4,793 4,793
Stock purchase options Various 415,000 $0.069 28,413 28,413
Stock purchase options Various 50,000 $1.00 50,000 50,000
Common stock subscribed 383,617 383,617
Net loss for the period (523,154) (523,154)
---------- ----------- ------------- ------------ ----------
Balance, March 31, 2000 74,322,088 $21,089,842 $383,617 $(21,163,984) $ 309,475
========== =========== ============= ============ ==========
</TABLE>
SEE ACCOMPANYING NOTES
6
<PAGE>
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 2000 and 1999
(Unaudited)
(Stated in US Dollars)
<TABLE>
<CAPTION>
Note 6
2000 1999
---------- ----------
<S> <C> <C>
Cash flow from operating activities:
Net loss $(523,154) $(225,732)
Adjustments to reconcile net loss to net cash used in
operations:
Amortization of capital assets 52,517 9,969
Amortization of patents 1,118 801
Write-down of advances 4,536 -
Cumulative effect on prior years amortization of changing to a
different amortization method - 27,390
Accounts receivable 354 (10,301)
Inventory (17,500) -
Prepaid expenses 13,708 16,016
Accounts payable (74,270) (49,403)
Due to related parties 52,144 (26,664)
---------- ----------
Net cash used in operating activities (490,547) (257,924)
---------- ----------
Cash flow used in investing activities:
Purchase of marketable securities - (1,203)
Advances-related parties (4,536) -
Purchases of capital assets (142,467) (12,804)
Patent fees - (11,768)
---------- ----------
Net cash used in investing activities (147,003) (25,775)
---------- ----------
Cash flow provided by financing activities:
Common shares issued for cash 139,690 285,535
Common share subscriptions 383,617 -
---------- ----------
Net cash provided by financing activities 523,307 285,535
---------- ----------
Net increase (decrease) in cash (114,243) 1,836
Cash, beginning of the period 417,666 2,618
---------- ----------
Cash and cash equivalents, end of the period $ 303,423 $ 4,454
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES
7
<PAGE>
USA VIDEO INTERACTIVE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
(Stated in U.S. Dollars)
Note 1 Interim Reporting
While the information presented in the accompanying interim three
months financial statements is unaudited (except for as indicated in
Independent Accountants' Report), it includes all adjustments which
are, in the opinion of management, necessary to present fairly the
financial position, results of operations and cash flows for the
interim periods presented. All adjustments are of a normal recurring
nature. It is suggested that these interim financial statements be read
in conjunction with the Company's December 31, 1999 annual financial
statements.
Note 2 Common Stock - Note 4
Authorized:
250,000,000 common stock without par value
250,000,000 preferred stock without par value
Commitments:
Common Stock Purchase Options
The following common stock purchase options were outstanding at March
31, 2000 entitling the holders thereof the right to purchase one
common share for each option held:
Number of Exercise Price
Options Per Share Expiry Date
--------- -------------- -----------
Directors 2,300,000 $1.00 July 16, 2001
Employees 80,000 $0.067 (CDN$0.10) October 20, 2000
875,000 $0.067 (CDN$0.10) January 31, 2001
500,000 $0.097 (CDN$0.14) March 9, 2001
640,000 $1.00 July 16, 2001
669,000 $1.00 November 25, 2001
750,000 $1.00 December 22, 2001
900,000 $5.00(1) February 17, 2002
---------
6,714,000
=========
(1) Granted during period and are subject to regulatory acceptance.
8
<PAGE>
Note 2 Common Stock - Note 4 - (cont'd)
Common Stock Purchase Warrants
The following stock purchase warrants were outstanding at March 31,
2000 entitling the holders thereof the right to acquire one common
share for each warrant held:
Number Exercise Price
of Warrants Per Share Expiry Date
----------- -------------- -----------
2,275,000 $0.067(CDN$0.10) September 30, 2000
925,000 $0.067(CDN$0.10) January 31, 2001
975,000 $0.131(CDN$0.19) March 23, 2001
500,000 $0.503(CDN$0.73) May 19, 2001
750,000 $1.10 July 15, 2001
-----------
5,425,000
===========
Common Stock Subscribed
At March 31, 2000, the Company had received $383,617 as payment for
common stock subscriptions for a private placement of 90,000 units at
$4.00 per unit (Note 4) and for the exercise of approximately 23,000
stock purchase options at $1.00 per share.
Note 3 Change in Accounting Principle
Amortization of capital assets acquired in prior years was previously
calculated using the graduated straight-line method over 7 years for
all classes of capital assets. The new method using straight-line
amortization over various periods for different classes was adopted to
recognize amortization over a shorter period in order to reflect the
rapid pace of technological change. This change has been applied
retroactively to capital asset acquisitions of prior years, and is
treated as a change in accounting principle due to the change in method
of amortization for previously recorded assets.
The effect of the change in amortization policy decreased the
amortization expense and the loss for the three months ended March 31,
1999 by $1,076. The cumulative effect on prior years of changing to a
different amortization method of $27,390 is included in the statement
of operations for the three months ended March 31, 1999. The
corresponding amount has been reflected in increased accumulated
amortization of the capital assets.
9
<PAGE>
Note 4 Subsequent Events
(a) On April 10, 2000, the Company completed a private placement of
190,000 units at $4.00 per unit for proceeds of $760,000 ($360,000
was included in share subscriptions at March 31, 2000). Each unit
consists of 1 common share and 1 share purchase warrant to purchase
1 common share at $4.00 per share, exercisable until January 26,
2002. The total proceeds of $4.00 per unit will be applied to the
common shares only.
(b) On April 28, 2000, the Company granted officers and a consultant
stock purchase options which entitle the holders thereof the right
to purchase up to 625,000 common shares of the Company at an
exercise price of $2.00 per share. These options are exercisable up
to April 28, 2005.
(c) On June 1, 2000, the Company entered into a private placement
agreement to sell 1,000,000 units at $1.50 per unit. Each unit
consists of 1 common share and 1 common share purchase warrant,
exercisable at $1.50 for 2 years from the date of payment for the
unit. The total proceeds of $1.50 per unit will be applied to the
common shares only. This agreement is subject to regulatory
approval.
Note 5 Contingent Liability
There is a contingent liability in respect to a default judgment
entered against the Company's subsidiary in the State of Texas with
respect to the lease of premises in Dallas, Texas in the amount of
$505,169 ($25,399 included in accounts payable at December 31, 1995).
The subsidiary vacated its premises in Dallas, Texas during the year
ended December 31, 1995 and was sued for the total amount payable under
the terms of the lease through the term of the lease, ended in 2002.
Management of the Company is of the opinion that the amounts payable
under the terms of this judgment is not determinable at this time as
the damages may be substantially mitigated by the landlord renting the
property to another party. Any settlement resulting from the resolution
of this contingency will be accounted for during the period of
settlement. The range of possible loss is NIL to $505,169.
Note 6 Uncertainty Due to the Year 2000 Issue
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using the year 2000 date is processed. In addition,
similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. Although the change in
date has occurred, it is not possible to conclude that all aspects of
the Year 2000 Issue that may affect the entity, including those related
to customers, suppliers or other third parties, have been fully
resolved.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
CAUTIONARY STATEMENT
USA Video Interactive Corp.'s (the "Company") Form 10-Q contains forward-looking
statements that are subject to risks and uncertainties, which could cause actual
results to differ materially from those expressed or implied in the statements.
Forward-looking statements (including oral representations) are statements about
future performance or results, and include any statements using the words
"believe," "expect," "anticipate" or similar words. All forward-looking
statements are only predictions or statements of current plans, which the
Company is constantly reviewing. All forward-looking statements may differ from
actual future results due to, but not limited to, changes in the overall
economy, the nature and pace of technological changes, the number and
effectiveness of competitors in the Company's markets, success in overall
strategy, changes in legal and regulatory policy, the Company's ability to
identify future markets and successfully expand existing ones and the mix of
products and services offered in the Company's target markets. You should
consider these important factors in evaluating any statement contained in this
report and/or made by the Company or on its behalf. The Company has no
obligation to update or revise forward-looking statements.
The following information has not been audited. You should read this information
in conjunction with the condensed financial statements and related notes to
financial statements included in this report.
OVERVIEW OF THE COMPANY
The Company is a public company emerging from the development stage. The
Company is listed on the Canadian Venture Exchange under the trading symbol "US"
and on the pink sheets operated by the National Quotation Bureau under the
trading symbol "USVO". A development stage company is one where substantial
efforts are devoted to establishing a new business but the planned principal
business has not commenced or has commenced but has not generated significant
revenues. This describes the Company through the year ended 1999. However, a
shift has occurred and the Company is now focused on marketing and selling its
products and services and as such it expects revenues to significantly increase
in 2000. The Company is essentially "emerging" from its development stage by
fully implementing its principal business.
The Company provides an array of products and services that allow businesses and
individuals to transmit video data through the Internet and other local and wide
area networks, while maintaining superior video quality at the receiving end.
The Company's goal is to exploit the market opportunity of customized system
solutions. Although there are many companies developing system components, such
as video servers, compression methods, and delivery infrastructure, the
Company's engineers and system architects design and develop video streaming
11
<PAGE>
systems to meet the needs of its clients and integrate these systems into the
clients' business models and infrastructures. There is a very large market for
this expertise as many diverse customers convert to digital content formats.
Key Technologies
The Company's key technologies are the following:
Video Compression - includes a proprietary Wavelet compression technique
which allows large video files to be greatly reduced in size to allow customers
to optimize use of available bandwidth;
Store and Forward Video-on-Demand ("VoD") - a patented technique for
transmitting video over switched (telephone-like) networks and allows users to
view the video using VCR-like controls (play, pause, stop, etc.);
Engineering and Scientific Expertise - enables the Company to integrate and
employ its technologies for various system and service related applications.
The revenue-generating applications include high-quality, end-to-end video
distribution systems that process video content from its source to its display
on a remote user's computer screen or TV. The Company is focusing on large-scale
systems that will drive revenues through economies of scale and the inclusion of
management and other fees. Significant revenues also are being targeted through
the sale of a basic set of standard system configurations that can be
constructed, delivered and billed efficiently and cost-effectively. Intellectual
property licensing will provide another significant revenue stream for the
Company as it seeks to establish its technology as a standard component of the
products and services of major industry players. In addition, the Company is
developing and expects to gain significant revenues from content licensing,
management and encoding, hosting for Web-based video delivery, services to
support webcast events, end-to-end production services, and advertising
contained within content and associated with web hosting and event support.
RESULTS OF OPERATIONS
Revenues
Revenues booked during the three-month period ended March 31, 2000 were
$163,600, as compared to $nil during the three month period ended March 31,
1999. Approximately fifty percent (50%) of these revenues were attributable to
sales of the Company's hardware and software systems and approximately fifty
percent (50%) were attributable to sales of engineering services.
Also during the three-month period ended March 31, 2000, the Company signed
additional sales contracts that will generate approximately another $75,000 of
revenue, which will be reflected in future financial statements as booked after
March 31, 2000.
Cost of Goods Sold
The cost to the Company of goods sold during the three months ended March 31,
2000 was $101,942 resulting in a gain of $61,658.
Net Losses
At this time, the Company has not achieved profitability and, in fact, expects
to incur net losses for the foreseeable future. USA Video's net losses for the
three months ended March 31, 2000, were $523,154 as compared with net losses of
$199,418 for the three months ended March 31, 1999. As a percentage of revenues,
net losses were 319% in the three months ended March 31, 2000. No revenue was
generated in the comparable period of 1999.
General and Administrative Expenses
General and Administrative (Operating) expenses consisted of research and
development, product marketing, amortization of capital assets, consulting fees,
office, professional fees and other expenses to execute the business plan and
for day-to-day operations of the Company.
General and Administrative expenses for the three months ended March 31, 2000,
increased $368,454 to $583,981 as compared to General and Administrative
expenses of $215,527 during the three months ended March 31, 1999.
12
<PAGE>
A number of General and Administrative expenses exhibited an upward trend in the
three months ended March 31, 2000 compared to the year-earlier period, in
response to the need to target additional resources in support of the Company's
increased effort to bring products to market.
Research and Development Expenses: Research and development expenses
---------------------------------
consisted primarily of compensation, hardware, software and licensing fees.
Research and development expenses were $65,258 for the three months ended March
31, 2000 compared with $14,250, an increase of $51,008 or 458% reflecting
development of new technology and refinement and enhancement of product
offerings to ensure competitiveness in the market and support the overall
business plan. Research and development expenses are impacted by increased
salaries and consulting costs as well as the timing of the development of
products. The Company has carried out preliminary investigation into the
development of an advanced Wavelet algorithm to adapt the existing Wavelet
mathematical algorithm to other operating platforms such as Unix. During the
first quarter of 2000, additional staff was engaged to commence development and
integration of these algorithms into initial Wavelet properties. No assurance
can be given that these efforts will result in a competitively marketable
product.
Product Marketing Expenses: Product marketing expenses for the three months
--------------------------
ended March 31, 2000, increased $101,548 or 255% from the year earlier period as
the Company hired additional staff and engaged in marketing activities related
to its efforts 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.
These expenses are expected to increase as the Company builds its business.
Office Expenses: Office expenses increased $53,969 or 282%, mainly for
---------------
administrative support resources. Printing expenses rose $3,591 or 152% to
$10,538 for marketing and investor relations materials. Professional fees
increased by $50,519 or 1,102% as the Company shifted to fully reporting status,
requiring a new level of accounting and legal services. Rent increased $16,254
or 287% to expand headquarters office space. Travel and promotional expenses
increased $32,449 or 1,888% due to the necessity of meeting with suppliers and
potential customers. Amortization of capital assets increased $42,548 or 282%
reflecting the increase in level of depreciable capital assets.
Interest Expense: Interest expense for the three months ended March 31,
----------------
2000 was $nil compared with $2,135 during the year-earlier period.
As the company expands its business in 2000 and beyond, its research and
development, sales and marketing, and general and administrative expenses will
continue to increase. Research and development expenses will increase as the
Company adds engineering resources to its technology and Web development teams.
Sales and marketing expenses will increase as the Company adds business
development, sales and marketing personnel to build business relationships, sell
advertising time and build brand awareness. Advertising and public relations
expenses will increase as the Company invests to grow its business. General and
administrative expenses will grow as the Company continues to build its
management infrastructure, including additional personnel, office space and
internal information systems.
Employees
The Company currently has 25 employees as compared to less than 20 during the
three months ended March 31, 1999.
Foreign Currency Exchange
The Company has experienced minimal gains or losses on foreign currency
translation since substantially all of its sales to date have been billed and
collected in U.S. dollars. The Company pays the expenses of its Canadian
operations in Canadian currency. Foreign currency exchange gain or loss for the
three months ended March 31, 2000 was ($440) compared with $17,185 during the
year-earlier period.
13
<PAGE>
Liquidity And Capital Resources
For the three-month period ended March 31, 2000, the Company's cash position was
$303,423, an increase of $298,969 from $4,454 in the year-earlier period. The
principal sources of cash were $139,690 which was generated from the issuance of
stock due to the exercise of options and warrants (see Note 2 to Financial
Statements) and $383,617 from a private placement, which was subsequently closed
(see Note 4 to Financial Statements).
This was offset by $490,547 of cash used in operating activities.
From January 1, 2000 through the date of this report, the Company completed one
private placement. This consisted of 190,000 units at US$4.00 per unit. Each
unit consists of one (1) common share and one (1) share purchase warrant to
purchase one (1) common share at US$4.00 per share, exercisable until January
26, 2002. Total proceeds of US$4.00 per unit will be applied to the common
shares only.
The independent accountants have expressed the opinion that the Company may not
be capable of continuing its existence as a going concern. Management
understands and acknowledges that it will be necessary to raise approximately
$3.5 million to $4 million of working capital over the next 12 months in order
to continue in business as a going concern. The threat to the Company's
continuation in business as a going concern will only be removed when revenues
have reached a level that sustains the Company's business operations.
The Company has historically satisfied its capital needs primarily by issuing
equity securities.
During the 2000 and 1999 quarters, the Company's operating activities used
$490,547 and $257,924, respectively. To fund its operations, the Company
generated $523,307 in the first three months of 2000 through sales of its common
stock, compared with $285,535 in the comparable 1999 period.
As of March 31, 2000, the Company had approximately $303,423 in cash and liquid
assets on hand - which together with the balance of proceeds from the private
placements is sufficient to fund current operations for three to four months.
Management's current expectation is that, assuming it can raise the
aforementioned $3.5 million to $4 million through private offerings, continuing
operations for the longer-term will be supported either through growth in
revenues from sales of products and services, or through a return to the equity
markets for additional funding, the level of which management cannot accurately
anticipate at this time due to the unpredictability of longer-term sales
performance. However, management would expect such additional funding
requirements to exceed $4 million. There is no guarantee that management will be
able to raise equity funds on terms acceptable to the Company, if at all.
14
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Potential Fluctuations in Quarterly Results - The Company's quarterly
-------------------------------------------
operating results have in the past and may in the future vary significantly
depending on factors such as the timing of customer development projects and
purchase orders, new product announcements and releases by the Company and other
companies, gain or loss of significant customers, price discounting of the
Company's products, the timing of expenditures, customer product delivery
requirements, availability and cost of components or labor and economic
conditions generally and in the electronics industry specifically. Any
unfavorable change in these or other factors could have a material adverse
effect on the Company's operating results for a particular quarter. Many of the
Company's customers order on an as-needed basis and often delay issuance of firm
purchase orders until their project commencement dates are determined. Quarterly
revenue and operating results will therefore depend on the volume and timing of
orders received during the quarter, which are difficult to forecast accurately.
Competition - The Company may not be able to compete effectively against
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intense competition from a multitude of competitors which will limit the amount
of market share the Company captures. It is impossible to project the market
share that the Company currently holds. In addition, the Company may not be
able to maintain a competitive position due to the pace at which the marketplace
is changing. The demand for its products and services may rapidly decline if the
marketplace for its products and services changes. The Company's success is
dependent on its ability to adjust to change and meet new demands.
New Products and Technological Change - The industry is characterized by
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extremely rapid technological change in both hardware and software development,
frequent new product introductions, evolving industry standards and changing
customer requirements. The introduction of products embodying new technologies
and the emergence of new industry standards can render existing products
obsolete and unmarketable. The Company's future success will depend upon its
ability to enhance its current series of simulation and emulation systems and to
design, develop and support its future simulation and emulation products on a
timely basis. These efforts require a high level of expenditures for research
and development by the Company to address the increasingly sophisticated needs
of the customers. There can be no assurance that the Company will be successful
in developing and marketing product enhancements or new products that respond to
technological change or evolving industry standards or changing customer
requirements, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of those
products, or that its new products and product enhancements will adequately meet
the requirements of the marketplace, will be of acceptable quality or will
achieve market acceptance. If the Company is unable, for technological or other
reasons, to develop and introduce products in a timely manner in response to
changing market conditions or customer requirements, the Company's business,
operating results and financial condition will be materially and adversely
affected. Moreover, from time to time, the Company may announce new products or
technologies that have the potential to replace the Company's existing product
offerings.
The Company Has Not Produced a Profit and Cannot Be Certain That It Will
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Produce a Profit or Remain Profitable If It Does Generate a Profit - The
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Company's auditors have expressed doubt about the company's ability to continue
as a going concern. At this time, the Company has not achieved profitability
and, in fact, expects to incur net losses for the foreseeable future. The
Company's limited operating history contributes to the difficulty of predicting
its potential to generate a profit. The Company expects to continue to increase
its marketing and sales efforts. As a result, it will need to generate
significant additional revenue and/or raise funds to achieve profitability.
Key Personnel - The Company depends upon a small number of key persons to
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implement its business plan. The Company may not be able to retain its key
personnel if it is unable to adequately compensate them which could affect its
competitive position and business operations.
15
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Implementation of the Company's Marketing Plan - The Company's marketing
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plan is based upon a number of assumptions which if invalid could result in
lower revenues than anticipated. The assumptions of the marketing plan are as
follows:
. The appeal of the Company's end-to-end video distribution systems will
continue to generate client interest;
. Market size estimates cited in the "Evolution of the Industry" section are
valid;
. Competition is not suppressed by an overwhelming technical breakthrough by
one of the major players in the field; and
. The Company's technology continues to keep pace with industry standards and
with the products of its competitors.
Need for Capital to Continue as a Going Concern - If the Company is unable
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to raise additional capital, it may not be able to continue as a going concern.
The Company typically needs more capital than it has available to it or can
expect to generate through the sale of its products and services. At this time,
the Company does not have sufficient cash resources to continue its operations
for the next twelve months. The Company has had to raise and will continue to
need to raise, by way of debt and equity financing, $3.5 million to $4 million
to meet its needs over the next 12 months. There is no guarantee that it will be
able to continue to raise the funds needed for its business. Failure to raise
the necessary funds in a timely fashion will limit its ability to sustain its
business.
Protection of the Company's Proprietary Technology - There can be no
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assurance that the Company will be able to maintain the confidentiality of any
of its proprietary technology, know-how or trade secrets, or that others will
not independently develop substantially equivalent technology. The failure or
inability to protect these rights could have a material adverse effect on the
Company's operations. Additionally, the Company may not receive a favorable
ruling on the reinstatement of its lapsed patent for its Store and Forward VoD.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company believes its exposure to overall foreign currency risk is
immaterial. The Company does not manage or maintain market risk sensitive
instruments for trading or other purposes and is, therefore, not subject to
multiple foreign exchange rate exposures.
The Company reports its operations in US dollars and its currency exposure,
although considered by it to be immaterial, is primarily between US and Canadian
dollars. Exposure to the currencies of other countries is also immaterial 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 are primarily in US
dollars except for the marketing efforts in Canada. The Company is not exposed
to the effects of interest rate fluctuations as it does not carry any long-term
debt.
From a quantitative point of view, the Company has had a foreign exchange gain
of $17,185, $70,328 and $5,074 in 1999, 1998 and 1997, respectively. In
addition, there is no material foreign exchange market risk exposure because,
although held in Canadian bank accounts, 90% of the Company's cash deposits are
in US currency.
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PART II - Other Information
Item 1. Legal Proceedings
The following are pending legal proceedings in which the Company is a party:
1. USA Video Interactive Corp. v. Wegener Communications, Inc.
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This case was commenced by the Company against Wegener Communications, Inc., a
Georgia corporation, on January 7, 2000 in the U.S. District Court for the
District of Connecticut.
The facts of the case follow. In early February, 1999, the defendant agreed to
pay the Company five percent of the value of any orders from customers referred
to it by the Company. In reliance on this agreement, the Company expended
efforts to find the defendant compatible clients and introduced the defendant to
Autotote Communications. The defendant secured a contract with Autotote
Communications worth $4 million. The defendant failed to pay the Company the
agreed upon commission of five percent and this suit was ultimately commenced to
seek relief in the form of compensatory damages, punitive damages, and attorney
fees in excess of $75,000.00 and in an amount deemed equitable and appropriate
by the court.
2. USA Video Interactive Corp. and Merging Rivers Media Corp. v. Rafael O.
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Quezada
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This case was commenced by the Company and its subsidiary, Merging Rivers Media
Corp., against Rafael O. Quezada, former president of Merging Rivers, on January
10, 2000 in the U.S. District Court for the District of Connecticut.
The facts of the case follow. In mid-April, 1999, the Company entered into a
Confidentiality and Non-Disclosure Agreement with the defendant, prohibiting him
from disclosing and using the Company confidential information without prior
written consent of the Company. The Agreement also provided that the Company
would retain all publication and ownership rights to all intellectual property.
In mid-June, 1999, the Company and Merging Rivers entered into a Consulting
Agreement with the defendant which provided that the defendant was to represent
Merging Rivers and the Company to clients and prospective clients for purposes
of selling video and other multimedia advertising. At the end of July, 1999, the
Company provided a laptop computer to the defendant containing proprietary
information.
The defendant later registered domain names and trademarks in his own name,
charging the expenses to the Company. While a consultant to the Company and
president of Merging Rivers, the defendant sought employment with a competitor
to work on an identical project for which he was doing work for the Company.
Following termination of his consulting agreement with the Company and his
employment with Merging Rivers, the defendant interfered with a business
relationship between the Company and one of its customers.
The plaintiffs are seeking full compensatory and consequential damages, an award
of treble damages, and other equitable relief in an amount in excess of
$75,000.00 and deemed equitable and appropriate by the court.
3. SABA Energy Ltd. v. USA Video Interactive Corp.
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This case was commenced by SABA Energy Ltd. against the Company on October 23,
1996 in the Court of Queen's Bench of Alberta Judicial Centre of Calgary.
This case involves a failed assignment of a Petroleum and Natural Gas Lease. The
plaintiff and the Company entered into an agreement to transfer the rights to
the Lease. The Company registered the assignment of the Lease but failed to
register the well licenses with Alberta Energy. The agreement provides that the
Company indemnify the plaintiff for any liability, loss, claim or damages
arising out of any act, omission, matter or thing done by the defendant. In May,
1995, the Company failed to pay rent for the Lease and failed to take
responsibility for abandoning the wells.
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On April 14, 1997, a Default Judgment was awarded to SABA Energy Ltd. In the
amount of Cdn $78,265.53 including interest and taxable costs. A settlement was
reached between the parties on March 3, 2000, in the amount of Cdn. $76,000,
which has been paid in full by the company. The settlement fully releases and
discharges the company from further liability in this case.
4. DCC Building #4 Limited Partnership v. USA Video Corporation
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This case was commenced by DCC Building #4 Limited Partnership against USA Video
Corporation, a subsidiary of the Company, on September 7, 1995 in the District
Court of Dallas County, Texas. A default judgment was entered by the court on
November 10, 1995.
This suit was brought in regard to a lease of premises by USA Video Corporation
in Dallas, Texas, which premises were vacated during the year ended December 31,
1995. A claim was made to the Company for the total amount payable through the
term of the lease, ending in 2002. Management of the Company is of the opinion
that the amount payable under the terms of the default judgment is not
determinable at this time as the damages may be substantially mitigated by the
landlord's renting of the property to another party. Settlement talks are
underway. For a discussion of the accounting treatment of the contingent
liability of $505,169 resulting from the default judgment, see Note 5 to the
Financial Statements.
To the knowledge of the Company's Executive Officers and Directors, the Company
is not a party to any other legal proceeding or litigation and none of its
property is the subject of a pending legal proceeding. Further, the Officers and
Directors know of no other threatened or contemplated legal proceedings or
litigation.
Item 2. Changes in Securities and Use of Proceeds
SALES OF UNREGISTERED SECURITIES IN THE FIRST QUARTER OF 2000
1. In January, 2000, USA Video concluded an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
$4.00 per share by January 26, 2002. On completion of the offering, a total of
190,000 units were issued at $4.00 per unit for total proceeds of $760,000.00.
The offer and sale of the units were exempt from registration under Rule 506 of
Regulation D and under Section 4(2) of the Securities Act of 1933. USA Video
limited the manner of the offering. The investors included four (4)
directors/executive officers and one (1) employee. If the foregoing exemptions
are not available, USA Video believes that $120,000.00 of these sales were also
exempt under Regulation S under the Securities Act of 1933, as amended, due to
the foreign nationality of the relevant purchaser.
2. During the period ended February, 2000, USA Video issued 825,000 shares
pursuant to warrants exercised at $0.068 per share for total proceeds of
$55,997.00. The shares acquired were exempt from registration under Rule 504 and
Rule 506 of Regulation D under Sections 3(b) and 4(2), respectively, of the
Securities Act of 1933. USA Video has made publicly available financial and
disclosure information with its filings to the Canadian Venture Exchange. USA
Video limited the manner of the offering. The investors included executive
officers, directors and employees and there were less than five (5) non-
accredited investors. USA Video believes that a portion of these sales were also
exempt under Regulation S under the Securities Act of 1933, as amended, due to
the foreign nationality of the relevant purchasers.
Item 6. Exhibits
Exhibit No. Description
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27 Financial Data Schedule
18
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Signatures
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: June 30, 2000
By: /s/ Edwin Molina
------------------------
Name: Edwin Molina
Title: President
19
