UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
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(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Quarter Ended April 30, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 33-2310-D
VIDEOLOCITY INTERNATIONAL, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 87-0429154
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44 West Broadway, Suite 1405 South, Salt Lake City, Utah 84101
(address of principal executive officers)
Issuer's telephone number: (801) 521-2808
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
State the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practicable date:
Class Outstanding as of April 30, 2002
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Common Stock, 5,072,410
Par Value $0.001 par value
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
VIDEOLOCITY INTERNATIONAL, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Financial Statements............................................................... 3
Item 2. Management's Discussion and Analysis or Plan of Operation.......................... 14
PART II
Item 1. Legal Proceedings.................................................................. 16
Item 2. Changes in Securities and Use of Proceeds.......................................... 16
Item 3. Defaults Upon Senior Securities.................................................... 17
Item 4. Submissions of Matters to a Vote of Security Holders............................... 17
Item 5. Other Information.................................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................................... 17
Signatures......................................................................... 18
-2-
PART I
Item 1. Financial Statements
The following unaudited Financial Statements for the period ended April
30, 2002, have been prepared by the Company.
Videolocity International, Inc.
Consolidated Financial Statements
April 30, 2002
(Unaudited)
-3-
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
(Development Stage Company)
CONSOLIDATED BALANCE SHEETS
April 30, 2002
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ASSETS
CURRENT ASSETS
Cash $ 22,609
Note receivable - net of provision for doubtful accounts - Note 3 200,000
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Total Current Assets 222,609
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EQUIPMENT - net of accumulated depreciation - Note 2 90,282
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OTHER ASSETS
Advance deposits and patents 5,292
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$ 318,183
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - related parties - Note 6 $ 573,000
Notes payable - Note 6 868,800
Accrued interest - notes payable - Note 6 63,855
Accounts payable 223,114
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Total Current Liabilities 1,728,769
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MINORITY INTERESTS 5,004
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STOCKHOLDERS' EQUITY - (deficiency)
Common stock
12,500,000 shares authorized, at $0.001 par value;
5,072,410 shares issued and outstanding 5,072
Capital in excess of par value 2,316,431
Deficit accumulated during the development stage (3,737,093)
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Total Stockholders' Equity (deficiency) (1,415,590)
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$ 318,183
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The accompanying notes are an integral part of these
financial statements.
-4-
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
(Development Stage Company)
CONSOLIDATED STATEMENTS OF
OPERATIONS For the Three and Six Months Ended April
30, 2002 and 2001 and the Period
May 26, 2000 ( date of inception - note 7 ) to April 30, 2002
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Three Months Six Months
------------ ----------- May 26, 2000
Apr 30, Apr 30, Apr 30, Apr 30, to
2002 2001 2002 2001 Apr 30, 2002
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REVENUES $ -- $ 2,961 $ -- $ 6,218 $ 5,578
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EXPENSES
Administrative 620,441 389,494 876,727 595,622 2,360,215
Interest 85,001 -- 192,799 -- 394,248
Depreciation and amortization 4,100 36,929 8,200 46,188 77,460
----------- ----------- ----------- ----------- -----------
709,542 426,423 1,077,726 641,810 2,831,923
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NET LOSS - from operations (709,542) (423,462) (1,077,726) (635,592) (2,826,345)
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OTHER INCOME (LOSS)
Minority interests 20 -- 34 -- (4,678)
Loss of good will -- -- -- -- (958,628)
Net gain from sale of investment stock -- 199,800 -- 199,800 338,049
Net loss from transfer of license
agreement - Note 3 (150,000) -- (150,000) -- (285,491)
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(149,980) 199,800 (149,966) 199,800 (910,748)
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NET LOSS $ (859,522) $ (223,662) $(1,227,692) $ (435,792) $(3,737,093)
=========== =========== =========== =========== ===========
LOSS PER COMMON SHARE
Basic $ (.18) $ (.05) $ (.25) $ (.10) --
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AVERAGE OUTSTANDING
COMMON SHARES
Basic (stated in 1000's) 4,837 4,299 4,963 4,299 --
----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these
financial statements.
-5-
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
(Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended April 30, 2002 and
2001 and the Period
May 26, 2000 (date of inception - note 7) to April 30, 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
Apr 30, Apr 30, May 26, 2000
2002 2001 to Apr 30, 2002
----------- ----------- -----------
Net loss (1,227,692) $ (435,792) $(3,737,093)
Adjustments to reconcile net loss to
net cash provided by operating
activities
Minority interest (34) -- 4,678
Loss from transfer of license 150,000 -- 150,000
Loss of good will -- -- 958,628
Change in accounts receivable -- (54,500) --
Change in accounts and short term notes payable 821,697 19,255 1,128,849
Depreciation and amortization 8,200 46,188 77,460
Issuance of common stock for services and expenses 496,057 20,000 596,057
Net gain from sale of investment stock -- -- (452,558)
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Net Changes in Cash From Operations 248,228 (404,849) (1,273,979)
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CASH FLOWS FROM INVESTING ACTIVITIES
Patents (560) -- (560)
Purchase of equipment (25,470) (30,782) (104,233)
Purchase of license agreement -- (251,500) --
Advances on note receivable -- (100,000) --
Advance deposits -- (14,605) (4,732)
Acquisition costs of good will -- -- (8,628)
Net Cost of investment stock and licenses (200,000) -- 395,516
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(226,030) (396,887) 277,363
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common capital stock -- 500,000 1,019,225
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Net change in Cash 22,198 (301,736) 22,609
Cash at Beginning of Period 411 402,934 --
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Cash at End of Period $ 22,609 $ 101,198 $ 22,609
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NON CASH FLOWS FROM OPERATING AND INVESTING ACTIVITIES
Issuance of 3,028,076 common shares for all outstanding stock of Videolocity Inc. $ 389,446
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Issuance of 950,000 preferred shares for members' interests in 5th Digit Technologies LLC 950,000
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Issuance of 15,000 common shares for expenses 75,000
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Issuance of 25,000 common shares for services 25,000
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Issuance of 180,000 common shares for retirement of 600,000 preferred shares - 2002 --
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Issuance of 158,500 common shares for interest expense - 2002 136,800
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Issuance of 29,733 common shares for services - 2002 23,787
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Issuance of 435,470 common shares for services and expenses - 2002 335,470
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The accompanying notes are an integral part of these
financial statements.
-6-
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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1. ORGANIZATION
The Company was incorporated under the laws of the State of Nevada on November
5, 1985 with authorized common stock of 50,000,000 shares at $0.001 par value
with the name "Pine View Technologies Corporation." On November 27, 2000 the
name was changed to "Videolocity International Inc." and on November 22, 2000
the Company increased the authorized common capital stock to 125,000,000 with
the same par value and authorized preferred capital stock of 10,000,000 shares
at $.001 par value and on March 1, 2002 reduced the authorized common shares to
12,500,000 with the same par value. The terms of the preferred stock will be
determined by the board of directors when issued.
The Company and its subsidiaries are in the business of developing and marketing
systems, products, and solutions for the delivery of video and other content to
end users on demand. The Company has not started operations and is considered to
be in the development stage.
On December 4, 2000 the Company completed a reverse common stock split of .61
shares for each outstanding share and on March 1, 2002 a reverse common stock
split of one share for ten outstanding shares. This report has been completed
showing after stock split shares from inception.
On December 4, 2000 the Company completed a private placement offering of
610,000 common shares for $500,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Methods
The Company recognizes income and expenses based on the accrual method of
accounting.
Dividend Policy
The Company has not yet adopted a policy regarding payment of dividends.
Income Taxes
On April 30, 2002, the Company and its subsidiaries had an accumulated net
operating loss available for carryforward of $3,665,589 . The tax benefit of
approximately $1,099,677 has been fully offset by a valuation reserve because
the use of the future tax benefit is doubtful since the Company has not started
operations. The net operating loss will expire in 2023.
Concentration of Credit Risk
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Financial instruments that potentially subject the Company to significant
concentration of credit risk consists of a note receivable. (note 3)
-7-
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Equipment
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Office equipment and the digital entertainment system is being depreciated over
five years.
Office equipment $ 36,253
Digital entertainment system 67,981
Less accumulated depreciation (13,952)
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$ 90,282
Basic and Diluted Net Income (Loss) Per Share
- ---------------------------------------------
Basic net income (loss) per share amounts are computed based on the weighted
average number of shares actually outstanding, after the stock splits. Diluted
net income (loss) per share amounts are computed using the weighted average
number of common shares and common equivalent shares outstanding as if shares
had been issued on the exercise of any preferred share rights unless the
exercise becomes antidilutive and then only the basic per share amounts are
shown in the report.
Principals of Consolidation
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The consolidated financial statements shown in this report includes the assets
and liabilities of all subsidiaries and excludes the historical operating
information of the Company prior to December 4, 2000, and the operating
information of the 5th Digit Technologies, LLC (subsidiary) prior to December
22, 2000. (Note 6 and 8)
All intercompany transactions have been eliminated.
Financial Instruments
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The carrying amounts of financial instruments, including cash, a note
receivable, and short term notes and accounts payable, are considered by
management to be their estimated fair values.
Estimates and Assumptions
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Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of the assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing these financial statements.
Comprehensive Income
- --------------------
The Company adopted Statement of Financial Accounting Standards No. 130. The
adoption of this standard had no impact on the total stockholder's equity.
-8-
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Recognition of Income
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The Company is installing the equipment needed to deliver digital information
and entertainment content and high speed internet access in selected hotels,
condominiums and hospitals. After the equipment is operational, the user will
pay for its use with a credit card and the Company will receive approximately
80% of the proceeds.
Other Recent Accounting Pronouncements
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The Company does not expect that the adoption of other recent accounting
pronouncements will have a material impact on its financial statements.
3. NOTE RECEIVABLE
The Company has a note receivable of $600,000 (outlined in note 4) due within
120 days from October 31, 2001, with no interest, secured by 1,000,000 common
shares of Merit Studios, Inc., held by the Company. At the report date the note
was in default and the Merit Studios, Inc. common stock was trading over the
counter with a liquidation value of $.20 per share. For reporting purposes the
value of the note receivable is shown at $200,000, the liquidation value of the
security. The officers of the Company are planning to file a legal action to
foreclose on the security and attempt to collect the note receivable. The note
receivable had been used as security on a note payable given by the Company as
outlined in Note 6.
4. ACQUISITION OF LICENSE AGREEMENT
On October 27, 2000, the Company entered into a technology license agreement
with Merit Studios, Inc. pertaining to Merit's proprietary compression
technology as it applies to the compression and delivery of video and other
content. On May 29, 2001, the Company, through its subsidiary Videolocity
Direct, Inc., entered into an additional technology license agreement with Merit
Studios, Inc., pertaining to Merit's proprietary compression technology for all
aspects and applications in addition to the video application previously
licensed.
On October 31, 2001, and amended on November 2, 2001, the Company, through its
subsidiary Videolocity Direct, Inc., agreed to sell and reassign the above two
license agreements to Merit Studios Inc. The terms of the agreement included a
note receivable of $600,000 due to Videolocity Direct, Inc. (subsidiary) within
120 days from October 31, 2001 with no interest, the return of 2,500,000 common
shares of Videolocity Direct, Inc., which were returned to Videolocity Direct,
Inc. and cancelled on November 11, 2001, and the reassignment of the 1,000,000
common shares of Merit Studios Inc. held by Videolocity Inc.(subsidiary). The
shares in Merit Studios Inc. will be held as security until the note receivable
is paid. (note 3) Videolocity Direct, Inc. changed its name to Healthcare
Concierge Inc. on December 31, 2001.
-9-
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
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5. ACQUISITION OF PATENTS
On April 6, 2002 a Provisional Patent Application for the "Videolocity Digital
Entertainment System-Linux Version" was filed with the United States Patent and
Trademark Office and given an Application No.: 60/370,663 and on May 20, 2002 an
Assignment of Provisional Patent Application No. 60/370,663 was filed on behalf
of Videolocity Technologies, Inc. See note 6 for security agreement.
6. NOTES PAYABLE
The Company has short term financing of $1,441,800 and has issued notes payable,
to various individuals and companies, with due dates of September 1, 2002,
including $300,000 / 6% and $1,141,800 / 8% interest.
On April 30, 2002 the Company filed a UCC-1 financing statement, with the state
of Nevada, on the six Provisional Patent applications held in the name of
Videolocity Technologies, Inc. (wholly owned subsidiary) in favor of certain
promissory note holders, as security, in exchange for an extension of the due
dates on promissory notes of $1,050,000 to September 1, 2002 which includes a
note payable of $300,000 due to WAJ Enterprises LLC thus releasing the
collateral security assignment of the Merit Studios, Inc. note receivable, and a
provision for the inclusion of additional future loans of $450,000 under the
security agreement of which $270,000 in new loans has been received in June
2002.
During November 2001, 108,500 common shares of the Company were issued to
selected note holders as bonus interest. During February and April 2002, 55,000
common shares of the company were issued to selected note holders as bonus
interest. June 2002 $123,000 of the notes payable, plus interest, due to related
parties, was converted to common capital stock at $1.00 per share and $238,124
due to non-related parties was converted to common stock at $1.00 per share
(183,124 shares of Videolocity International, Inc. (parent) and 50,000 shares of
Healthcare Concierge, Inc. (subsidiary). $573,000 of the notes payable was
received from related parties. (123,000 converted)
7. ACQUISITION OF ALL OUTSTANDING STOCK VIDEOLOCITY, INC.
On December 4, 2000 Videolocity International, Inc. (parent) completed the
acquisition of all of the outstanding stock of Videolocity, Inc. (subsidiary),
by a stock for stock exchange in which the stockholders of the subsidiary
received 3,028,076 common shares of the parent, representing 82% of the
outstanding stock of the parent. For reporting purposes, the acquisition was
treated as an acquisition of the parent by the subsidiary (reverse acquisition)
and a recapitalization of the subsidiary. For reporting purposes the assets and
liabilities of the subsidiary are shown in the balance sheet as if the
acquisition had been completed on October 31, 2000. The historical operating
statements prior to December 4, 2000 are those of the subsidiary. No good will
was recognized from the acquisition.
The subsidiary was organized on May 26, 2000 for the purpose of developing and
marketing systems, products, and solutions for the delivery of video and other
content to end users on demand.
-10-
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
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8. SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
Officers, directors, employees and their families and affiliates, have acquired
36 % of the common stock issued and have made short term loans to the Company of
$573,000. The balance of $450,000 with interest of 6% on $300,000 and 8% on
$150,000 is due on September 1, 2002. See Note 6.
D.T. Norman, an affiliate, caused the voluntary contribution and cancellation of
50,000 shares as manager of ISOZ, LC.
9. ACQUISITION OF ALL MEMBERS' INTERESTS OF 5TH DIGIT TECHNOLOGIES, LLC
On December 22, 2000 the Company (the parent) acquired all of all the
outstanding members' interest in 5th Digit Technologies LLC (the subsidiary) in
exchange for 950,000 series A preferred shares of the parent, valued at $1.00
per share, in which good will of $950,000 was recognized. Prior to June 30, 2001
the good will was being amortized over ten years, or a shorter period if an
impairment in value was determined. On October 31, 2001 the remaining value of
the good will was determined to be zero and was expensed.
5th Digit was organized on October 10, 2000. The acquisition was recorded as a
purchase and the operating statements of 5th Digit after November 1, 2000 are
included in the consolidated operating statements. There is no contingent
consideration from the merger agreement remaining.
10. REDEEMABLE PREFERRED CAPITAL STOCK
During December 2000 the Company issued 950,000 shares of series A preferred
stock and 40,000 shares of series B preferred stock. During March 2001 the sale
of the series B preferred stock was rescinded and all monies paid were returned.
During 2001, the company retired 600,000 of the outstanding series A preferred
shares by the issuance 1,800,000 common shares of the Company . A legal action
was filed against the holder of the remaining 350,000 preferred shares
outstanding alleging misrepresentation of the technology acquired as part of the
merger with 5th Digit Technologies, LLC as outlined in note 9. On January 24,
2002 the preferred shares were tendered for liquidation at $5.00 per share and
were subsequently deposited with the court pending the outcome of the legal
action.
On April 11, 2002 Judge Wm. Bohling of the Third Judicial District Court, Salt
Lake County signed a Default Judgment against the holder of the outstanding
350,000 preferred shares ordering cancellation of the shares. It was further
adjudged and decreed that any and all redemption or other rights vested in and
related to the shares be voided. The 350,000 preferred shares were cancelled on
April 12, 2002.
-11-
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
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11. STOCK INCENTIVE PLANS
On October 1, 2000 the Company established a stock incentive plan to attract and
retain qualified people to serve as key employees. Awards made under the plan
shall be in plan units and each unit can be convertible, at the option of the
participant, into one share of the Company's common stock after the vesting
requirement has been satisfied. The Company reserved 1,000,000 common shares
that can be issued under the plan. The Company has issued 34,708 common shares
under the plan.
On March 26, 2002 the Company filed an additional stock option and stock award
plan which had been approved by the shareholders of Pine View Technologies in
November 2001 as part of the merger with Videolocity, Inc.(subsidiary). The
purpose of the plan is to enable the Company to attract and retain qualified
persons to serve as officers, directors, key employees and consultants of the
Company, and to align the financial interests of these persons with those of its
shareholders by providing those officers, directors, key employees and
consultants with a proprietary interest in the Company's performance and
progress through the award of stock options, appreciation rights or stock awards
from time to time.
The plan shall remain in effect for a period of five years or until amended or
terminated by action of the Board. The termination of the Plan shall not affect
any outstanding awards made under the Plan. The maximum number of shares of
Common Stock, which may be issued pursuant to the Plan is 500,000. The Company
has issued 400,000 shares under the Plan.
12. CONTINUING AND CONTINGENT LIABILITIES
The Company is obligated under office leases for $6,500 per month through
December 2002.
On December 26, 2001 Gateway Center, LLC filed a complaint in the Third District
Court, Summit County against a former company president, Jerry Romney, Jr. and
Movies on Line, Inc. (now Videolocity, Inc.) The complaint alleges non-payment
of Common Area Maintenance fees for office space leased between August 2000 and
December 31, 2000 in the amount of $1,564.
On April 8, 2002, the company filed a response which alleges that during the
entire term of the Lease, the Gateway Center, LLC never provided written or oral
notice of any sums it claimed were due and owning for "additional rent" or any
other purpose, never sent a monthly or other statement for any such additional
amount, never demanded payment of any such sums and, when the term of the lease
had expired, they orally notified the company that it had paid all amounts that
Gateway Center, LLC had claimed under the lease. The company received no notice,
written oral of any supposed amount due until September 24, 2001.
On May 2, 2002 the company filed a complaint in the Third Judicial District
Court, Salt Lake County against former employee. The complaint alleges a willful
breach of the provisions of the Employment Agreement executed between the
parties on March 16, 2001. The complaint also alleges misrepresentation and
fraud on the part of the former employee.
-12-
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
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13. SUBSEQUENT EVENTS
On May 28, 2002 Videolocity International, Inc. finalized an Equity Line of
Credit Agreement, with Cornell Capital Partners, LP, a New Jersey-based domestic
investment fund. Under the Equity Line, Videolocity has the right, but not the
obligation, to require Cornell Capital to purchase shares of Videolocity common
stock up to a maximum amount of $20,000,000 over a 24-month period. There is no
minimum draw down although Videolocity may make draws, as provided below, during
the term of the Equity Line.
Pursuant to terms of the Equity Line, Videolocity is required to file with the
SEC a registration statement covering the shares to be acquired by Cornell
Partners. The 24-month term commences on the effective date of the registration
statement. The purchase price of the shares will be 95% of the lowest closing
bid price of Videolocity common stock during the five consecutive trading days
immediately following receipt of the Company's notice of its intent to make a
draw. Videolocity may make up to four draws per month at a maximum $250,000 per
draw. In addition to the shares to be issued under the Equity Line, Videolocity
will include in its registration statement an additional 300,000 shares being
issued to Cornell Partners and the Placement Agent in connection with the
execution of the Equity Line.
On May 15, 2002 the Company issued a $20,000 sixty day note payable, bearing 8%
interest, to a non-related party for the repurchase of 20,000 shares of
Healthcare Concierge, Inc. (subsidiary).
The accompanying consolidated balance sheets of Videolocity International Inc.
and Subsidiaries (development stage company) at April 30, 2002 and December 31,
2001, and the related statement of operations and cash flows for the three
months ended April 30, 2002, and 2001 and the period May 26, 2000 April 30, 2002
have been prepared by the Company's management in conformity with generally
accepted accounting principles in the United States of America. In the opinion
of management, all adjustments considered necessary for a fair presentation of
the results of operations and financial position have been included and all such
adjustments are of a normal recurring nature.
Operating results for the three months ended April 30, 2002 are not necessarily
indicative of the results that can be expected for the year ending October 31,
2002.
-13-
Item 2. Management's Discussion and Analysis or Plan of Operation
The following information should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Form 10-QSB.
Plan of Operation
We are a solution engineering and marketing company involved in the
deployment of the Videolocity "Digital Entertainment SystemTM" (DES) and other
advanced digital information and entertainment solutions. DES delivers
video-on-demand in near DVD quality, including movies and other videos, medical
information and educational material to individuals, residents, hotel guests,
and patients and attendants in the healthcare industry.
We operate our business through five subsidiaries which perform various
functions, strategic to their market place or core competency. A sixth
subsidiary is inactive. To date, our activities have been limited to developing
the DES and other technologies. We are presently commencing the initial
marketing of DES into various marketplaces.
DES permits viewers to select from an extensive library of movie titles
or informational/educational content and view their selections on their
television screens, lap top computers or PDA's. All content is protected through
our proprietary encryption and encoding process, which limits viewing to the
person, or persons, authorized to access the movie or other content and prevents
unauthorized digital reproduction or rebroadcast. Our system also provides
digital music-on-demand, Internet games, high-speed Internet access and many
other e-commerce applications.
We intend to use our existing capital, together with proceeds from
prospective future financings, to continue deployment and sales of DES, which
includes high-speed Internet access. Management estimates that minimum expenses
during the next twelve months will be approximately $1,800,000, consisting of
$1,400,000 in payroll, $70,000 for office rent, and $261,000 for general and
administrative expenses including legal and accounting fees. Research and
development expenses are estimated to be approximately $69,000 during the next
twelve months. These expenses will be directed at further development of the DES
and integration in television sets and other monitors. We will also incur
substantial additional costs in connection with the manufacture and deployment
of DES. Management further estimates that such costs will be a minimum of
$10,000,000, but we are optimistic that we will be able to cover most of those
costs, either from future financing, or based on contracts entered into and
financed on an individual basis for the deployment of each individual system. We
have entered into a strategic relationship with Tech Flex Funding, Inc., wherein
funding is available for all future installations on a lease back program
without recourse to Videolocity.
We anticipate generating future revenues from the delivery of video and
other content to the end users of our DES, together with high-speed Internet
access. Management believes revenues from contracts will commence by September
30, 2002 from contracts now in process. We will charge a fee for each movie or
other item of content viewed through our system and/or high-speed Internet
access and we will remit a portion of each fee to the studio or other content
provider. We also plan to sell or lease our set-top boxes for use with the DES
to viewers at a price calculated to return it's out of pocket costs and a small
profit over a period of three to five years.
During the next twelve months, we plan to seek additional debt funding
in the form of credit lines for up to approximately $50 million. This would
permit us to cover our minimum expenses described above and accelerate
deployment of our DES. We have entered into a $20 million equity line of credit
agreement with Cornell Capital, which we anticipate will provide us with
adequate working capital for at least the next 24 months. Without drawing
against the line of credit and based on current costs of operation, contract
commitments, and availability of credit, management estimates that our current
assets will be sufficient to fund our cost of operation for approximately the
next three months and that we must obtain additional financing during that time
in order to continue operations.
-14-
During the six month period ended April 30, 2002, we have received an
aggregate of $716,000 in loans from various individuals, including $173,000 from
related parties. These loans are evidenced by 8% notes and the funds are being
used for general operational expenses. In April 2002 we filed a UCC-1 financing
statement, with the State of Nevada, covering the six Provisional Patent
applications held in the name of Videolocity Technologies, Inc., a wholly owned
subsidiary. The financing statement extends, without penalty, certain promissory
notes totaling $1,050,000 to September 1, 2002. The filing also includes a note
payable of $300,000 due to WAJ Enterprises LLC, which releases a prior
collateral security assignment of our Merit Studios, Inc. note receivable, and a
provision for the inclusion of additional future loans of $450,000 under the
security agreement. Of this amount, $270,000 in new loans have been received in
June 2002.
On April 30, 2002, the Board of Directors unanimously authorized the
sale at the price of $1.00 per share of up to 1,000,000 shares of the Common
Stock of Healthcare Concierge, Inc., formerly Videolocity Direct, Inc., and
which shares are issued and outstanding as an asset of Videolocity
International, Inc.
Upon our acquisition of 5th Digit Technologies, LLC. in December 2000,
we issued 950,000 shares of Series A Preferred Stock, which shares were
redeemable at the option of the holders during the period from January 2 through
January 31, 2002, at a price of $5.00 per share. On January 2, 2002, we filed a
lawsuit alleging fraud and misrepresentation. Three of the individuals
originally comprising 5th Digit ownership, settled with us in an exchange (sale
and purchase) of one share of their Series "A" Preferred shares for three shares
Videolocity common stock. Subsequently, the Court canceled the remaining 350,000
Series "A" shares.
On July 30, 2001, the Board of Directors unanimously authorized the
offering of up to $750,000 in 60-Day Secured Notes bearing interest at 8% per
annum. An aggregate of $750,000 of the secured Notes had been placed by August
1, 2001 and have been extended until September 1, 2002. A total of $450,000 of
the notes are with affiliated parties.
To date, we have not realized material revenues from our operations.
For the six months ended April 30, 2002, we had no revenues and only nominal
revenues of $6,218, in the form of interest, for the comparable 2001 period. For
the six months ended April 30, 2002, total expenses increased 68% from the
comparable 2001 period. This is attributed primarily to the 47% increase in
administrative expenses in 2002 which reflects our increased activities related
to readying the DES for installation. Administrative expenses include ongoing
research and development of our technology. Also, we had interest expense of
$192,799 for the six month ended April 30, 2002 compared to $0 for the same 2001
period, reflecting our financing activities in 2002. Management anticipates that
as we scale up the installation of the DES, our expenses will increase
proportionately.
Liquidity and Capital Resources
During the first half of fiscal 2002 our total current assets decreased
from $350,411 at October 31, 2001 to $222,609 at April 30, 2002. This decrease
is attributed primarily to the $150,000 reduction in notes receivable due to the
decrease in the liquidation value of the security collateralizing the note.
During this same period, cash increased from $411 to $22,609. Total assets
decreased from $428,155 at October 31, 2001 to $318,183 at April 30, 2002,
primarily due to the reduction in notes receivable.
Total current liabilities increased from $907,072 on October 31, 2001
to $1,728,769 at April 30, 2002. The change is attributed to the increase from
$750,000 in notes payable to $1,441,800 during the six month period, due to
additional borrowing. Accounts payable also increased during the six month
period from $143,123 to $223,114 due to insufficient operating capital.
Inflation
In the opinion of management, inflation has not and will not have a
material effect on the operations in the immediate future.
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Net Operating Loss
At April 30, 2002, Videolocity and its subsidiaries had accumulated a
net operating loss carryforward of approximately $3,665,589, with a tax benefit
of approximately $1,099,677. No tax benefit has been recorded in the financial
statements because the tax benefit has been fully offset by a valuation reserve
as the use of the future tax benefit is in doubt. The net operating loss will
expire in 2023. In the event of certain changes in control, there will be an
annual limitation on the amount of net operating loss carryforwards which can be
used.
Risk Factors and Cautionary Statements
This report contains forward-looking statements that reflect the views
of management with respect to future events based upon information available at
this time. These forward-looking statements are subject to certain uncertainties
and other factors that could cause actual results to differ materially from
these statements. Forward-looking statements are typically identified by the use
of the words "believe," "may," "will," "should," "expect," "anticipate,"
"estimate," "project," "propose," "plan," "intend," and similar words and
expressions. Examples of forward-looking statements are statements that describe
the proposed operation and marketing of the Videolocity Digital Entertainment
System(TM), statements that describe the functions and operations of technology
it has licensed but not tested, statements with regard to the nature and extent
of competition Videolocity may face in the future, and statements with respect
to future strategic plans, goals or objectives. Forward-looking statements are
contained in this report under the caption "Plan of Operation." These
forward-looking statements are based on present circumstances and on predictions
respecting events that have not occurred, that may not occur, or that may occur
with different consequences and timing than those now assumed or anticipated.
Actual events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including the risk
factors discussed in this report. These cautionary statements are intended to be
applicable to all related forward-looking statements wherever they appear in
this report. Forward-looking statements are made only as of the date of this
report and Videolocity assumes no obligation to update forward-looking
statements to reflect subsequent events or circumstances.
PART II
Item 1. Legal Proceedings
In January 2002 we filed an action in the Third Judicial District Court
of Salt Lake County, Utah against the holder of 350,000 shares of Series "A"
Preferred stock, together with certain other persons. The complaint asks the
court to cancel the remaining 350,000 shares outstanding from the 5th Digit
Technologies, LLC acquisition. The suit alleges fraud and misrepresentation
which induced our acquisition of 5th Digit Technologies, LLC. The remaining
350,000 shares were tendered for liquidation at $5.00 per share on January 24,
2002, however, they were deposited with the Court.
On April 11, 2002 the Court entered a Default Judgment against the
holder of the outstanding 350,000 preferred shares, ordering cancellation of the
shares. It was further adjudged and decreed that any and all redemption or other
rights vested in and related to the shares be voided. The 350,000 preferred
shares were cancelled on April 12, 2002.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During our second fiscal quarter ended April 30, 2002, we issued an
aggregate of 485,491 shares of our common stock. Also during the quarter, one of
our directors, D.T. Norman, through ISOZ, L.C. of which she is the manager,
voluntarily contributed back to us for cancellation, 50,000 shares to help
offset additional shares that we have issued as consideration to acquire certain
loans.
Of the 485,491 shares issued, 50,000 shares, valued at $1.00 per share,
were issued to The Greenwood Technology Group and 25,495 shares, valued at $1.00
per share, were issued to Bernard E. Driscoll, both unrelated parties, as bonus
shares pursuant to loans made to us. These issuances were made in private
transactions and, accordingly, we relied upon the exemption from registration
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under the Securities Act of 1933, as amended, provided by Section 4(2) of the
Act. These shares are deemed to be restricted securities. Also during the second
quarter, we issued 21 shares to existing shareholders pursuant to the rounding
up of fractional shares resulting from our one share for ten shares reverse
stock split.
In April 2002 we issued 400,000 shares of our common stock under the
Videolocity International, Inc. 2002 Stock Option and Stock Award Plan. The
shares were issued to nine persons and were subject to a registration statement
filed with the SEC on April 15, 2002 on Form S-8. Also during the second
quarter, we issued 9,975 vesting shares to employees under the Videolocity, Inc.
2000 Stock Incentive Plan. These shares were issued to five persons and were
subject to a registration statement filed with the SEC on July 31, 2001.
Item 3. Defaults Upon Senior Securities
This Item is not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
This Item is not applicable.
Item 5. Other Information
On March 1, 2002, we effected a reverse stock split of our issued and
outstanding shares of common stock on a one (1) share for ten (10) shares basis.
The reverse stock split also affects the conversion of any of our outstanding
convertible securities. In connection with the stock split, the NASD issued a
new trading symbol of "VCTY" for the trading of our shares on the OTC Bulletin
Board.
On May 28, 2002 we entered into an equity line of credit agreement with
Cornell Capital Partners, LP. Under the equity line, we have the right, but not
the obligation, to require Cornell Capital to purchase shares of our common
stock up to a maximum amount of $20 million over a 24-month period. There is no
minimum draw, although we may, at our discretion, make up to four draws per
month at a maximum of $250,000 per draw, or $1million per month.
Under the terms of the equity line, we are required to file with the
SEC a registration statement covering the shares issued under the equity line.
The 24-month term commences on the effective date of the registration statement.
Cornell Partners' purchase price will be 95% of the lowest closing bid price of
our common stock during the five consecutive trading days immediately following
receipt of our notice to make a draw. In addition to the shares to be issued
under the equity line, we will include in the registration statement an
additional 290,000 shares issued to Cornell Partners, and 10,000 shares issued
to Westrock Advisors to act as our exclusive placement agent in connection with
the equity line.
The total amount of shares issuable under the equity line is based upon
the number of draws we make and the sale price of the shares. We are presently
in the process of preparing the registration statement for filing with the SEC.
Upon effectiveness of the registration statement, we will be able to begin
drawing against the equity line.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following documents are included attached as
exhibits to this report.
None
(b) Reports on Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VIDEOLOCITY INTERNATIONAL, INC.
BY: /S/ ROBERT E. HOLT
--------------------------------------------
ROBERT E. HOLT
President and Director
Date: June 19, 2002
BY: /S/ LARRY R. MCNEILL
- ----------------------------------------------
LARRY R. MCNEILL
Vice President, Chief Financial Office
and Director
(Principal Financial and Accounting
Officer)
Date: June 19, 2002
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