Is Usa Video Ready For Prime Time?

With his silk suits and black alligator-skin cowboy boots, Gordon F. Lee comes out of central casting: the oil-and-gas speculator, ready to sell you a spindletop anytime. "A real wildcatter," says Dallas investor L. Cade Havard, who, as it happens, tried to sell Lee a Nevada gold mine in 1989. These days, however, Lee, 43, is drilling a different field. Working out of a Century City office one floor below ABC TV, he wants to cash in on the Information Highway.

Lee controls a company called USA Video Corp. And like dozens of other high-tech startups, USA claims it holds the key to the coming information revolution. In this case, it's a system TV viewers can use to order movies and other programs at the flick of a switch and store them in a set-top box to play, rewind, and show again.

USA isn't the only company developing such technology. Nor is it clear if video-on-demand will be a hit with consumers. But that hasn't stopped Gordon Lee from proselytizing. "Blockbuster [Entertainment Corp.] went from zero to $2 billion in five years," he declares. "And this is a lot bigger business."

BREATHLESS. Perhaps. For now, though, the real business is in Superhighway speculators. Like biotech and other hot-growth industries before it, interactive TV is spawning scores of high-tech companies backed by savvy promoters such as Lee. "It's not uncommon to see really promotional-minded people involved with cutting-edge technology," says Jonathan K. Layne, a securities lawyer at Gibson, Dunn & Crutcher.

Bashful, Lee is not. Since his Micron Mining Co. bought a controlling interest in USA 18 months ago, the company has exhibited all the hallmarks of a classic penny-stock outfit. Start with its breathless claims: USA announced it would buy home-shopping programs from Lincoln Mint Network Inc. But the deal later foundered. Lee says the company didn't produce the shows he wanted. Lincoln says it decided to test such programs itself.

USA also told a Wall Street newsletter that it would have 100,000 subscribers by mid-1994. And it said that PaineWebber Inc. and Dean Witter Reynolds Inc. had agreed to help the company raise capital. PaineWebber says it has never heard of USA Video, while Dean Witter officials didn't return phone calls. Lee now says he was overly optimistic on the subscriber projections. As for the two big investment firms, Lee claims those deals were cut by USA's previous management, and he now has new investment bankers.

USA Video's history is also typical of penny-stock companies. Founded in 1989 by a defense electronics expert, Elbert G. Tindell, the company was sold to Micron Mining for $650,000, plus a commitment to raise $3.5 million to test and market its technology. Micron, which was listed on the Alberta Stock Exchange, then changed its name to USA. In the U.S., the company's shares are sold by independent brokers.

To be sure, USA Video has some bona fide agreements. It has signed two companies to manufacture the gear for its system, which combines existing technology with USA's proprietary software. Digital Equipment Corp. will build the video servers, while Samsung Electronics Co. will make the set-top boxes. Also, Rochester Telephone Corp. has invested $1 million for a 5% stake in the company and will test USA's system in 100 apartments in Brighton, N.Y. USA says it has signed up Paramount Pictures Corp. and Warner Bros. Inc. to supply movies. Warner Bros., though, says it wants to vet the company's technology further.

"BATTLE SCARS." USA demonstrated its system to BUSINESS WEEK at the company's research facility in Dallas. It seemed basically sound, though with some important limitations. For one thing, the picture quality of movies ordered on demand is slightly lower than prerecorded videotapes. Also, USA can't digitally compress pictures in real time, which means it can't offer live events, such as sports, on demand. USA says it is working on real-time compression and has improved picture quality. On the programming front, it is developing a video version of yellow pages and plans to sell advertising.

Still, several better-financed technology companies are developing similar systems. The fact that USA has found partners is a testament to the fear among companies of being left behind in the digital derby. That attracted Lee, a onetime hockey player who dropped out of Canada's University of Guelph to help put together limited partnerships to buy stocks and oil wells (table). Lee freely admits his business record is uneven: "If any of my other deals had worked, we wouldn't be having this discussion of who I am to be doing this."

But if USA takes off, Lee stands to make a pot of cash. As chairman, he owns 7.6 million shares, or 21%, and has options to buy 1.5 million more. Should the company produce net cash flow, he could get as many as 29 million more shares. Although the company had no operating revenues and lost $2.2 million in the first nine months of 1993, USA's stock has risen 30% since January, 1993, and now trades at 87c a share.

With no customers to speak of, Lee has kept his stock floating through assiduous promotion. Bruce Gedde, an analyst at L.H. Alton & Co., recalls that when he published a favorable report on USA last fall, the company was so anxious to circulate it to reporters and investors that it sent out draft copies before the typos had been corrected. Alton also happens to be Lee's investment bank.

CLOSE WATCH. Sometimes, Lee goes even further. USA recently announced it would participate in an interactive-video test sponsored by US West Inc. in Omaha. That's no big deal: As a common carrier, the Baby Bell must open its lines to all comers. But USA boasted in its release that US West recognized its "technological achievements." Not so, says US West: "We are not partnering with USA Video and do not have any comment, positive or negative, on the quality of their service," the company said in a Mar. 16 release. Lee blames the erroneous claim on a clerical error and says he has issued a corrected press release.

It's not the first time Lee has been brought up short. In 1989, the Alberta Stock Exchange demanded that Lee retract two releases claiming that samples from his Nevada gold mine contained commercial quantities of gold. A test by the exchange couldn't prove that claim. Lee complied without admitting guilt. Indeed, he says a separate test by the mining unit of Shell Oil Co. confirmed his claims. And he notes that the exchange didn't delist him.

That doesn't mollify Tim Daly, manager of surveillance for the stock exchange. Lee's previous ventures have been "checkered," he says, and "we're going to be watching [USA] closely." With investors swooning over the Info Highway, he won't be the only one.