As Filed with the Securities and Exchange Commission on July 5, 2002
Registration No.
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
---------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
VIDEOLOCITY INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Nevada 4899 87-0429154
- ------------------------------- --------------------- ------------------
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classifi- Identification Number)
cation Code Number)
44 West Broadway, Suite 1405 South, Salt Lake City, Utah 84101
--------------------------------------------------------------
(801) 521-2808
(Address and telephone number of principal executive offices)
44 West Broadway, Suite 1405 South, Salt Lake City,
--------------------------------------------------------------
Utah 84101 (Address of principal place of business or intended
principal place of business)
Larry R. McNeill
Videolocity International, Inc.
44 West Broadway, Suite 1405 South
Salt Lake City, Utah 84101
(801) 521-2808
(Name, address and telephone number of agent for service)
Copy to:
Leonard E. Neilson, Esq.
Leonard E. Neilson, P.C.
8160 South Highland Drive, Suite 209
Sandy, Utah 84093
Approximate date of proposed sale to the public: As promptly as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check he following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum Amount of
Title each class of Securities Amount to be Offering Price Aggregate Registration
to be Registered Registered Per Share Offering Price Fee(1)
Common stock issuable under equity 21,200,000 $ 1.30 $ 27,560,000 $ 2,535.52
line of credit shares(2) per share(3)
========================================= ================== ================== ==================== =================
Additional common stock offered by 290,000 $ 1.30 $ 377,000 $ 34.69
Cornell Capital Partners L.P. shares per share(3)
========================================= ================== ================== ==================== =================
Common stock offered by Westrock 10,000 $ 1.30 $ 13,000 $ 1.20
Advisors, Inc. shares per share(3)
========================================= ================== ================== ==================== =================
TOTAL FEE $ 2,571.41
(1) The fee with respect to these shares and as required by Section 6(b) of
the Securities Act of 1933, as amended, (the "Securities Act"), has
been calculated pursuant to Rule 457(c) under the Securities Act and
based upon the last sale price per share of the Issuer's common stock
on a date within five (5) days prior to the date of filing this
Registration Statement, as reported by the OTC Bulletin Board.
(2) Estimated 21,200,000 shares issuable pursuant to our equity line of
credit agreement with Cornell Capital Partners, L.P.
(3) Estimated solely for purposes of calculating the registration fee and
base on the last reported sale price per share on July 2, 2002.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Subject to completion dated July 5, 2002
----------------------------------------
PROSPECTUS
VIDEOLOCITY INTERNATIONAL, INC.
21,500,000 Shares of Common Stock
This prospectus relates to the sale of up to 21,500,000 shares of our
common stock by certain persons who are, or will become, stockholders of
Videolocity International, Inc. Please refer to the "Selling Stockholders"
section beginning on page 22. We are not selling any shares of common stock
pursuant to this offering and, therefore, we will not receive any proceeds from
the offering. However, we will receive funds upon the sale and issuance of
shares under the equity line of credit agreement with Cornell Capital Partners,
L.P. We will bear all costs associated with the registration statement to which
this prospectus relates. Cornell Capital is entitled to retain 5.0% of the
proceeds raised under the equity line of credit.
The shares of common stock are being offered for sale on a best efforts
basis by the selling stockholders at prices established on the Over-the-Counter
Bulletin Board during the term of this offering. There are no minimum purchase
requirements. These prices will fluctuate based on the demand for the shares of
common stock.
The selling stockholders are as follows:
a. Cornell Capital Partners, L.P., who may offer and sell, from
time to time, up to 21.2 million shares of common stock being
issued pursuant to the equity line of credit, and 290,000
additional shares previously issued under that agreement;
b. Westrock Advisors, Inc., who may offer and sell, from time to
time, up to 10,000 shares of common stock previously acquired
pursuant to the placement agent agreement
We refer to Cornell Capital and Westrock Advisors, and other
stockholders who may offer and sell shares of our common stock under this
prospectus, as "selling stockholders."
Cornell Capital and Westrock Advisors are underwriters within the
meaning set forth in the Securities Act of 1933 with respect to the shares to be
offered and sold by each of them. Cornell Capital will pay us 95% of the market
price of our common stock. The 5% discount on the purchase of the common stock
received by Cornell Capital is considered an underwriting discount. None of the
proceeds from the sale of shares by selling stockholders will be placed in
escrow, trust or similar account. Broker- dealers who act in connection with the
sale of the common stock may also be deemed to be underwriters. Profits on any
resale of the common stock as a principal by these broker-dealers and any
commissions received by the broker-dealers, may also be deemed underwriting
discounts and commissions under the Securities Act.
Our common stock currently trades on the OTC Bulletin Board, also
referred to as the OTC-BB, under the symbol "VCTY." The last reported selling
price as of July 2, 2002 was $1.30.
These securities are speculative and involve a high degree of risk.
Investing in our common stock involves risks which are described in the "Risk
Factors" section beginning on page 9 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is July __, 2002
-1-
VIDEOLOCITY INTERNATIONAL, INC.
A True Digital Information and Entertainment End-to-End Solution
o Fully integrated software driven hardware application o Fully
scalable for any size deployment o Fully adaptable to all architecture
o Fully customizable and designed for each application
[Graphic Omitted]
Our technology allows us to deliver true video-on-demand streaming in
Mpeg4 format at 900kbps or less achieving near DVD quality over wireless,
Ethernet or DSL WAN & LAN network architectures. Accordingly, we can offer the
following innovations and features:
* Property/Facility Information * Personal and Corporate E-mail
* Specific Application Content / Information * Music on Demand
* Specific Educational Content / Information * Internet Games
* Dietary Menus * Wireless Headset
* Movies/Videos on Demand * Wireless Keyboard
* High Speed Internet Access * Handheld Remote Control
-2-
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY........................................................................... 3
RISK FACTORS................................................................................. 9
USE OF PROCEEDS.............................................................................. 17
DILUTION..................................................................................... 18
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY.............................................. 19
CAPITALIZATION............................................................................... 20
EQUITY LINE OF CREDIT........................................................................ 20
PLAN OF DISTRIBUTION......................................................................... 21
SELLING STOCKHOLDERS......................................................................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS................................... 23
BUSINESS..................................................................................... 26
MANAGEMENT................................................................................... 36
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................. 41
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS................................................. 42
DESCRIPTION OF CAPITAL STOCK................................................................. 43
SHARES ELIGIBLE FOR FUTURE SALE.............................................................. 45
LEGAL MATTERS................................................................................ 46
EXPERTS...................................................................................... 46
WHERE YOU CAN FIND MORE INFORMATION.......................................................... 46
CONSOLIDATED FINANCIAL STATEMENTS............................................................ F-1 TO F-25
--------------
You should rely only on the information contained in this prospectus.
We have not authorized any other person to provide you with different
information. This prospectus is not an offer to sell, nor is it seeking an offer
to buy, theses securities in any state where the offer or sale is not permitted.
The information in this prospectus is complete and accurate as of the date on
the front cover, but the information may have changed since that date.
All references in this prospectus to "we," "us" and "our" refer to
Videolocity International, Inc., unless indicated otherwise.
-3-
(This page intentionally left blank)
-4-
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus, but does not contain all of the information that may be important to
you. This prospectus includes specific terms of the offering, information about
our business and financial data. We encourage you to read this prospectus in its
entirety, particularly the "Risk Factors" section, financial statements and
notes, before making an investment decision.
WHAT WE DO
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.
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 operate our business through five subsidiaries which perform various
functions strategic to their market place or core competency. To date, our
activities have been limited to DES and other technologies. We are presently
commencing the initial marketing of DES into various marketplaces.
ABOUT US
Our principal executive offices are located at 44 West Broadway, Suite
1405 South, Salt Lake City, Utah 84101, telephone number (801) 521-2808. Our
operations offices are located at 1762-A Prospector Avenue, Park City, Utah
84060, and our telephone number is (435) 615-8338. We also maintains a Salt Lake
City mailing address at 358 South 700 East, #B-604, Salt Lake City, Utah 84102,
telephone number (801) 230-0839.
OUR BUSINESS STRATEGY
Our current business strategy is to drive demand of the wireless usage
of our DES worldwide in the hospitality, healthcare and residential markets. We
are committed to continued development and installation of innovative, high
quality, cost effective solutions and systems to build an increased and ongoing
revenue stream. We provide a revolutionary wireless quality solution and also
offer a parallel quality solution over wire (Ethernet, DSL, CATV) and Fiber
architectures. Our DES is available on either a Mircosoft or Linux operating
system in a stand alone set top box or integrated in a television set.
HISTORICAL INFORMATION
We originally incorporated in Nevada on November 5, 1985 as Pine View
Technologies, Inc. In 1987, we completed a public offering of shares of common
stock, from which we realized net proceeds of approximately $103,361. We had
limited operations until 2000.
On December 4, 2000, we finalized the acquisition of Videolocity, Inc.,
a Nevada corporation, pursuant to a reorganization agreement dated as of
November 15, 2000. Videolocity, Inc. was created as Moviesonline, Inc. to
develop and market systems, products and solutions for the delivery of video and
other content to end users on demand. It also developed a business plan,
assembled an experienced management team, acquired rights to proprietary
technology, and raised $519,000 as initial working capital through the private
placement of common stock. In connection with the acquisition, we issued
3,028,125 shares of our common stock to the shareholders of Videolocity, Inc. We
also sold 610,000 shares of our common stock for $500,000 pursuant to a private
placement, that was subject to the completion of the acquisition and was closed
immediately following the transaction. As a result of the acquisition and
private placement, 15% of our outstanding shares were held by our shareholders
prior to the acquisition, 71%, were held by former shareholders of Videolocity,
Inc., and 14%, were held by purchasers in the private placement. At the closing
of the acquisition, our incumbent directors resigned and the persons nominated
by Videolocity, Inc. were elected as our new directors.
-5-
In connection with our acquisition of Videolocity, Inc., we adopted its
stock incentive plan and reserved 1.0 million shares of its common stock for
issuance in connection with awards made under the plan to their key employees
and consultants. Also, we amended and restated our articles of incorporation
that included the following:
* changing our corporate name from Pine View Technologies, Inc.
to Videolocity International, Inc.;
* increasing our authorized capitalization to 125 million shares
of common stock, par value $0.001, and 10 million shares of
preferred stock, par value $0.001;
* limiting the liability of our directors and officers to the
maximum extent permitted by Nevada law; and
* other miscellaneous items.
The acquisition and related proposals were approved by the written
consent of shareholders holding a majority of our issued and outstanding shares
of common stock. The acquisition and reorganization was treated for accounting
purposes as a reverse acquisition of our company by Videolocity, Inc., although
for corporate purposes we are the acquiring entity.
On December 4, 2000, we effected a reverse stock split of our issued
and outstanding shares on a 0.61 share for one share basis. On March 1, 2002, we
effected a second reverse stock split, this split being on a one share for ten
shares basis. In July 2000, we change our authorized capitalization to 50
million shares of common stock. Unless otherwise noted, all share figures in
this prospectus have been adjusted to give effect to the two stock splits.
SELLING STOCKHOLDERS
This prospectus relates to shares of our common stock being offered by
the selling stockholders, Cornell Capital and Westrock Advisors, who may offer
and sell shares under this prospectus.
On May 28, 2002 we entered into an equity line of credit agreement with
Cornell Capital. Under the equity line, Cornell Capital agrees to provide to us
private financing up to $20 million during the 24 months following the effective
date of the registration statement, to which this prospectus relates. Cornell
Capital received an additional 290,000 shares of our common stock under the
equity line of credit agreement and Westrock Advisors received 10,000 shares to
act as our exclusive placement agent in connection with the equity line of
credit. A provision of the equity line of credit agreement and placement agent
agreement requires that we file a registration statement with the SEC for the
purpose of registering the shares of common stock issued, and to be issued
pursuant to the agreements.
The equity line permits us to draw, at our option, up to $250,000 a
maximum of four times per month. The total amount of shares issuable under the
equity line is based upon the sale of shares at 95% of the current market price
at the time of sale.
The following table sets forth the total amount of shares issuable
under the equity line if the maximum $20 million is used and presumes the
issuance of shares at various prices, based upon the formula set forth in the
equity line of credit agreement. You should note that there is no minimum price
at which shares may be issued under the equity line. Accordingly, if the price
of our stock declines and we elect to draw against the equity line at the lower
stock prices, we would issue more shares.
Investor's Number
Current Price(1) Price(2) of Shares(3)
---------------- --------------- ------------
$ 1.00 $ 0.95 21,052,631
1.25 1.1875 16,842,105
1.50 1.425 14,035,087
2.00 1.90 10,526,315
2.50 2.375 8,421,053
3.00 2.85 7,017,544
(1) Assumed current market price of common stock at time we draw
against the equity line.
(2) Price to Cornell Capital based on 95% of current market price.
(3) Represents total shares issued if the entire $20 million is
drawn at the prices depicted, but does not include the 300,000
shares issued upon entering into the equity line.
-6-
This prospectus relates only to 21.5 million shares of our common
stock. Thus, if we were to issue more that this amount under the equity line of
credit agreement, we would have to file a new registration statement to
accommodate the additional shares.
-7-
THE OFFERING
Securities offered by selling stockholders .... 21,500,000 shares of our common stock
Offering price................................. Determined at the time of sale by the selling stockholders
Common stock outstanding before offering:...... 5,748,011 shares(1)
Common stock outstanding after offering:....... 27,248,011 shares(2)
OTC Bulletin Board Symbol...................... Common Stock: "VCTY"
Use of proceeds................................ We will not receive any proceeds from the shares offered by
the selling stockholders. Any proceeds we receive under the
equity line of credit agreement will be used for general
corporate purposes.
Risk Factors................................... The common stock offered involve a high degree of risk,
immediate substantial dilution, and should not be purchased
if you cannot afford the loss of your entire investment.
Before purchasing any of the offered shares, you should
review carefully and consider all information contained in
this prospectus, particularly the items set forth under "Risk
Factors."
(1) As of June 28, 2002 and includes:
/ 290,000 shares issued to Cornell Capital under the equity line of
credit agreement; and
/ 10,000 shares issued to Westrock under the placement agent agreement.
The amount of outstanding shares excludes outstanding options,
warrants, convertible promissory notes and convertible debentures which, if
exercised or converted in our common stock, would result in an additional
282,800 shares outstanding. The amount also excludes 50,000 shares of common
stock that has been authorized for issuance under our 2002 Stock Award Plan, but
has not been issued.
(2) Assumes 21.2 million shares of common stock issued under the equity
line of credit agreement at a price equal to 95% of the current market
price, plus the 300,000 previously issued.
USE OF PROCEEDS
We will not receive any proceeds from shares offered by the selling
stockholders. Proceeds from the sale of our stock under the equity line of
credit will be used for general corporate purposes.
-8-
SUMMARY FINANCIAL INFORMATION
The following information was taken from our financial statements for
the six months ended April 30, 2002 and 2001 (unaudited) and the fiscal years
ended October 31, 2001 and 2000 appearing elsewhere in this prospectus. This
information should be read in conjunction with such financial statements and the
notes thereto. In management's opinion all adjustments, consisting of normal
recurring items, considered necessary for a fair presentation have been
included.
Consolidated Statements of Operations Data
Six Months Years Ended
Ended April 30, Ended October 31,
-------------------------- --------------------------
2002 2001 2001 2000
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Revenues: $ -- $ 6,218 $ 5,578 $ --
----------- ----------- ----------- -----------
Expenses:
Administrative 876,727 595,622 1,353,710 129,778
Interest 192,799 -- 201,449 --
Depreciation and amortization 8,200 46,188 69,260 --
----------- ----------- ----------- -----------
Total expenses 1,077,726 641,810 1,624,419 (129,778)
----------- ----------- ----------- -----------
Net loss - from operations (1,077,726) (635,592) (1,618,841) (129,778)
----------- ----------- ----------- -----------
Other income (loss)
Minority interests 34 -- (4,712) --
Loss of good will -- -- (958,628) --
Net gain from sale of investment stock -- 199,800 338,049 --
Net loss from transfer of license
agreement (150,000) -- (135,491) --
----------- ----------- ----------- -----------
Net loss $ 1,227,692) $ (435,792) $(2,379,623) $ (129,778)
=========== =========== =========== ===========
Loss per common share - Basic $ (.25) $ (.10) $ (.06) $ (.02)
----------- ----------- ----------- -----------
Average outstanding common
shares (stated in 1000's) 4,963 4,299 43,087 6,406
Consolidated Balance Sheet Data
April 30, 2002 October 31, 2001,
----------- -----------
(Unaudited)
Assets
Current assets
Cash $ 22,609 $ 441
Notes receivable - net or provision of
for doubtful accounts 200,000 350,000
----------- -----------
Total current assets 222,609 350,411
----------- -----------
Equipment - net of accumulated depreciation 90,282 73,012
Other assets
Advance deposits 5,292 4 732
----------- -----------
Total assets $ 318,183 $ 428,1155
=========== ===========
Liabilities and stockholders equity
Current Liabilities
Notes payable - related parties $ 573,000 450,000
Notes payable 868,800 300,000
Accrued interest - notes payable 63,855 13,949
Accounts payable 223,114 143,123
----------- -----------
Total current liabilities 1,728,769 907,072
----------- -----------
Redeemable preferred capital stock
Series A issued -- 950
Capital in excess of par value -- 3,957,380
----------- -----------
-- 3,958,330
Minority interest 5,004 5,038
Stockholders' equity - (deficiency)
Common stock 5,072 43,187
Capital in excess of par value 2,316,431 (1,976,071)
Deficit accumulated during development stage (3,737,083) (2,509,401)
Total stockholders; equity (deficiency) (1,415,590) (4,442,155)
----------- -----------
Total liabilities and stockholders deficiency$ 318,183 $ 428,155
=========== ===========
-9-
RISK FACTORS
A purchase of our common stock is speculative and involves a high
degree of risk. You should consider carefully the following risks, together with
all other information included in this prospectus, before you decide to buy our
common stock. Please keep these risks in mind when reading this prospectus,
including any forward- looking statements appearing herein. If any of the
following risks actually occurs, our business, financial condition or results of
operations would likely suffer materially. As a result, the trading price of our
common stock may decline and you could lose all or part of the money you paid to
buy our common stock.
Risks Relating to Our Business
Our extremely limited operating history makes it difficult to evaluate
our business and prospects
We commenced our current business operations in January 2001 and have
conducted only minimal operations since that time. As a result of our short
operating history, we have only limited financial data and business information
for you to evaluate our business strategies, past performance and an investment
in our common stock.
We have a history of losses and anticipate future losses
We have not achieved any significant revenues to date and we may not
achieve, or subsequently maintain profitability if anticipated revenues occur
more slowly than we expect, or not at all. At April 30, 2002, our accumulated
deficit was approximately $3,737,093. We expect to continue to incur significant
expenses in connection with:
* funding for research and development;
* costs of our sales and marketing efforts;
* increased general and administrative expenses; and
* additional non-cash charges relating to amortization of
intangibles and other deferred expenses.
Accordingly, we need to generate significant revenues to achieve and
sustain profitability. If we do achieve profitability, we may be unable to
sustain or increase profitability on a quarterly or annual basis. Any of these
factors could cause our stock price to decline. The current economic downturn
has resulted in reduced entertainment spending in many of the markets that we
serve worldwide.
There is substantial doubt about our ability to continue as a going
concern due to working capital shortages, which means that we may not
be able to continue operations unless we obtain additional funding
The report of our independent accountants on our October 31, 2001
financial statements and note 13 thereto, indicates that there is substantial
doubt about our ability to continue as a going concern due to working capital
shortages. Our ability to continue as a going concern depends on our ability to
obtain additional funding. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The video-on-demand market is new and may not gain broad market
acceptance; our potential customers may not purchase our
video-on-demand systems
We are focusing our initial sales efforts on various video-on-demand
markets. The growth and future success of our business depends largely upon our
ability to penetrate new markets and sell our systems to individuals, residents,
hotel guests, and patients and attendants in the healthcare industry. Because
the video-on- demand market is relatively new, there can be no assurance that
there will be broad customer acceptance. If these potential customers determine
that video-on-demand is not viable as a business proposition, or if they decide
to delay their purchase decisions or to purchase systems from our competitors,
our business, financial condition and results of operations will be
significantly adversely affected.
-10-
If our technology and solutions are not accepted by the market, our
revenues will decline
Our technology and solutions are ready for deployment in the
marketplace. Market acceptance of our technology is critical to our future
success. Factors that may affect the market acceptance of our technology
include:
* market acceptance of our DES and related technology;
* features, performance, and cost of installation and use of our
technology;
* availability of competing solutions and technologies;
* success and development of our marketing and distribution
channels;
* the length of the sale cycle for our products;
* our ability to control costs;
* quality of our customer service and support of our technology;
and
* general political and economic conditions in the United States
and abroad, including, but not limited to, results of
terrorist events throughout the world.
Failure of our existing or future technology to achieve and maintain
meaningful levels of market acceptance would materially adversely affect our
business, financial condition, results of operations and market penetration.
Operating results are likely to fluctuate significantly and cause our
stock price to be volatile, which could cause the value of your
investment in our company to decline
Our future quarterly and annual operating results are likely to
fluctuate significantly due to a variety of factors, many of which are outside
our control. If operating results do not meet the expectations of investors and
securities analysts, the trading price of our common stock could significantly
decline, which may cause the value of your investment in our company to decline.
Some of the factors that could affect our quarterly or annual operating results
or impact the market price of our common stock include:
* given the nature of the markets in which we participate, we
may not be able to reliably predict future revenue and
profitability;
* our ability to develop, market and support our technology and
any technological advancements;
* the timing and amount of, or cancellation or rescheduling of,
orders for our technology, particularly large orders for key
installations;
* our ability to retain key management, sales and marketing and
engineering personnel;
* our ability to obtain sufficient supplies of sole or limited
source components for our DES technology;
* a decrease in the average rental prices of our content;
* changes in costs of components; and
* the mix of technologies that we sell and the mix of
distribution channels through which they are marketed.
Due to these and other factors, quarterly and annual revenues, expenses
and results of operations could vary significantly and period-to-period
comparisons should not be relied upon as indications of future performance.
Because we currently depend on a single family of products, any decline
in demand for those products may harm our operating results
We presently anticipate that initially, substantially all of our
revenues will be derived from implementation of the DES. There may not be an
immediate demand for our technology and products, or the demand may not continue
and we may not be successful in marketing any new or enhanced products. Any
reduction in the demand for our current products or our failure to successfully
develop or market and introduced new or enhanced products could materially
adversely affect our business, financial condition and results of operations.
Accordingly, we will strive to:
-11-
* properly identify customer needs;
* differentiate our technology and products from our
competitors;
* price our products competitively; and
* anticipate our competitors new technology, products, services
and innovations.
Our future success requires that we develop and market additional
products that achieve market acceptance and enhance our current
products; if we fail to develop and market new products and product
enhancements in a timely manner, our business could be adversely
affected
We generally sell our products and services in markets that are
characterized by technological changes, frequent new product and service
introductions and changing industry standards. The failure to make timely
introductions of new products and service enhancements, or the failure of such
new products or enhancements to achieve market acceptance, could result in a
material adverse affect on our business, financial condition and results of
operations. We recently completed development of our DES. There can be no
assurance that we will be successful in developing and marketing new or enhanced
products.
System errors, failures, or interruptions could cause delays in
delivery or require design modifications, which may have a negative
impact on our business and damage our reputation and customer
relationships.
System errors or failures may adversely affect our business, financial
condition and results of operations. Despite our testing and testing by current
and potential customers, all errors or failures may not be found in our products
or, if discovered, successfully corrected in a timely manner. These errors or
failures could cause delays in product introductions and delivery or require
design modifications that could adversely affect our competitive position. Our
reputation may also suffer if our customers view our products as unreliable,
whether based on actual or perceived errors or failures in our products.
Further, a defect, error or performance problem with our DES could cause our
customers' cable television systems to fail for a period of time. Any such
failure would cause customer service and public relations problems for our
customers. As a result, any failure of our customers' systems caused by our
technology could result in delayed or lost revenue due to adverse customer
reaction, negative publicity regarding us and our products and services and
claims for substantial damages against us, regardless of our responsibility for
such failure. Any claim could be expensive and require us to spend a significant
amount of resources, regardless of whether we prevail.
If we lose key personnel, we may be unable to successfully operate our
business
We depend on the continued contributions of our executive officers and
other technical personnel to work effectively as a team, to execute our business
strategy and to manage our personnel. The loss of key personnel or their failure
to work effectively could have a material adverse effect on our business,
financial condition and results of operations. There is intense competition
amongst employers to attract certain technical specialties. Although the labor
market has changed dramatically within the last year, our attrition rate has
been low.
If we are unable to attract and retain additional qualified personnel,
our future business may suffer
Our business strategy requires us to attract and retain additional
qualified technical and marketing personnel. We may experience difficulty in
recruiting qualified personnel, which is an intensely competitive and time
consuming process. We may not be able to attract and retain the necessary
personnel to accomplish our business objectives as our business develops and
grows. Accordingly, we may experience constraints that will adversely affect our
ability to satisfy future customer demand in a timely fashion or to support our
customers and operations. This could cause an adverse effect on our business,
financial condition and results of operations.
Our limited ability to protect our intellectual property may prevent us
from retaining our competitive advantage
Our future success and ability to compete are dependent, in part, upon
our proprietary technology. Taken as a whole, we believe our intellectual
property rights are significant and any failure to adequately protect our
proprietary rights could result in our competitors offering similar products,
potentially resulting in loss of a competitive advantage and decreased revenues.
In addition, the laws of many foreign countries do not protect our intellectual
property to the same extent as the laws of the United States. Also, it may be
possible for unauthorized third parties to copy or reverse engineer aspects of
our products, develop similar technology independently or otherwise obtain and
use information that we regard as proprietary. Furthermore, policing the
unauthorized use of our products is difficult. Litigation may be necessary in
-12-
the future to enforce our intellectual property rights, to protect our trade
secrets or patents that we may obtain, or to determine the validity and scope of
the proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on our
future operating results.
Intellectual property claims against us can be costly and restrict our
business
The digital video industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. As the number of entrants into our market increases and the
functionality of our products is enhanced and overlaps with products of other
companies, we may become subject to claims of infringement or misappropriation
of the intellectual property rights of others. Any claims asserting that our
products infringe or may infringe proprietary rights of third parties, if
determined adversely to us, could have a material adverse effect on our
business, financial condition or results of operations. Any claims, with or
without merit, could be time-consuming, result in costly litigation, divert the
efforts of our technical and management personnel, cause product shipment delays
or require us to enter into royalty or licensing agreements. Any of these
outcomes could have a material adverse effect upon our operating results. Legal
action claiming patent infringement could be commenced against us. If such an
event occurs, we cannot assure you that we would prevail in litigation given the
complex technical issues and inherent uncertainties in patent litigation. If a
claim against us was successful and we could not obtain a license to the
relevant technology on acceptable terms, license a substitute technology, or
redesign to avoid infringement, this could have a material adverse effect on our
business, financial condition and results of operations.
Additional required capital may not be available
To date, we have financed much of our operations through cash from the
private sale of our securities and by borrowing funds. If we are unable to
finance our future operations from private sources or from operating revenues,
we may be required to secure additional debt and/or equity financing. We cannot
assure that such financing will be available when required or, if available, it
can be secured on acceptable terms. Selling additional stock, either privately
or publicly, could dilute the equity interests of our stockholders. If we borrow
more money, we will have to pay interest and may also have to agree to
restrictions that limit our operating flexibility. Further, we may only be able
to secure funding on terms that are unattractive or unfavorable to us, or not at
all.
Because we are a new business and significantly smaller than the
majority of our national competitors, we may lack the financial
resources required to capture an increased market share or to compete
successfully against our current and future competitors, which would
adversely affect our business
The market for our DES technologies and products is highly competitive
and rapidly changing. Given that there have been limited commercial deployments
of video-on-demand systems to date, the respective market shares of companies
competing in this market are uncertain. We are significantly smaller than the
majority of our competitors and we face such competition on a local, regional
and international basis. If we compete with them for the same geographical
markets, their financial strength could prevent us from capturing those markets.
New technologies we may develop will bring us into further competition with
various companies. Additional new competitors may also enter the market and
competition may intensify. Although we believe our technology and products are
better than those offered by our competitors, they may be able to narrow or
eliminate the differences. We believe that the primary factors influencing
competition in the video-on-demand market include the flexibility of the
video-on-demand system, product quality and reliability and established
relationships with providers of interactive television services, including cable
operators. In the video-on-demand market, our competitors currently include the
following:
* in the domestic cable, international cable and digital
subscriber line market, principally SeaChange International
Inc., nCUBE Corporation, Concurrent Computer Corporation and
DIVA Systems Corporation;
* in the education market, principally Silicon Graphics, Inc.,
Cisco Systems, Inc. and International Business Machines Corp.,
as well as other third parties; and
* in the Video-on-Demand market, principally Lodgnet, OnCommand
and Hospitality Networks
-13-
If we do not manage our anticipated business growth, we may not be able
to operate our business effectively; our failure to manage growth could
disrupt operations and adversely affect our business.
We anticipate that initially, substantially all of our future revenue
growth will come from our DES operations. Our anticipated growth could place a
strain on our management systems and other resources. Our ability to
successfully implement our business plan in a rapidly evolving market will
require an effective planning and management process. We cannot assure you that
we will be able to successfully manage our anticipated expansion. If we fail to
manage our growth, our operations may be disrupted and our business may be
adversely affected. We must continue to improve and effectively use our existing
operational, management, marketing and financial systems and successfully
recruit, hire, train and manage personnel, which we may be unable to do.
Further, we must maintain close coordination among our technical, finance,
marketing, sales and production staffs.
Future acquisitions, alliances, joint ventures or divestitures that we
may possibly undertake could be difficult to integrate and disrupt our
business, dilute stockholder value and harm our operating results
If appropriate opportunities arise in the future, we may possibly
consider acquiring or making investments in complementary businesses,
technologies, services or products, entering into joint ventures, or divesting
certain operations. The process of integrating any acquired business,
technology, service or product into our business and operations may result in
unforeseen operating difficulties and expenditures. Integration of an acquired
company also may consume significant management resources that would otherwise
be employed in the ongoing development of our business. In addition, we may not
realize the expected benefits of any acquisition, joint venture or divestiture.
We may be unable to successfully identify, negotiate or finance future
acquisitions or integrate any acquisitions with our current business. Future
acquisitions could result in potentially dilutive issuances of equity securities
or the incurrence of debt, contingent liabilities or amortization expenses
related to goodwill and other intangible assets, any of which could harm our
business and financial results.
Risks Relating to Our Industry
Implementation of our products is complex, time consuming and
expensive, and we may experience long sales and implementation cycles,
which may cause our quarterly revenues, expenses and operating results
to vary significantly in future, period-to-period comparisons of our
results of operations
Video-on-demand products are relatively complex and their purchase
generally involves a significant commitment of capital, with delays frequently
associated with large capital expenditures and implementation procedures within
an organization. Moreover, the purchase of such products typically requires
coordination and agreement among a potential customer's corporate headquarters
and its regional and local operations. As a result, the sales cycles associated
with the purchase of our products may be lengthy and subject to a number of
significant risks, including customers' budgetary constraints and internal
acceptance reviews, over which we have little or no control.
The success of our business is dependent upon the emerging digital
video market, which may not gain broad market acceptance; any failure
by the market to accept digital video technology will have a material
adverse effect on our business
Video-on-demand is a new and emerging technology, and we cannot assure
you that it will attract widespread demand or market acceptance. Further, the
potential size of the video-on-demand market and the timing of its development
are uncertain. Our success in the video-on-demand market will depend upon the
commercialization and broad acceptance of video-on-demand by residential cable
subscribers and other industry participants, including cable system operators,
content providers, set-top box manufacturers, and educational and healthcare
institutions.
Cable television operators historically have relied on traditional
analog technology for video management, storage and distribution. Interactive
technology installation, which is necessary to provide video-on-demand, requires
a significant initial investment of capital. The future growth of our business
will depend on the pace of the installation of interactive digital cable and
digital set-top boxes, the rate at which television operators deploy digital
infrastructure and the rate at which digital video technology expands to
additional market segments.
-14-
The success of our business is dependent on the availability of, and
the distribution windows for, movies, programs and other content and,
if sufficient video-on-demand content is not available on a timely
basis, our business will be adversely affected
The success of DES will largely be dependent on the availability of a
wide variety and substantial number of movies, programs, educational matter and
other material, which we refer to as content, in digital format. We do not
produce or provide digital video-on-demand content. Therefore, the future
success of our business is dependent in part on content providers, such as
traditional media and entertainment companies, providing significant content for
video-on-demand. Further, we are dependent in part on other third parties to
convert existing analog content into digital content so that it may be delivered
via video-on-demand.
In addition, we believe that the ultimate success of video-on-demand
will depend in part on the timing of the video-on-demand distribution window.
The distribution window is the time period during which different mediums, such
as home movie rental businesses, receive and have exclusive rights to motion
picture releases. Currently, video rental businesses have an advantage of
receiving motion picture releases on an exclusive basis. This is before most
other forms of non-theatrical movie distribution, such as pay-per-view, premium
television, video-on- demand, basic cable and network syndicated television. The
length of the exclusive distribution window for movie rental businesses varies,
typically ranging from 30 to 90 days for domestic video stores. Thereafter,
movies are made sequentially available to various television distribution
channels. We believe the success of video-on-demand will depend in part on
movies being available for video-on-demand distribution either simultaneously
with, or shortly after, they are available for video rental distribution. The
order, length and exclusivity of each window for each distribution channel is
determined solely by the studio releasing the movie. Given the size of the home
video rental industry, the studios have a significant interest in maintaining
that market. We cannot assure you that favorable changes, if any, will be made
relating to the length and exclusivity of the video rental and television
distribution windows.
Several major studios have entered into agreements with certain cable
operators and content aggregators to provide digital movies for distribution
through video-on-demand. However, not all of the major studios have reached
agreements regarding the content for video-on-demand. If studios fail to reach
agreements regarding content or cancel existing agreements, our customers could
delay or cancel video-on-demand system orders, which would adversely affect our
video-on-demand business.
We cannot assure you that our products and services will keep pace with
technological developments and emerging industry standards, address the
changing needs of our customers or achieve market acceptance, any of
which could materially adversely affect our business.
The markets for our products are characterized by rapidly changing
technology, evolving industry standards and new product introductions and
enhancements. There can be no assurance that we will be successful in enhancing
our real-time or video-on-demand products or developing, manufacturing and
marketing new products that satisfy customer needs or achieve market acceptance.
In addition, services, products or technologies developed by others may render
one or more of our products or technologies uncompetitive, unmarketable or
obsolete. Future technological advances in the real-time, television and video
industries may result in the availability of new products and services that
could compete with our solutions or reduce the cost of existing products or
services. Our future success will depend on our ability to continue to enhance
our existing products, including development of new applications for our
technology, and to develop and introduce new products to meet and adapt to
changing customer requirements and emerging technologies. Further, announcements
of currently planned or other new product offerings by our competitors, may
cause customers to defer purchase decisions or to fail to purchase our existing
solutions. Our failure to respond to rapidly changing technologies could
adversely affect our business, financial condition and results of operations.
Recent attempts to establish industry-wide standards for interactive
television software include an initiative by cable network operators in the
United States to create a uniform platform for interactive television called
OpenCable. The OpenCable standard is not yet defined, and we do not know whether
our video-on-demand system will be compatible with OpenCable or any other
industry standard. The establishment of this standard or other industry
standards could hurt our video-on-demand business, particularly if our products
require significant redevelopment in order to conform to the newly established
standards.
-15-
We are subject to certain governmental regulations and any finding that
we have been, or are in noncompliance with such laws, could result in,
among other things, governmental penalties; changes in existing laws or
new laws may adversely affect our business
Our business may be subject to various international, federal, state,
local, health, safety, labor and product regulations. The regulations may be
complex, change frequently and may require significant expense in order to
comply. The television industry is subject to extensive regulation in the United
States and other countries. Our video-on-demand business is dependent upon the
continued growth of the digital television industry in the U.S. and
internationally. Television operators are subject to extensive government
regulation by the Federal Communications Commission and other federal and state
regulatory agencies. These regulations could have the effect of limiting capital
expenditures by television operators and thus could have a material adverse
effect on our business, financial condition and results of operations. The
enactment by federal, state or international governments of new laws or
regulations could adversely affect our cable operator customers, and thereby
materially adversely affect our business, financial condition and results of
operations. Further, our products and services may be subject to the rules of
industry standards bodies like the International Standards Organization, as well
as regulation of other agencies such as the FCC. If we fail to adequately
address any of these regulations, our business may be significantly harmed.
Risks Relating to Ownership of Our Common Stock
The price of our common stock after this offering may be lower than the
price you pay
Our stock is currently traded on the OTC Bulletin Board on a limited
basis. If you purchase shares of our common stock in this offering, you will pay
a price established by the current market place. The price of our common stock
that will prevail in the market after this offering may be higher or lower than
the price you pay.
Our stock price has been volatile in the past and may be volatile in
the future
In the past, there has been a limited public market for our common
stock and there can be no assurance that an active trading market for our stock
will develop or be maintained. Because there has been little trading volume in
our shares, the price has been quite volatile. Also, we have effected two
reverse stock splits since December 2000. The market price of our common stock
may fluctuate significantly in the future in response to various factors, some
of which are beyond our control, including the following and the other risks
discussed under the heading "Risk Factors:"
* variations in our quarterly operating results;
* the development of the video-on-demand market in general;
* changes in market valuations of similar companies
* announcement by us or our competitors of significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
* loss of a major customer or failure to complete significant
transactions;
* additions or departures of key personnel; and
* fluctuations in stock market price and volume.
Additionally, in recent years the stock market in general, and the
OTC-BB and the market for technology companies in particular, have experienced
extreme price and volume fluctuations. In some cases, these fluctuations have
been unrelated or disproportionate to the operating performance of these
companies. These market and industry factors may materially and adversely affect
our stock price, regardless of our operating performance.
In the past, class action litigation often has been brought against
companies following periods of volatility in the market price of those
companies' common stock. If we become involved in this type of litigation in the
future, it could result in substantial costs and diversion of management
attention and resources, thus harming our business.
-16-
Purchasers of the shares offered hereby will suffer immediate and
substantial dilution in the value of your investment
You will incur immediate and substantial dilution in the net tangible
book value of common stock based on the current market price of $1.30 per share,
and assuming all the equity line of credit is fulfilled. There are no limits on
the maximum number of shares that may be issued under the equity line. The lower
the stock price at the time shares are issued under the equity line, the more
shares investor will receive which will increase dilution. Also, to the extent
that the investor under the equity line sells their shares into the market, the
price of our shares may decrease due to the additional shares in the market.
We do not intend to pay dividends
To date, we have never declared or paid any cash dividends on shares of
our common stock. We currently intend to retain our future earnings for growth
and development of our business and, therefore, we do not anticipate paying any
dividends in the foreseeable future.
Our executive officers, directors and principal stockholders own a
significant percentage of our company and will be able to exercise
significant influence over our company, which could have a material and
adverse effect on the market price of our common stock
After this offering and assuming all of the shares of common stock to
which this prospectus relates are issued, our executive officers, directors and
other principal stockholders and their affiliates will together control
approximately 11% of our outstanding common stock. As a result, these
stockholders, if they act together, may be able to control all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, and will continue to have significant
influence over our affairs. This concentration of ownership may have the effect
of delaying, preventing or deterring a change in control, could deprive our
stockholders of an opportunity to receive a premium for their common stock as
part of a sale and might affect the market price of our common stock.
The market price of our common stock may drop significantly when the
restrictions on resale by our existing securityholders lapse
Following this offering, we will have approximately 27,248,011 shares
of common stock outstanding, premised on the maximum number of shares being
offered under the equity line. Approximately 4,897,157 shares, or 18%, of our
outstanding common stock will be subject to restrictions on resale under United
States securities laws. As these restrictions on resale end, the market price of
our common stock could drop significantly if holders of these shares sell them
or are perceived by the market as intending to sell them. These sales also may
make it difficult for us to sell equity securities in the future at a time and
price that we deem appropriate.
Possible "Penny Stock" Regulation
Trading of our common stock on the OTC Bulletin Board may be subject to
certain provisions of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), commonly referred to as the "penny stock" rule. A penny stock
is generally defined to be any equity security that has a market price less than
$5.00 per share, subject to certain exceptions. If our stock is deemed to be a
penny stock, trading in our stock will be subject to additional sales practice
requirements on broker-dealers. These may require a broker dealer to:
o make a special suitability determination for purchasers of
penny stocks;
o receive the purchaser's written consent to the transaction
prior to the purchase; and
o deliver to a prospective purchaser of a penny stock, prior to
the first transaction, a risk disclosure document relating to
the penny stock market.
Consequently, penny stock rules may restrict the ability of
broker-dealers to trade and/or maintain a market in our common stock. Also,
prospective investors may not want to get involved with the additional
administrative requirements, which may have a material adverse effect on the
trading of our shares.
-17-
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING-STATEMENTS
This prospectus, including the sections entitled "Summary," "Risk
Factors," "Management's Discussion and Analysis or Plan of Operations" and
"Business," contains forward-looking statements. These statements relate to
future events or our future financial performance and involve known and unknown
risks and uncertainties. These factors may cause our company's or our industry's
actual results, levels of activity, performance or achievements to be materially
different from those expressed or implied by the forward-looking statements.
These risks and other factors include those listed under "Risk Factors" and
elsewhere in this prospectus. In some cases, you can identify forward-looking
statements by terminology such as "may," "will" "should," "expects," "intends,"
"plans," anticipates," "believes," "estimates," "predicts," "potential,"
"continue," or the negative of these terms or other comparable terminology.
These statements are only predictions. Although we believe that the
expectations reflected in the forward- looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements.
USE OF PROCEEDS
We will not receive any proceeds from the sale of our shares by the
selling stockholders, although we will receive proceeds from the shares issued
pursuant to the equity line. We cannot predict the total amount of proceeds to
be raised in this transaction because we cannot determine the total amount of
advances we intend to draw. If we use the entire line of credit, we will realize
net proceeds of approximately $18.95 million, after deducting the 5% discount to
Cornell Capital and estimated offering expenses of approximately $50,000 payable
by us.
We expect to use substantially all of the net proceeds for general
corporate purposes, including working capital, research and development, and
sales and marketing activities. The amounts we actually expend for such working
capital and other purposes may vary significantly and will depend on a number of
factors including, but not limited to, the actual net proceeds received, the
amount of future revenues and other factors described under "Risk Factors."
Accordingly, our management will retain broad discretion in the allocation of
the net proceeds of this offering. We intend to use a portion of the net
proceeds to repay certain debts and obligations, such as any and all short term
loans together with any interest due thereon of approximately $1,700,000. Of
this amount, $1,500,000 is secured with a UCC-1 Financing Statement of the
corporation's technology. Pending such uses, the net proceeds will be invested
in short-term, interest-bearing, investment grade securities or guaranteed
obligations of the U.S. government.
For illustrative purposes, we have set forth below a probable use of
proceeds for the range of net proceeds indicated below to be received under the
equity line of credit. The table assumes estimated offering expenses of $50,000
and fees of 5.0% of the gross proceeds raised under the equity line have been
deducted from the gross proceeds.
Gross proceeds................... $3,000,000 $5,000,000 $10,000,000 $15,000,000 $20,000,000
Net proceeds .................... 2,800,000 4,700,000 9,450,000 14,200,000 18,950,000
---------- ---------- ----------- ----------- -----------
Use of proceeds:
Inventory and installation....... 25,000 1,300,000 3,900,000 5,400,000 7,100,000
Research and development......... 175,000 1,800,000 2,800,000 4,300,000 5,700,000
Repayment of debt................ 1,700,000 - - - -
Operations / overhead............ 850,000 1,550,000 2,700,000 4,450,000 6,100,000
General working capital.......... 50,000 50,000 50,000 50,000 50,000
-18-
DILUTION
As of April 30, 2002, our net tangible book value was ($1,410,586), or
($0.28) per share of common stock. Net tangible book value per share is
determined by dividing our tangible book value (total tangible assets less total
liabilities) by the number of outstanding shares of our common stock.
Because this offering is being made solely by selling stockholders and
none of the proceeds will be paid to us, our net tangible book value will be
unaffected by this offering. Net tangible book value, however, will be impacted
by the common stock to be issued under the equity line of credit. The amount of
dilution will depend on the offering price and the number of shares to be issued
under the equity line. The following example shows the dilution to new investors
at an offering price of $1.00 per share.
For illustration purposes, we will assume that at April 30, 2002 we had
issued 20 million shares of common stock under the equity line of credit at an
assumed sale price of $1.00 per share, less commitment fees of $1.0 million and
$50,000 of other offering expenses. At a price of $1.00 per share, we would
receive net revenues of approximately $18,950,000. Accordingly, our net tangible
book value at April 30, 2002 would have been $17,539,414 or $0.70 per share.
Such an offering would represent an immediate increase in net tangible book
value to our existing shareholders of $0.98 per share and an immediate dilution
to new stockholders of $0.30 per share, or30%. The following table illustrates
the per share dilution:
Assumed sale price per share $ 1.00
Net tangible book value per share before the sale (0.28)
Increase attributable to new investor 0.98
Net tangible book value per share after this offering 0.70
Dilution per share to new investor 0.30
- ----------------------
The offering price of our common stock to new investors by this
prospectus is based on the then-existing market price. To give prospective
investors an idea of the potential dilution per share they may experience, we
have prepared the following table showing the dilution per share at various
assumed offering prices to new investors:
Assumed No. of Shares to Be Dilution per Share to
Offering Price Issued(1) New Investors
-------------- --------- -------------
$ 1.00 21,052,631 $ 0.30 - (30%)
1.25 16,842,105 0.47 - (38%)
1.50 14,035,087 0.61 - (41%)
2.00 10,526,315 0.92 - (46%)
2.50 8,421,053 1.26 - (50%)
3.00 7,017,544 1.63 - (54%)
- ----------------------
(1) Based on the number of shares issued at 95% of the current
market price at the time of sale for the maximum $20 million
under the equity line.
-19-
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock trades in the over-the-counter market and quotations
are published on the OTC Bulletin Board under the symbol "VCTY." The table below
sets forth the high and low bid prices of our common stock for each quarterly
period indicated since July 2000 as reported by the OTC-BB. There was no
established market prior to the third quarter of 2000. Prior to March 2002 our
shares traded under the symbol "VIDC" and, prior to December 2000, our stock's
symbol was "PVTC." All quotations have been adjusted to give effect to the .61
for 1 reverse stock split effected by us on December 4, 2000, and the 1 share
for 10 shares reverse split effected March 1, 2002. On July 2, 2002, the last
reported sales price of our common stock on the OTC-BB was $1.30 per share.
High Bid Low Bid
-------- -------
2000
Third Quarter $ 9.21 $ 9.21
Fourth Quarter 50.00 32.50
2001
First Quarter $ 53.75 $ 30.00
Second Quarter 51.00 22.50
Third Quarter 20.50 10.50
Fourth Quarter 10.10 1.10
2002
First Quarter $ 1.50 $ 0.90
Second Quarter(1) 1.75 1.05
----------------------
(1) Through July 2, 2002.
The foregoing quotations represent inter-dealer prices without retail
mark-up, mark-down, or commission, and may not represent actual transactions.
Despite the publication of quotations during the above periods, there was light
trading volume in our shares and the quotations may not be indicative of an
established trading market.
We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future.
At June 28, 2002, there were approximately 308 holders of record of our
common stock, including broker- dealers and clearing firms holding shares on
behalf of their clients, as reported by our transfer agent.
Equity Compensation Plan Information
The following table sets forth the number of securities that we may issue
pursuant to our equity compensation plans and the remaining number of shares
available under the plan. Presently, there are no options outstanding under the
plans.
Number of securities
remaining available for
Number of Securities to be Weighted-average exercise future issuance under
Issued upon exercise of exercise price of equity compensation plans
outstanding option, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a)
Plan category (a) (b) (c)
Equity compensation -0- -0- 749,872(1)
plans approved by
security holders
- ----------------------
(1) The number of shares available for future issuance does not
include 250,075 share that have been reserved for plan units
that have been issued, but not yet vested under the 2000 Stock
Incentive Plan, and 50,000 shares that have been authorized
for issuance under the 2002 Stock Award Plan, but have not
been certificated.
-20-
CAPITALIZATION
The following table sets forth our capitalization as of April 30, 2002
on an actual basis. You should read this table together with the consolidated
financial statements and accompanying notes that we include later in this
prospectus.
April 30, 2002
(Unaudited)
--------------
Cash....................................................................... $ 22,609
==============
Long-term debt............................................................. 0
Stockholders' equity (deficit)
Common stock: 50,000,000 shares authorized of $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 development state............................... (3,737,093)
--------------
Total stockholders' equity (deficiency) .............................. $ (318,183)
Total capitalization.................................................. $ (318,183)
==============
EQUITY LINE OF CREDIT
On May 28, 2002, we entered into an equity line of credit agreement
with Cornell Capital, a private limited partnership. Pursuant to the agreement,
Cornell Capital will provide to us private equity financing up to a maximum $20
million over a period of up to 24 months from the effective date of the
registration statement to which this prospectus relates. By the terms of the
equity line, we may, from time to time, in our sole discretion, sell shares of
our common stock to Cornell Capital at a price per share equal to 95% of the
average market price established during the pricing period related to a
particular sale. Each periodic sale is referred to as an advance. The pricing
period is defined as the five consecutive trading days after we give Cornell
Capital notice of an advance. A closing will take place seven trading days after
our notice of an advance. At the closing, we will deliver shares of our common
stock and Cornell Capital will pay the advance amount. Cornell Capital will
retain 5% of each advance under the terms of the equity line.
The equity line permits us to draw, at our option, up to $250,000 a
maximum of four times per month. The total amount of shares issuable under the
equity line is determined by the price of the actual sales. There is no minimum
price at which shares can be sold under the equity line of credit. Accordingly,
if the price of our stock declines, we will be obligated to issue more shares.
In connection with the equity the line of credit agreement, we issued
to Cornell Capital 290,000 shares of our common stock as a commitment fee upon
execution of the agreement. We also issued to Westrock Advisors 10,000 shares of
common stock to act as our exclusive placement agent pursuant to the placement
agent agreement.
The equity line of credit agreement provides that Cornell Capital will
purchase up to $20 million of our shares and that we must register with the SEC
the resale of the common stock issuable under the equity line. We are also
required to register the additional 300,000 shares issued to Cornell Capital and
Westrock Advisors.
Registration enables Cornell Capital and Westrock Advisors to resell
their common stock from time to time in the market or in privately-negotiated
transactions. We will prepare and file amendments and supplements to the
registration statement as may be necessary in order to keep the registration
statement effective as long as the selling stockholders hold shares of our stock
or until such shares can be sold pursuant to an appropriate exemption from
registration. We have agreed to bear certain expenses (other than broker
discounts and commissions, if any), including certain legal fees for Cornell
Capital not to exceed $10,000 plus $500 for escrow fees per closing of each
advance under the equity line.
We anticipate that we will draw against the equity line up the
applicable maximum amount as we deem prudent and necessary based upon our
corporate needs. Our ability to put shares of our common stock to Cornell
Capital is subject to certain conditions and limitations, including, but not
limited to the following:
-21-
o the registrations statement, of which this prospectus is a
part, must have previously become effective and shall remain
effective on the date of each put;
o our representations and warranties to Cornell Capital set
forth in the equity line of credit agreement must be true and
correct in all material respects as of the date of each put;
o no statute, rule, regulation, executive order, decree, ruling
or injunction shall be in effect that prohibits, nor any
action, suit or proceeding shall be in progress, pending or
threatened that seeks to enjoin or prohibit, the transactions
contemplated under the equity line of credit agreement, or
otherwise has a material adverse effect on our business,
operations, properties or financial condition;
o at the time of a notice to draw against the equity line, there
shall have been no material adverse change in our business,
operations, properties, prospects or financial condition,
except as disclosed in our reports filed with the SEC pursuant
to the Exchange Act; and
o our common stock shall not have been delisted from its
principal market (currently the OTC-BB) nor suspended from
trading.
We intend to use our best efforts to satisfy the conditions required
under the equity line of credit agreement with Cornell Capital and believe we
will be able to sell shares to Cornell Capital thereunder. We cannot predict the
actual number of shares of our common stock that will be issued pursuant to the
equity line, in part, because we cannot estimate the total number of advances we
intend to make and the purchase price of the shares will fluctuate based on
prevailing market conditions. Assuming we draw down the entire $20 million
available under the equity line in a single advance, which is not permitted, and
the purchase price was equal to $1.00 per share, then we would issue 20 million
shares of common stock to Cornell Capital. These shares would represent
approximately 73% of our then outstanding common stock upon issuance. If the
price of our common stock declines, we would be required to issue a greater
number of shares under the equity line.
Cornell Capital (or any other underwriter) has the right to review this
prospectus, the registration statement, and our records and properties to obtain
information about us and the accuracy of this registration statement and
prospectus. Cornell Capital has the opportunity to comment on the registration
statement and prospectus, but is not entitled to reject a notice to draw against
the equity line based on its review. Cornell Capital may be entitled to
indemnification by us for any lawsuits based on the interpretation of the
language in this prospectus with which it does not agree.
PLAN OF DISTRIBUTION
Pursuant to our equity line of credit agreement with Cornell Capital
and subject to certain conditions contained therein, we may from time to time,
in our sole discretion, sell or "put" shares of our common stock to Cornell
Capital. Thereafter, Cornell Capital may resell these shares pursuant to this
prospectus. Other than the equity line of credit agreement, we do not have any
material relationship with Cornell Capital.
We will not receive any of the proceeds from the sale of our common
stock by the selling stockholders. However, we will receive funds upon the sale
and issuance of shares under the equity line of credit agreement. We will bear
all costs relating to the registration of the common stock offered by this
prospectus, including printing, accounting, legal and filing fees. Such costs
are estimated by us to be approximately $50,000.
This prospectus relates to the offer and sale by selling stockholders
of our common stock. We are not aware of how or when selling stockholders will
choose to make such sales. Selling stockholders will be able to sell their
shares, from time to time, in any of several ways including, without limitation;
* one or more market transactions at the prevailing market
prices and terms;
* in negotiated transactions;
* block sales; or
* individual sales.
Sales by selling stockholders will be without the payment of any
underwriting discounts or commissions, except for usual and customary selling
commissions paid to brokers or dealers. Selling stockholders also may sell their
shares, from time to time, as permissible under Rule 144 promulgated under the
Securities Act, if applicable.
-22-
Under the securities laws of certain states, the selling stockholders
may sell their shares in such states only through registered or licensed brokers
or dealers. In addition, in certain states the shares of common stock may not be
sold unless the shares have first been registered or qualified for sale in such
state or an exemption from registration or qualification is available and is
complied with.
Each selling stockholder has represented to us that it currently has no
plans, proposals, arrangements or understandings with any potential sales agent
with respect to participating in the distribution of our common stock. Each
selling stockholder has further represented that no securities selected dealer
agreement or similar agreement is intended to be used with respect to the
offering and sale of our common stock. Selling stockholders may sell their
shares in an ordinary brokerage transaction, without any placement or other
agent, and for normal and customary brokerage fees and/or commissions.
The selling stockholders are deemed to be underwriters with respect to
the shares sold by them. Also, broker-dealers, agents or other persons acting in
connection with such sales may also be deemed to be underwriters. Any commission
received by them or discounts or concessions allowed to such persons, and any
profits received on the resale of the shares may be deemed to be underwriting
discounts and commissions under the Securities Act.
Cornell Capital will pay to us 95% of the lowest closing bid price on
our shares reported by the OTC-BB, or other principal trading market on which
our shares may be traded, for the 5 days immediately following the notice date.
The 5% discount on the purchase price is deemed to be an underwriting discount
for Cornell Capital. Cornell Capital will also retain 5% of the gross proceeds
raised under the equity line. In connection with the equity line, we have issued
290,000 shares of our common stock to Cornell Capital as a commitment fee, and
10,000 shares to Westrock Advisors as a placement agent fee.
We have advised the selling stockholders that during the time each is
engaged in distribution of the securities covered by this prospectus, each must
comply with Rule 10b-5 and the anti-manipulation provisions of Regulation M
under the Exchange Act. Accordingly, each selling stockholder:
* must not engage in any stabilization activity in connection
with our securities;
* must furnish each broker through which securities covered by
this prospectus may be offered the number of copies of this
prospectus which are required by each broker; and
* must not bid for or purchase any of our common stock or
attempt to induce any person to purchase any of our common
stock other than as permitted under the Exchange Act.
Any Selling Stockholders who may be "affiliated purchasers" of us as defined in
Regulation M, have been further advised that pursuant to Securities Exchange Act
Release 34-38067 (December 20, 1996), they must coordinate their sales under
this prospectus with each other and with us for purposes of Regulation M. None
of the selling stockholders has been an officer, director or otherwise an
affiliate of our company during the last three years.
SELLING STOCKHOLDERS
We entered into the equity line of credit with Cornell Capital to
provide financing for a period of up to 24 months from the effective date of the
registration statement. As Cornell Capital provides funds under the equity line,
it receives shares of our common stock. As a provision of the equity line and
placement agent agreement, we issued and additional 290,000 shares and 10,000
shares to Cornell Capital and Westrock Advisors, respectively.
As a condition of the equity line of credit agreement, we agreed to
file a registration statement with the SEC for the purpose of registering the
shares of common stock issued under the equity line and placement agent
agreements. This prospectus relates to the offer of common stock by the selling
stockholders into the public market. All expenses associated with the sale of
shares of common stock by the selling stockholders will be paid by the selling
stockholders.
Following effectiveness of our registration statement, the selling
stockholders' shares, upon issuance, will be free of restrictions, other than
restrictions under the Securities Act with respect to persons who may be deemed
to be our affiliates.
The selling stockholders may sell their respective shares of common
stock: (1) directly through broker-dealers acting as agents for them; or (2) to
broker-dealers who may purchase shares as principal and thereafter sell the
shares from time to time in negotiated transactions or otherwise. Such
-23-
broker-dealer, if any, may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders and/or the purchasers
for whom such broker-dealers may act as agents or to whom they may sell as
principals or both. Compensation as to a particular broker-dealer may be in
excess of customary commissions.
None of the selling stockholders have held a position or executive
office, or had any other material relationship with us, except as follows:
o Cornell Capital is the investor under the equity line of
credit. All investment decisions for Cornell Capital are made
by its general partner, Yorkville Advisors, LLC. Mark Angelo,
the managing member of Yorkville Advisors, makes the
investment decisions on behalf of Yorkville Advisors.
o Westrock is the placement agent to us in connection with the equity
line of credit.
The following table sets forth as of the date hereof, certain
information regarding the beneficial ownership of our common stock, or the
maximum number of shares to be received upon fulfillment of the equity line of
credit, by each selling stockholder. Except as otherwise noted, the persons
shown in the table have sole voting and investment power with respect to the
shares. These selling stockholders are presented together in this table for
convenience of presentation only.
Number
Beneficial Ownership Prior to Offering Of Shares
Name Number of Shares Percent of Class(1)(2) To Be Sold
- -------------- -------------- -------------- --------------
Cornell Capital Partners, L.P............... 21,490,000(3) 78.9% 2,490,000
Westrock Advisors, Inc...................... 10,000 0%(4) 10,000
-------------- -------------- --------------
Totals............................ 21,500,000 78.9% 21,500,000
============== ============== ==============
(1) Total outstanding shares includes 5,748,011 shares issued and
outstanding as of June 28, 2002 plus the maximum number of shares being
offered by Cornell Capital and Westrock Advisors.
(2) Computation of percentages assumes maximum number of shares issued
under the equity line of credit. However, percentage does not take into
account: (i) additional shares that may be issued upon the exercise of
various options presently outstanding and exercisable; or (ii)
additional shares of common stock that may be issued upon conversion of
certain other convertible securities, either presently outstanding or
that may be issued in the future. See "Description of Securities", and
"Risk Factors."
(3) Based on 290,000 shares previously issued to Cornell Capital and the
issuance of approximately 21,200,000 additional shares pursuant to the
equity line. Shares are issued under the equity line at 95% of the
market price of our common stock.
(4) Less than .01%.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion regarding our financial condition should be
read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this prospectus.
Overview
We are a solution engineering and marketing company involved in the
deployment of the 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.
During fiscal 2001 and the first six months of fiscal 2002 ended April
30, 2002, we were a research and development company and received no revenues
from operations. During this period we did realize minimal interest income.
-24-
Plan of Operation
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.
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 $1.8 million, consisting of
$1.4 million 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
million, 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 equity line 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.
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, which amount and 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 July 30, 2001, the board 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 under the UCC-1 financing
statement. A total of $450,000 of the notes are with affiliated parties.
On April 30, 2001, the board of directors unanimously authorized the
sale at the price of $1.00 per share of up to 1 million 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, leaving no shares outstanding.
-25-
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.
Net Operating Loss
At April 30, 2002, Videolocity and its subsidiaries had accumulated a
net operating loss carryforward of approximately $3,737,093, with a tax benefit
of approximately $1,121,128. 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.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activities. The new standard establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Accounting for changes in the values of
those derivatives depends on the intended use of the derivatives and whether
they qualify for hedge accounting. SFAS 133, as amended by SFAS 137 and SFAS
138, was adopted as of April 1, 2001. We believe the adoption of this statement
will have no material impact on our financial statements.
In June 2001, the FASB issued SFAS 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 as well as all purchase method business combinations completed after
June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill, noting that any purchase price allocatable to an assembled
workforce may not be accounted for separately. SFAS 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS 142. SFAS 142 also requires that intangible assets with
estimatable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of.
-26-
We adopted SFAS 141 upon issuance and SFAS 142 effective April 1, 2001. The
adoption of SFAS 141 and 142 did not affect our consolidated financial
statements.
On August 16, 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations," which is effective for fiscal years beginning after
June 15, 2002. It requires that obligations associated with the retirement of a
tangible long-lived asset be recorded as a liability when those obligations are
incurred, with the amount of the liability initially measured at fair value.
Upon initially recognizing an accrued retirement obligation, an entity must
capitalize the cost by recognizing an increase in the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.
Although we have not completed the process of determining the effect of this new
accounting pronouncement, we currently expect that the effect of SFAS No. 143 on
our consolidated financial statements, when it becomes effective, will not be
significant.
In October 2001, the FASB issued SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
Although SFAS 144 supersedes SFAS 121, it retains many of the fundamental
provisions of SFAS 121. SFAS 144 also supersedes the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, Reporting- the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. However, it retains the requirement in
APB 30 to report separately discontinued operations and extends that reporting
to a component of an entity that either has been disposed of, by sale,
abandonment, or in a distribution to owners, or is classified as held for sale.
SFAS 144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. We believe the adoption of SFAS 144
will not have a significant effect on our consolidated financial statements.
BUSINESS
Overview
We are a development stage company engaged in solution engineering,
marketing and deployment of our proprietary Videolocity "Digital Entertainment
SystemTM," or DES, that we completed in 2001, as well as other advanced digital
information and entertainment solutions. Our DES delivers to the end user true
video-on-demand in near DVD quality over Ethernet, DSL, or Wireless WAN and LAN
network architectures, combined with Wireless High Speed Internet Access.
DES is designed to deliver specific digital content, including video,
medical information and educational material to individuals, residents, hotel
guests, and patients and attendants in the healthcare industry. DES offers
streaming video-on-demand technologies that permit viewers to select from an
extensive library of movie titles or medical/educational content. Users can view
their selections on their television screens, lap top computers or PDA's
on-demand, in quality equivalent to DVD, in real-time, full-screen and
full-motion. All content is protected through our proprietary encryption and
encoding process to limit viewing to the person or persons paying for the movie
or other content. Our security protocol also prevents unauthorized digital
reproduction or rebroadcast of the ordered movies and/or other content.
Additionally, our system provides digital music-on-demand, Internet games,
high-speed Internet access and many other e-commerce applications.
We have five subsidiaries which perform various functions of our
business. One of our subsidiaries, Videolocity Technologies, Inc., holds six
Provisional Patent Applications encompassing and protecting our proprietary
technology. To date we have concentrated on the acquisition and development of
our technology and are now positioned to begin initial marketing of DES and
related technology and products.
Our subsidiaries and a summary of their primary functions are set forth
below:
Videolocity, Inc. (Operations, management and marketing)
A wholly owned subsidiary that we created to provide operational,
marketing and management support for the other subsidiaries.
-27-
Videolocity Technologies, Inc. (Licensing: internal and external)
A wholly owned subsidiary that we created to research and develop
solutions for the delivery of digital entertainment and information. Videolocity
Technologies, Inc. holds our Provisional Patents on file with the U.S. Patent &
Trademark Office.
Hospitality Concierge, Inc. (Hospitality: hotel, timeshare and resort)
A wholly owned subsidiary that we created to develop and market
systems, products, and solutions for the delivery of video and other digital
content, to include high-speed Internet, to end users on demand. This subsidiary
is focused entirely on the hospitality industry.
Healthcare Concierge, Inc. (Healthcare: assisted living)
A 94% owned subsidiary that we created to develop and market technology
solutions for the healthcare industry for the delivery of specific digital
content, including video, medical information and educational information, to
patients, families and attendants.
Videolocity Direct, Inc. (Residential: intelligent communities)
A wholly owned subsidiary that we created to develop and distribute
competitive last mile digital entertainment solutions to the residential
community.
Industry Background
Management believes that the market for our products represent a
combination of several large existing and rapidly expanding target areas. The
current market wave of broadband delivery into hotels, resorts, retirement
homes, universities, hospitals, extended stay facilities and residential
communities enables us to deliver content to many diverse market segments. We
believe the combined market place represents more than $50 billion a year.
Management further believes that there is a $15 billion per year
existing market in video rentals that can be served through alliances with
existing video distribution channels. There is also a strong potential for
strategic alliances and partnerships with network and content providers such as
Telecommunications Companies, Cable Companies, and Internet/Broadband based
content providers.
With such a large and dynamic market, we do not require significant
market penetration in any specific market segment in order to become a
successful enterprise. Because of the incremental scalability of the Videolocity
business model, relatively small percentages in any number of the potential
market categories may result in a profitable scenario. These multiple markets
also help mitigate risk from competition or technological changes that could
potentially affect any single market segment.
[GRAPHIC OMITTED]
North American Video-on-Demand
Service Revenues
After years of trials and tentative service introductions, the past year has
seen interactive services become a common sight on most pay-TV /networks. Cable
TV operators, terrestrial broadcasters, and satellite TV providers have all been
active in testing different interactive applications in the quest to increase
average subscriber revenues," says Mike Paxton, a Senior Analyst with
In-Stat/MDR. "The expanded capabilities that two-way, digital transmission
networks offer to both subscribers and service providers have resulted in
greater penetration of interactive applications like Electronic Programming
Guides and Video-on-Demand.
-28-
In-Stat/MDR also found that:
* Of all the different iTV applications, "on-demand"
applications, like video-on-demand and personal video
recording, have sparked the most industry interest due to
their great potential for adoption by today's TV viewers. The
number of television households using on-demand services
worldwide will jump from 1.3 million in 2001 to over 33
million in 2005.
* North American Video-on-Demand service revenues are forecasted
to grow from $86 million in 2001 to over $1.75 billion in
2005.
* In a recent survey of consumers, 75% of the respondents were
familiar with several different iTV applications, but had
rarely or never used them.
Strategic Partnerships
ONSAT Network Communications, Inc.
Videolocity has entered into a strategic relationship with ONSAT
Network Communications, Inc. The relationship is designed to enhance the
Videolocity product family with a satellite bandwidth backbone and with
earthbound 802.11 wireless network infra structure. The complimenting
technologies enable the deployment of the DES virtually anywhere in North and
South America, which system has already been deployed in the Park City, Utah
area with approximately 40mbps in available bandwidth.
TechFlex Funding, Inc.
Videolocity Inc., our wholly owned subsidiary, has executed a
non-exclusive contract with Tech Flex Funding Inc., of Mission Viejo, Calif.,
for financing the DES Videolocity or its customers can now take advantage of the
comprehensive and competitive leasing package to finance the total installation
and equipment cost of Videolocity's proprietary DES. The Tech Flex financing
package is underwritten by American Express Equipment FinanceTM and includes
maintenance and service calls as well as future technology upgrades. All
Videolocity products have been fully approved to be included in the financing
package.
Foundry Networks, Inc.
Foundry Networks, Inc. (NASDAQ: FDRY) is a leading next-generation
networking company providing end-to-end Global Ethernet and intelligent
traffic-management solutions. Foundry's products include Internet routers, Layer
2/3 LAN switches, and Layer 4-7 web switches with integrated Internet traffic
and content management. Foundry has more than 3,300 customers worldwide,
including leading enterprises, Internet-based businesses, metro area and
Internet service providers and other institutions. We have selected the Foundry
Layer 3 Fast Iron switch as a core switch for its network infrastructure.
VenturCom
VenturCom's strategic services offer complete expertise and support in
the development, deployment and maintenance of next generation systems on all
Win32 platforms including Windows NT Embedded, Windows 2000, and Windows CE. In
addition, VenturCom Strategic Services provides expert consulting, training and
support services. Videolocity has entered into an agreement with the company to
purchase and implement their BootNIC and embedded Windows products for "DES".
Viator Networks, Inc.
Viator Networks, Inc. is an Internet infrastructure company that
manufactures hardware and software solutions for the hospitality, commercial
offices, multiple-dwelling and multiple-tenant units, and residential markets.
We have partnered with Viator Networks to integrate and enhance their
billing/reporting server. It is now being deployed as an integrated as part of
our back end solution.
Major Events
5th Digit Technologies, LLC. Acquisition
On December 21, 2000 we acquired 5th Digit Technologies, LLC in
exchange for 950,000 shares of Series "A" Preferred stock, with a one year put
of $5.00 per share.
-29-
At the time of the acquisition, it was represented in the contract that
we were acquiring three Provisional Patent Applications representing exclusive
proprietary technologies which were ready to deploy. However, we subsequently
learned that 5th Digit did not own the Provisional Patent Applications and that
the exclusive proprietary technologies where not ready to deploy, as had been
represented.
As a result of the transaction, we filed a lawsuit in January 2002
alleging fraud and misrepresentation. Three of the holders of the Preferred
shares settled with us by exchanging their 600,000 Preferred shares for 180,000
shares of our common stock. The remaining 350,000 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. In April 2000, the Court issued a
default judgment ordering cancellation of the 350,000 shares and ruling that any
and all redemption or other rights vested in and related to the shares be
voided. The 350,000 shares were canceled on April 12, 2002, leaving no Series
"A" Preferred shares outstanding.
Merit Studios, Inc. License Agreements
On October 27, 2000 Videolocity, Inc. acquired an exclusive license
from Merit Studios, Inc., who represented their Wormhole technology to be a
video packing (compression) technology.
On March 6, 2001 the license acquired from Merit was transferred, by
mutual agreement, to our newly created subsidiary, Videolocity Direct, Inc. (now
known as Healthcare Concierge, Inc.), wherein Merit Studios was issued 2.5
million shares of Videolocity Direct and we retained 5.0 million shares. The
license agreement guaranteed a completed Wormhole video technology on or before
April 30, 2001.
On May 29, 2001 Videolocity Direct acquired a second Wormhole license
from Merit for the packing (compression) of all data. We paid Merit and/or
expended a total of $600,000 hoping to commercialize the promised technology.
The promised deployable Wormhole technology was never demonstrated or received
by Videolocity Direct. After many months of delay and the inability to prove the
compression capability and/or marketability of the Wormhole technology, as
represented to us by Merit, Merit agreed to repurchase the two Wormhole
licenses. Merit agreed to pay $600,000 on or before March 1, 2002 and
immediately return for cancellation the 2.5 million shares of Videolocity Direct
stock it held. Upon full payment and receipt of the $600,000 by us, we agreed to
return 1.0 million shares of Merit common stock we had acquired coincidental
with the execution of the initial October 27, 2000 license agreement, together
with any and all rights under the two Wormhole license agreements, and as
amended.
We have no assurance that Merit will be able to fulfill the cash
obligation of $600,000 under its license repurchase agreement. However, because
of the original and continued representations by Merit to us as to the accuracy
concerning the Wormhole capabilities and the deployment dates of the Wormhole
technology, we will aggressively pursue the collection of the total amount due
under the contract. The $600,000 due from Merit will repay us the sums expended
by us on behalf of Merit and the Wormhole technology.
Healthcare Concierge, Inc.
In November 2001 we decided to change the corporate name of our 90% +
owned subsidiary, Videolocity Direct, Inc., to Healthcare Concierge, Inc. We
have transferred the healthcare technology and solutions and our healthcare
business division to Healthcare Concierge.
Healthcare Concierge develops total solutions for the delivery of
specific digital content (video, medical information, educational material) to
patients and attendants in the healthcare Industry. Healthcare Concierge offers
streaming video-on-demand technologies that permit viewers to select from an
extensive library of titles and or medical/educational content, and view them on
their television screens. "on-demand." The system is designed to play video in
like-DVD quality, in real-time, full-screen and in full-motion. All content is
protected through proprietary encryption and encoding process to limit viewing
to the patients and or persons receiving the video and to prevent unauthorized
reproduction or rebroadcast of all content ordered. The video content is being
streamed through a proprietary, multi-functional Digital Healthcare &
Entertainment System. Additionally, the system provides digital music-on-demand,
Internet games, high-speed Internet access and other e-commerce applications
together with certain specialized bedside patient care functionality.
It is our present intention, most likely during the second half of
2002, to file a registration statement for Healthcare Concierge for the purpose
of raising equity for the implementation of its healthcare technology and
solutions in the healthcare marketplace. Completion and filing of the
registration statement and proposed IPO is subject to market conditions and
there can be no assurance that such an offering will be successful.
-30-
60 Day Secured Notes
On July 30, 2001 our Board of Directors authorized the borrowing of
$750,000 in 60 day secured notes bearing 8% simple interest. The notes are
secured by an assignment and collateral pledge of 100% of the outstanding stock
of our subsidiary, Videolocity Technologies, Inc. (5 million shares), which
holds our five (5) Provisional Patent Applications.
We owed certain of our affiliates approximately $320,000 which was due
as of July 29, 2001. The affiliates loaned us an additional $30,000 and agreed
to convert their total outstanding loans of $350,000 to the 60 day notes. One
additional affiliate loaned us $100,000 and three independent, unaffiliated
individuals each loaned an additional $100,000, bringing the total notes payable
to $750,000. These funds provided us with necessary operating capital. We also
expected certain other funds due to an agreement with Millennium International,
LLC. These funds suddenly became unavailable, according to Millennium, because
of the overall market conditions created by the September 11, 2001 tragedy.
The total of $750,000 in notes, which was due and payable on or before
October 31, 2001, has been continued from time to time until February 28, 2002.
As bonuses for these loans and the extensions thereof, we have issued an
aggregate of 685,000 shares of our common stock and 300,000 shares of common
stock of our subsidiary, Videolocity Direct, Inc., which is now known as
Healthcare Concierge, Inc. These notes remain outstanding as of the date hereof,
however extended until September 1, 2002.
UCC-1 and Extension of Secured Notes
On April 1, 2002, together with our subsidiary Videolocity
Technologies, Inc., we entered into a security agreement with the holders of
certain promissory notes totaling $1,050,000. The note holders were granted a
security interest, pro rata their loan amount, in the Provisional Patent
Applications which embrace the proprietary technology and intellectual property
held by Videolocity Technologies, Inc.
On April 1, 2002 WAJ Enterprises, LLC entered into an agreement
rescinding its interest in the assignment of the Merit Agreements, wherein Merit
was to repurchase its technology, and WAJ accepted a 20% interest in the UCC-1
filing for the total amount of its outstanding $300,000 note and all interest
earned to date, extending the due date until September 1, 2002.
On April 30, 2002 the UCC-1 financing statement was filed with the
Secretary of State of Nevada. The filing of the financing statement extended,
without penalty, the due date of the promissory notes totaling $1,050,000 until
September 1, 2002, which amount included the $300,000 WAJ Enterprises, LLC note.
Greenwood Technology Group
In October 2001 we entered into an agreement with The Greenwood
Technology Group, Potomac, MD., wherein Greenwood would arrange for and/or
provide capital (debt and/or equity) to us. However, no guarantees were given
that any such funding would be made available at acceptable terms or at all.
On December 12, 2001, we entered into a letter of intent with Greenwood
wherein it agreed to provide an initial bridge loan of $750,000 on or before
December 31, 2001, enabling us to continue operations. Greenwood also committed
to provide up to $1.7 million by March 1, 2002, and an additional $1.2 million
prior to April 1, 2002. These additional funds would retire any and all
outstanding payables and outstanding notes and, together with other funding,
would finance future operations.
From December 12, 2001 through December 31, 2001, Greenwood provided
only $50,000 and, from December 12, 2001 through May 23, 2002, Greenwood
provided an aggregate of $392,800 of the initial bridge loan. To date, Greenwood
has not fulfilled its commitment under the letter of intent.
WAJ Enterprises, LLC.
In November 2001 Healthcare Concierge and Videolocity International
executed a promissory note for $300,000 in favor of the WAJ Enterprises, LLC. As
collateral security for the promissory note, we agreed to transfer to WAJ all of
our rights, title and interest to the first $300,000 payable under the Merit
License Repurchase Agreement. We also issued 50,000 shares of our common stock
as additional consideration for the loan.
-31-
On April 1, 2002, WAJ entered into an agreement rescinding its interest
in the collateral assignment of the Merit License Repurchase Agreements. In
exchange for rescinding its interest, WAJ accepted a 20% interest in the UCC-1
filing of the Provisional Patent Applications for the total amount of its
outstanding $300,000 note and all interest earned to date, thus extending the
due date until September 1, 2002.
Hospitality: Hospitality Concierge, Inc.
The worldwide hospitality market is as diverse as it is large. There
are over 4.1 million hotel rooms in the U.S. alone. Because our technology is
deployable without prejudice as to the type of broadband delivery system, it is
ideal for installation in all types of hospitality facilities. While the
competition for high-end, large-scale properties is significant for both
video-on-demand systems and broadband access in the rooms, the mid-range and
lower-range properties are significantly underserved with either service.
Properties in this segment, ranging from 75 to 300 rooms, represent more than
56% of the total rooms in the U.S.
The following is a percentage breakdown of properties based on the
number of rooms per property:
2001 United States Property / Room Breakdown
Size of Property(1) Rooms(2)
By Size
Under 75 rooms............ 51.5% 22.5%
75-149 rooms.............. 33.5% 35.1%
150-299 rooms............. 10.9% 21.3%
300-500 rooms............. 2.8% 9.9%
Over 500 rooms............ 1.3% 11.2%
------------------------------
(1) Based on a total of 53,500 properties
(2) Based on a total of 4.1 million rooms
Numbers based on 2001 Lodging Industry Profile from he American Hotel &
Motel Association
Health Care: Healthcare Concierge, Inc.
The worldwide health-care market is a rapidly growing and completely
underserved, as far as video-on- demand and broadband access are concerned. We
believe the current trend includes hospitals focusing on customer care,
satisfaction and amenities. There are approximately 6,000 registered hospitals
with approximately 1 million beds in the U.S. This does not include the number
of assisted living centers, which we estimate to include approximately 17,000
locations and 1.7 million rooms.- Source: 2001 American Hospital Association -
AHA survey.
Residential: Videolocity Direct, Inc.
Management has determined that anywhere a head-end for broadband
delivery can be found is a potential distribution point for the DES.
Practically, however, most service providers of broadband have made little
impact into the home marketplace. DSL has been agonizingly slow and both fiber
and cable systems have limited reach.
However a new use of an old technology, radio, is rapidly emerging as
the solution to existing markets, not served by fiber or cable. Wireless
deployments of broadband are emerging across the U.S. and abroad. Because both
low bandwidth utilization and scalability in the head-end equipment are
attractive to radio networks, our product is ideally suited for this
environment.
Videolocity, Inc.
Our wholly owned subsidiary, Videolocity, Inc., provides operational,
marketing and management support for the other subsidiaries.
Videolocity Technologies, Inc.
Videolocity Technologies, Inc. our wholly owned research and
development subsidiary, holds the following six Provisional Patent Applications,
which encompass the proprietary technology and intellectual property of our
company:
-32-
* Videolocity Digital Entertainment Solution;
* Videolocity Video Encoding & Compression Process;
* Videolocity Graphical User Interface;
* Videolocity Embedded Software Image;
* Videolocity Proprietary PCI Video Card;
* Videolocity Digital Entertainment System Linux Version.
In addition to these six Provisional Patent Applications, we presently
have a U.S. Patent Application and an International Patent Application pending
which encompasses the Videolocity Digital Entertainment Solution. We also have a
backlog of viable proprietary concepts that are in the advanced research and
development stages.
We have obtained or filed trademark and/or servicemark applications
preserving our right to use the following trademarks and servicemarks:
* Videolocity * Videolocity Technologies
* Videolocity Direct * VideolocityTV
* Videolocity and Design (logo) * Digital Entertainment System
* DES
As we proceed forward with the commercialization of our current products and
other products, we will file U.S. and foreign trademark applications to protect
selected product names.
We intend to obtain copyright protection on our product packaging,
instruction sheets, and such other materials that we believe are significant to
warrant procurement of copyrights.
5th Digit Technologies, LLC
We acquired 5th Digit Technologies in December 2000 specifically to
acquire three Provisional Patent Applications representing exclusive proprietary
technologies which were ready to deploy. However, we subsequently filed a
lawsuit when we learned that 5th Digit did not own the applications and that the
technologies were not ready to deploy. The lawsuit has been resolved and the
subsidiary has been inactive for more than a year.
Our Technology
We provide a pay-per-view system that delivers video-on demand at the
highest quality level available today. Our system can be deployed in closed
system environments such as in hotels, resorts, hospitals, rehabilitation or
assisted living facilities, or over a wide area wireless network throughout
communities, campuses and developments. Using a proprietary encoding process,
the video files are standardized to run on Microsoft's Windows Media Player (or
other player) as ASF files at 900 Kbps or less, where a like-DVD quality is
achieved. With the proprietary encoding process, smaller files at higher quality
are delivered. Smaller files mean smaller servers, more simultaneous users on a
network segment, and the ability to download the movie and/or other content from
or to a remote library. The system provides high availability of the local
Internet connection to support multiple users with the web surfing, email, and
web radio. The exclusive server software on the caching server improves overall
network capacity, and improves video quality of service on the network. Again,
this allows the use of smaller servers and more efficient and cost effective
network segments.
The system can deliver digital media-on-demand to a multimedia PC, or
to our proprietary DES. It displays full-resolution text and graphics onto any
standard TV in high resolution. The system is fast, reliable, and powered by a
high-level CPU and customized chip sets using 128 megabytes (or 64 megabytes) of
SDRAM, audio and video out, modem and printer ports, plus a wireless, Ethernet
or DSL connection. We provide an entirely software based design, thus
eliminating the need for hard drives in our digital set top boxes.
In addition to video content viewing, the DES provides digital music,
games, full web surfing and a variety of computer applications such as e-mail
and messaging. The customized Web Browser is fully compliant with the HTML 4.0
plus standard and JavaScript, ensuring proper web page display. It also supports
the most commonly used graphics and audio formats such as FIF87, animated GIF,
JPEG, WAV, AU, AIFF, Flash, Shockwave, RealAudio, RealVideo, QuickTime, and
Windows Media. Our software based design lets us upgrade and update any and all
software versions, players and plug-ins remotely and quickly. With an easy,
user-friendly graphic user interface, or GUI, the digital entertainment solution
-33-
allows sending and receiving text, data, graphics and video at the click of a
keyboard and/or handheld remote control. All content can be enjoyed using
wireless headsets and therefore ensuring privacy for the end user.
DES is a true digital information and entertainment end-to-end
solution. It provides fully integrated software driven hardware application and
is fully scalable for any size deployment. The system is adaptable to all
architecture and is customized for each application.
Our technology allows us to deliver true video-on-demand streaming in
Mpeg4 format at 900kbps or less achieving near DVD quality over wireless,
Ethernet or DSL WAN & LAN network architectures. Accordingly, we can offer the
following innovations and features:
* Property/Facility Information * Personal and Corporate E-mail
* Specific Application Content / Information * Music on Demand
* Specific Educational Content / Information * Internet Games
* Dietary Menus * Wireless Headset
* Movies/Videos on Demand * Wireless Keyboard
* High Speed Internet Access * Handheld Remote Control
The features are very flexible and are delivered over an entirely software based
platform, available on either a Microsoft or Linux Operating Systems.
Our Business Strategy
Our current business strategy is to drive demand of the wireless usage
of our digital entertainment and information system worldwide in the
hospitality, healthcare and residential markets. We intend to take full
advantage of the advanced technologies we have developed. We will market our
products to the initial market segments identified based on a strong revenue
share model and anticipate generating residual income on an ongoing basis. Any
additional markets that have need for our technologies may be approached with
established partners using a licensing scenario. Both business models will
support ongoing revenue streams for all entities.
We are committed to continued development and installation of
innovative, high quality, cost effective solutions and systems to build an
increased and ongoing revenue stream. We provide a revolutionary wireless
quality solution and also offer a parallel quality solution over wire (Ethernet,
DSL, CATV) and Fiber architectures. Our DES is available on either a Mircosoft
or Linux OS in a stand alone set top box or integrated in a television set.
All functions that are not part of our core expertise will be
outsourced to strategic partners specializing in those fields. This will allow
us to focus on continued technical development and will ensure that our
technologies will continue to provide competitive advantages.
Research and Development
We have devoted the majority of our resources to developing advanced
technology on a new operating system (Linux OS), conducting beta testing and
engineering supporting our wireless delivery platforms, and deploying
infrastructures. For the past two years, we have spent substantial resources,
approximately $2.5 million, to facilitate the engineering and technical
development of our DES using a Microsoft Operating System and beta testing it,
both wired and wireless, though our facilities in Park City, Utah. We catagorize
pure research and development expenditures (for tax purposes) in the fiscal
years of 2000 and 2001 and the first eight months of fiscal 2002 as $0, $27,818,
and $60,000 respectively.
Manufacturing
To date, we have engineered, selected, and are contracting all sourcing
and outsourcing of components, manufacturing, assembly, testing and shipping.
All supplies are available and ready for shipment to or through U.S. based
assembly. Our alliances are ready to produce, assemble, test and ship all
products. We do not anticipate significant delays or back orders, all of which
are scaleable with relatively short notice.
Marketing
Our initial marketing effort is focused on hotels, hospitals, long-term
care homes, retirement centers as well as developments, universities, resorts,
multi-dwelling units/timeshares and planned residential communities. We are
using existing channels to pursue the hospitality and healthcare markets.
Management believes that there exists strong potential for strategic alliances
-34-
and partnerships with network and content providers such as telecommunications
companies, cable companies, and Internet/broadband based content providers to
further our efforts and impact residential applications.
The sales and distribution will focus on the following primary
channels:
* Traditional Distribution channels for target markets
* Strategic Alliances and Partnerships
* Trade Shows and Conferences
* Leverage existing contacts of management team and investors
* Website and Hyperlinks to trade sites
* Advertising in trade publications
* Direct mailing campaign and telemarketing efforts
Our sales and channel support is headquartered in Park City, Utah with
additional regional support organizations planned throughout the country.
Members of the support team will be compensated with base salary, commission and
stock option programs.
We intend to promote our products aggressively through Internet
websites and will ensure that the sites are easily searchable through all the
major search engine companies under a variety of topics and key words. We also
intend to place advertisements on strategic websites to attract the target
markets described above.
Competition
While competition for high-end large-scale properties is significant
for both video-on-demand systems and broadband access in the rooms, we believe
the mid-range and lower-range properties are significantly underserved with
either service. Properties in this segment ranging from 75 to 300 rooms,
represent more than 56% of the total rooms in the U.S. Because our cost for
deployment is far less on a per location basis than other existing technologies,
we believe we are ideally suited for this market. Present competition mainly
comes from cable TV or satellite pay- per-view services that lack the ability to
provide true video-on-demand, broadband access or easily navigated Internet
access. Two smaller companies, Hospitality Networks and KoolConnect, are both
currently trying to deploy their solutions.
Competition in the hospitality sector comes mainly from LodgeNet and
On-Command. According to published information from their respective websites,
On-Command currently has more than 750,000 hotel rooms world-wide but only
35,000 of them have current true video-on-demand systems. Both companies are
deploying systems that use high bandwidth MPEG 2 formats while Videolocity uses
the more efficient MPEG 4 format. These type systems are readily available for
purchase and represent the main technology of the competition to our DES.
Comparable cost for these systems typically starts at approximately $150,000 to
$200,000, not including set-top- boxes. The equivalent for our system would be
approximately $35,000.
While companies like On-Command and LodgeNet rely on direct sales, we
will mainly use existing companies/channels that are presently specifically
serving our target market segments with related products. We market our products
to the hospitality industry through our subsidiary Hospitality Concierge.
There currently exists little competition for video-on-demand in the
healthcare industry. Most companies, such as HCORP and Get Well Network, provide
limited functionality at lower delivery quality. We market our products to the
healthcare industry through our subsidiary Healthcare Concierge.
The home entertainment industry is extremely competitive and is
dominated by several large companies with worldwide name brand recognition and
substantial financial resources. In attracting subscribers to our video-on-
demand system, we will be competing with traditional video rental chains such as
Blockbuster Video, Hollywood Video, and Movie Gallery; providers of video
entertainment over cable and satellite networks, such as DirectTV, Dish Network,
and AT&T; video stores, supermarkets, mass merchandisers, club stores, and other
retail outlets that sell video cassettes; web-based video channels; and movie
theaters, live theater, sporting events, and other similar businesses that
compete for the general public's entertainment dollar.
-35-
In addition, numerous companies including Blockbuster Video, Microsoft
WebTV, EchoStar, and TIVO, all of which have substantially greater resources and
name recognition than us, have announced their intent to deliver state of the
art video-on-demand systems in the near future, although to the best of our
knowledge, no such systems are available for widespread public use as of this
date. Several major movie studios, including Sony, Walt Disney Co. and 20th
Century Fox have also announced their intention to develop systems for the
delivery of movies directly to consumers over the Internet, which could impede
our ability to obtain content for use with its video-on-demand systems and could
provide significant additional competition from large, established companies
with a high degree of name recognition in the entertainment industry. There can
be no assurance that other companies will not develop technologies superior to
ours, that new technology will not emerge that renders our technology obsolete,
that we will be precluded from licensing the video content we require to
effectively compete in the market, or that a competing company or companies will
not be able to capture more market share than us due to name recognition and the
expenditure of greater amounts for marketing and advertising. We will market to
the residential market segments through our subsidiary Videolocity Direct.
Backlog
We presently do not have a backlog for any of our products and do not
foresee a backlog in the immediate future.
We have entered into certain letters of agreement that anticipate
future contracts with the following businesses:
* Fandango Resorts - Hotels Park City (includes other Fandango
Resorts properties)
We will deploy our DES in the new Fandango Hotel Park City, a new
all-suite, condominium luxury resort hotel currently under construction and
scheduled to open in Park City, Utah in the fall of 2002. Fandango Resorts is a
premier resort development and management company that specializes in the
programming, marketing and management of upscale, full service boutique resorts.
The Fandango projects integrate beautiful accommodations, personalized service
and luxurious amenities found only in the finest hotels with the specialized
requirements of condominium ownership. Headquartered in Park City, Utah,
Fandango Resorts' founders have 45 years of experience with deluxe hotels and
resorts. Our projected installation date for the Fandango Park City property is
October 1, 2002.
* Jameson Health System
Jameson Hospital is committed to providing convenient, affordable, high
quality healthcare to the people of Lawrence County. Serving as the primary
subsidiary of Jameson Health System, Inc., Jameson Hospital continues to be a
healthcare leader as well as the largest employer in Lawrence County. Jameson
Hospital is a 204 bed facility featuring a skilled nursing unit, inpatient and
outpatient rehabilitation units, senior adult day health care, an inpatient
geriatric psychiatric unit, a maternity care center, pediatrics unit, cardiac
services and emergency department. Our project finalization date for the Jameson
Hospital is scheduled for the last week of July 2002, with a projected
installation date of November 1, 2002.
* Emerald Suites Hotel Las Vegas
Emerald Suites is located on the Las Vegas strip, four miles south of
Mandalay Bay Resorts. There are a total of 396 suites, of which 300 are single
bedroom suites and 96 are two-bedroom suites. This represents one of the higher
counts of two bedroom suites found at any extended stay property in Las Vegas.
We completed installation of the high speed internet access, but have yet to
install our DES.
Regulation
We are not required to obtain any government approval as a condition to
marketing our DES. However, such systems will be required to operate in
compliance with applicable regulations of the FCC, when in wireless mode, and
the set-top boxes used in connection with such systems may require approval from
Underwriters' Laboratories. We will also be subject to various federal, state
and local laws that govern the conduct of our business, including state and
local advertising, consumer protection, credit protection, licensing, and other
labor and employment regulations. We have not incurred any notice, warning or
expenses resulting from compliance or non- compliance with federal, state or
local environmental laws.
-36-
Properties
Our technical and marketing offices are located at 1762 A Prospector
Avenue, Park City, Utah 84060, and our telephone number is (435) 615-8338. Such
offices consist of approximately 2800 square feet.
We are currently evaluating the need for additional space and may
relocate our corporate offices in the near future. We maintain our corporate
offices at 44 W. 300 S., Salt Lake City, mailing address at 358 S. 700 E., #
B-604, Salt Lake City, Utah 84102, and our Salt Lake City telephone numbers are
(801) 521-2807/2808 and Fax (801) 521- 2844.
Product Liability and Liability Insurance
We may be exposed to potential product liability claims by users of our
products. We currently maintain general business liability insurance limited to
$200,000 coverage per occurrence and in the aggregate. We have not obtained
product liability insurance to date, however it is available.
Employees
We presently have nine full-time employees, one consultant, and one
part-time consultant. We do not anticipate a need to hire additional high-level
employees for the next several months, except for possibly a technical director,
marketing and sales project manager, and two or more assistants. In addition to
our employees, we may use the services of certain consultants on a contract
basis. Presently, we do not believe that our employees will be represented by
unions and considers our relationship with our employees to be good.
Legal Proceedings
On January 4, 2002 we filed an action in the Third Judicial District
Court of Salt Lake County, Utah, against the holders of our Series "A" Preferred
stock, issued pursuant to our acquisition of 5th Digit Technologies. The suit
alleges fraud and misrepresentation of the technology which induced our
acquisition of 5th Digit. Three of the individuals originally comprising 5th
Digit ownership, settled with us by exchanging their 600,000 Series "A"
Preferred shares for 180,000 shares of our common stock. The remaining 350,000
Preferred shares were tendered for liquidation at $5.00 per share on January 24,
2002, however, the shares were deposited with the Court.
On April 11, 2002 the Court entered a default judgment against the
holder of the 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.
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, their ages and positions held as
of May 31, 2002, are as follows:
Name Age Position
---- --- --------
Bennie L. Williams............... 65 Chairman of the Board and Director
Robert E. Holt................... 38 President, Chief Executive Officer and Director
Larry R. McNeill................. 60 Vice President, Chief Financial Officer and Director
Dan Driscoll..................... 45 Vice President Corporate Development and Director
Dr. James P. Hill................ 65 Vice Chairman and Director
D. T. Norman..................... 41 Secretary / Treasurer and Director
Currently we have six members on our board of directors. Each of these
directors will hold office until the next annual meeting of our stockholders and
until his or her successor is elected and qualified, subject to removal by the
board of directors and or shareholders.
Certain biographical information of our directors and officers is set
forth below.
Bennie L. Williams. Mr. Williams was appointed Chairman and a director
in 2001. He has spent 36 years in the broadcasting industry in general
management, sales management, marketing, promotion and advertising of several
radio stations. Mr. Williams was Vice President of sales for Intermountain Radio
Network, with 132 affiliates. From to 1970 to 1987, he was Vice President of
-37-
sales for Communications Investment Corporation's twelve owned and operated
stations in Utah, Idaho and Montana. In addition he was general manager of KALL
AM and KLCY FM until his retirement in 1988. At that time he founded his own
company, Business Idea Company of America, an investment portfolio management
firm that also provided marketing, advertising and consulting services to select
clients. Mr. Williams is currently serving his sixth year as Chairman of the
Board of Governors of Shriners Hospital for Children, Intermountain, in Salt
Lake City.
Robert E. Holt. Mr. Holt acted until recently as Chief Operating
Officer of Greenwood Technology Group. Prior to joining Greenwood Technology
Group, Mr. Holt held a series of leadership positions with high-tech companies
including Qualcomm Inc., where he was head of the Wireless Campus Group,
overseeing product development, marketing, and technology introduction. Mr. Holt
also served as a Director of the $500m Qualcomm Ventures and Wireless
Infrastructure Products Division. He has 10 years of P&L responsibility between
the U.S. Army Signal Corps, GTE Government Systems, PrimeCo PCS and Sprint PCS
where he led the development and deployment of wireless networks in over thirty
countries. His expertise is around the following issues: Strategic
Planning/Partnership, Competitive Intelligence, Operations and Implementation.
Mr. Holt has earned a Bachelor of Science degree in electrical engineering and a
master of science degree in communications. He has also earned certification in
project management, PCS technologies, call processing and systems engineering.
Larry R. McNeill. From 1998 to the present, Mr. McNeill has been the
Chief Financial Officer of Theatre Candy Distributing Company, Inc. of Salt Lake
City, Utah. In 1996, Mr. McNeill retired from Salt Lake City based Smith's Food
& Drug Centers, Inc. after 17 years as an executive officer of that company,
most recently Senior Vice President of Corporate Development. In that capacity
he managed over 60 employees within the real estate, legal, and research
departments of that company. Mr. McNeill is a director of Theatre Candy
Distributing Company, Inc.; American Polymer Corp.; Water and Wellness Centers
LLC; Construction.com, LLC; and Financial Services, LLC. He is the President of
the West Valley Colonels Association and past president and founder of the
Cystic Fibrosis Foundation of Utah. Mr. McNeill holds a B.A. degree in Business
Administration, Economics and Russian, a MBA degree in Business Management, and
is pursuing his Ph.D. in Business Administration..
Dan Driscoll. Mr. Driscoll is Senior VP of Business Development of the
Wireless Division of CommScope, Inc. The CommScope Wireless Division was created
in 1997; Mr. Driscoll has spearheaded the sales and business development since
1998. CommScope Wireless Division produces cable, connectors and accessories for
Wireless Telecom operators, AT&T and Sprint among others and Mr. Driscoll's
leadership has positioned CommScope as the No. 2 worldwide supplier. Mr.
Driscoll has 20 years experience in sales and business development in the
Wireless Telecom arena, his expertise in developing strategic partners was
instrumental in Hewlett Packard's entrance in the RF/Microwave component market
through its purchase of Avantek. Mr. Driscoll holds both a BSBA and BSEE from
Villanova University. He also holds multiple business certificates from PCS
technology to process control programs. Mr. Driscoll is actively involved in his
community, and has created two non-profit organizations that promote youth
activities; which organizations currently generate over $200,000 of revenue each
year. Mr. Driscoll has been chairman of the local Parks and Recreation of his
community for the past 15 years and previously played football in the CFL and
NFL.
Dr. James P. Hill. Dr. Hill is the Executive Director of the Home
Challenge Trust Fund of the Indianapolis Neighborhood Housing Partnership. Prior
to his current position, he served as the Chief Development Officer of Community
Hospitals Indianapolis Foundation in Indianapolis, Indiana. Prior to that he
served as Vice President and Associate Dean of Southern Illinois University
School of Medicine; President of Indiana Wesleyan University; Academic Dean,
Peidmont Community College; Division Chair of Math and Science, Virginia Western
Community College; and Department Chair of Chemistry, Virginia Western Community
College. Dr. Hill has served on numerous boards and community civic groups
including the Chamber of Commerce Board, Economic Development Council, Crisis
Nursery Center Board, Symphony Board and President, and Area Scout Council
Board. He also holds memberships in several national and state professional
associations and honor societies. Dr. Hill holds a Doctorate in Administration
and Statistical Research Design Methodology from Virginia Polytechnic Institute
and State University, a Masters degree in Chemistry and Biology from the
University of Virginia, and a Bachelor's degree in Biology and Chemistry from
Roanoke College. Dr. Hill is the brother-in-law of George Norman, a co- founder,
officer and director of Videolocity, Inc.
D. T. Norman. D.T. Norman is a co-founder of Videolocity, Inc. and
serves as Secretary, Treasurer and a director of that company. She is also
Secretary, Treasurer and a director of Brain Tree International, Inc., an
inactive public company, and is Secretary and a director of Dynamic Software,
past Secretary and a director of Santa Barbara Oil Corp., past Secretary and
director of Pacifica Financial Corp., a director of Worldwide Ministries and
Education Fund, and a director of the Stubbs Foundation. D.T. Norman is the wife
of George Norman, a co-founder, officer and director of Videolocity, Inc.
-38-
Committees of the Board of Directors
Our audit committee presently consists of Ms. Norman and Messrs.
McNeill and Williams. It is responsible for reviewing the scope of annual
audits, considering specific problems and questions that arise during the course
of audits, monitoring the adequacy of accounting and audit controls, and such
other functions as the board of directors may from time to time delegate to it.
Our audit committee must report to the board of directors when asked to do so.
Our executive committee consists of Ms. Norman and Messrs. McNeill and
George Norman and is authorized to exercise the powers of the board during
intervals between board meetings. The executive committee also handles matters
concerning compensation and salaries, subject to review and approval by the
board. A nominating committee consisting of Ms. Norman and Messrs. Hill and
Williams reviews the qualifications of potential candidates for the board,
evaluates the performance of incumbent directors and recommends to the board
nominees for election to the board at the annual meeting of stockholders.
Director Compensation
Presently, we do not provide monetary compensation to directors for
serving on our board of directors or the boards of our subsidiaries, or for
attendance at board or committee meeting. We anticipate that as we acquire
adequate funding, we will consider instituting a policy to compensate our
directors. In that event, we believe that any proposed compensation will be
equivalent to that of companies of similar size and stature as ours. We have
issued compensation shares totaling 250,000 under our 2002 Stock Incentive and
Stock Award Plan to our directors for past service rendered in 2000 and 2001.
Significant Employees, Consultants and Directors of Our Subsidiaries
The following tables set forth information with respect to current
directors and executive officers of five of our subsidiaries. 5th Digit
Technologies, LLC is presently inactive. These persons are expected to make a
significant contribution to our business.
Videolocity, Inc.
Name Age Positions
---- --- ---------
Robert E. Holt................... 38 President, Chief Executive Officer and Director
Larry R. McNeill................. 60 Chief Financial Officer and Director
D. T. Norman..................... 41 Secretary / Treasurer and Director
George Norman.................... 71 Chairman of the Board and Director
Martin P. Senn................... 39 Senior Vice President and Chief Operating Officer
Please note that the directors and executive officers for Hospitality
Concierge, Inc. and Videolocity Direct, Inc. are the same as for Videolocity,
Inc.
The resumes for Ms. Norman and Messrs. Holt and McNeill are set forth
above under the information for our parent company. Biographical information for
Messrs. Norman and Senn is set forth below.
George Norman. Mr. Norman is the co-founder of Videolocity, Inc. and
served as its president through July 1999. Prior to founding Videolocity, he was
semi-retired. He is President and a director of Dynamic Software, past President
and a director of Santa Barbara Oil Corp., past President and director of
Pacifica Financial Corp., a director of Worldwide Ministries and Education Fund,
and a director of the Stubbs Foundation. Approximately thirty years ago, in
1970, Mr. Norman was convicted of two counts of aiding and abetting the
misapplication of bank funds and was sentenced to two years on each of the
counts, of which he served nine months at the Federal Medical Center in
Rochester, Minnesota. Prior to 1970, Mr. Norman spent many years in the
operation and ownership of broadcasting properties and other general business
activities. Mr. Norman is the husband of D.T. Norman and the brother-in-law of
Dr. James P. Hill. Mr. Norman notified the board in June 2002 of his intention
to retire and leave our company in September 2002.
-39-
Martin P. Senn. From 1999 until he joined Videolocity in November 2000,
Mr. Senn was Vice President, Sales & Marketing of Teleflex Systems, Inc., a
provider of state-of-the-art billing solutions, voice/data processing platforms,
calling cards, and operator services software, where he handled public relations
and corporate development. From 1995 to 1999, Mr. Senn served as Vice President
of Sales & Marketing for Teltrust Inc, forming and managing its Teleservices
division and actively working on applications and designs with Teltrust's
Internet division. The Teleservices division grew in 4 years to annual revenue
of over $10 million with over 700 employees. From 1993 to 1995, Mr. Senn managed
Online Reservations Systems, Inc., a Park City, Utah based company providing
wholesale and retail travel operations. Mr. Senn holds a Masters degree in
Travel Industry Management, Marketing and Languages from the University of
Zurich, Switzerland. He speaks fluent English, German, Italian and French, and
speaks conversational Spanish.
Healthcare Concierge, Inc.
The following table sets forth information with respect to the current
directors and executive officers of Healthcare Concierge, Inc., (formally named
Videolocity Direct, Inc.) our 93% owned operating subsidiary. These persons are
expected to make a significant contribution to our business.
Name Age Positions
---- --- ---------
Bennie L. Williams............... 65 Chairman and Director
Robert E. Holt................... 38 President, Chief Executive Officer and Director
Martin P. Senn................... 39 Vice President, Chief Operating Officer and Director
Larry R. McNeill................. 60 Chief Financial Officer and Director
D.T. Norman...................... 41 Secretary / Treasurer and Director
The resumes for Ms. Norman and Messrs. Williams, Holt and McNeill are
set forth above under the information for our parent company. Mr. Senn's resume
is set forth above under Videolocity, Inc.
The following table sets forth information with respect to the current
directors and executive officers of Videolocity Technologies, Inc., our wholly
owned operating subsidiary.
Videolocity Technologies, Inc.
Name Age Position
---- --- --------
George Norman.................... 71 Chairman / Director
Robert E. Holt................... 38 President / CEO / Director
Bennie L. Williams............... 65 Director
Martin P. Senn................... 39 Vice President / COO / Director
Larry R. McNeill................. 60 CFO / Director
D.T. Norman...................... 41 Secretary / Treasurer / Director
The resumes for Ms. Norman and Messrs. Holt, Williams and McNeill are set forth
above under the information for our parent company. Resumes for Messrs Norman
and Senn resume are set forth above under Videolocity, Inc.
Executive Compensation
The following table sets forth all cash compensation actually paid (and
not deferred) by us for services rendered for the years ended October 31, 2001
and 2000 to our Chief Executive Officer and to each of the next four most highly
compensated executive officers whose total annual salary and bonus was in excess
of $100,000.
Summary Compensation Table
Other
Name and Annual Compensation Annual All Other
Principal Position Year Salary Bonus Compensation Compensation
---- -------- ------------ ------------
Jerry E. Romney, Jr, 2001 $ 150,000 $ -0- $ -0- $ 5,000 (1)
President 2000 -0- -0- -0- -0-
Martin P. Senn, 2001 128,000 -0- -0- -0-
C.O.O. 2000 -0- -0- -0- -0-
- ----------------
(1) Vested 5,000 shares of common stock under our 2000 Stock
Incentive Plan.
-40-
Employment Agreements
We have entered into employment agreements with Mr. Holt and Mr. Senn.
Certain aspects of these agreements are specific to the individual's agreement:
Mr. Holt: Pursuant to his employment agreement dated January 16, 2002,
Mr. Holt is serving as our Chief Executive Officer and receives an annual base
salary of $240,000. His employment has an initial term of three years ending
January 15, 2005. Mr. Holt is entitled to 90,000 plan units under our 2000 Stock
Incentive Plan, of which 5,000 have vested. Mr. Holt received a bonus of 100,000
shares under our 2002 Stock Incentive Stock Award Plan. In addition, upon our
receiving a minimum of $1 million in capital funding, Mr. Holt will receive a
bonus of 100,000 shares of our common stock and the right to purchase at $0.01
per warrant, 900,000 stock purchase warrants, exercisable at $1.00 per share.
Mr. Senn: Pursuant to his employment agreement dated November 16, 2000
with our subsidiary Videolocity, Inc. (formerly Moviesonline, Inc.), Mr. Senn is
serving as its Chief Operating Officer and receives an annual base salary of
$137,000, increased in October 2001 from an initial base salary of $125,000. His
employment has an initial term of three years ending November 16, 2003. Mr. Senn
is also entitled to 118,750 plan units under our 2000 Stock Incentive Plan, of
which he has vested rights in 6,875 shares of our common stock.
Each of the above-described employment agreements has the following
uniform terms:
Assignment of Inventions: During the terms of the employment
agreements, any invention, discovery, concepts and ideas, whether or not
patentable or subject to copyright protection, which the employee discovers or
conceives, will become our sole property.
Non-Compete: During the term of their agreement with us and for two
years after the expiration of Mr. Senn's agreement, and three years after the
expiration of Mr. Holt's agreement, the employees agree not to:
* own, manage operate or control any business that competes with
us;
* provide services to any business in the video-on-demand
industry that is directly competitive with us;
* solicit any business similar to ours from, or sell any
products or services that are in direct competition with ours
to, any business that within one year prior to the date of
termination of employment, was a customer or client of ours or
any of our subsidiaries; and
* solicit the employment of any of our full-time executives or
employees as of the date of termination of the agreement.
Change of Control:
In the event of a change of control of our company, whether by merger,
acquisition, consolidation, reorganization, liquidation or otherwise, the
employee will be entitled to voluntarily terminate his agreement and receive
certain benefits set forth below:
* the annual base salary through the date of termination, to the extent
not theretofore paid;
* reimbursement for any monies advanced by employee through the date of
termination;
* all other payments and benefits to which the employee is entitled
through the date of termination;
* for six months after the termination date, continued health and
medical insurance coverage; and
* all unvested plan units under the stock incentive plan will vest.
Indemnification of Directors and Executive Officers and Limitation on Liability
We have adopted certain provisions in our articles of incorporation
that limit the liability of our directors and executive officers and provide for
indemnification by us for our directors and officers to the fullest extent
permitted by Nevada law. Such provisions substantially limit the shareholders'
ability to hold directors and officers liable for monetary damages resulting
from breaches of their fiduciary duties.
-41-
Benefit Plans
Videolocity, Inc. 2000 Stock Incentive Plan
We adopted the Videolocity, Inc. 2000 Stock Incentive Plan in
connection with our acquisition of Videolocity, Inc. We have reserved one
million shares of common stock for issuance under the plan. As of June 28, 2002,
plan awards with respect to 282,283 shares have been made, of which 32,208 plan
awards have vested and 32,208 shares issued. Plan awards with respect to 717,717
shares remain available under the plan. All awards made under the plan are made
in plan units. Each plan unit becomes convertible, at the option of the
participant, into one share of our common stock on the date vesting requirements
for the plan units have been satisfied. Shares to be issued under the plan will
be registered under the Securities Act of 1933. The awards granted to date
provide certain continued vesting as set forth and determined in each individual
employment agreement, to be vested on the first day of each consecutive fiscal
quarter.
If a plan participant voluntarily terminates his employment or is
terminated for cause, any unvested plan awards will be forfeited. If a plan
participant is terminated without cause, terminates for good reason (including a
change of control), dies, or becomes disabled, all as defined in the plan, any
unvested plan awards will vest on the date of such termination.
Videolocity International, Inc. 2002 Stock Option and Stock Award Plan
Also at the time of our acquisition of Videolocity, Inc., we adopted an
omnibus stock option and stock award plan. The plan was inactive until it was
formalized on March 1, 2002 as the Videolocity International, Inc. 2002 Stock
Option and Stock Award Plan The plan may be administered either by the board or
by a committee to be appointed from time to time by the board. Awards granted
under the plan may be stock options, appreciation rights, or stock awards which
are awarded to employees, including officers and directors, who, in the opinion
of the board or the committee, have contributed, or are expected to contribute,
materially to the success of our company. In addition, at the discretion of the
board or the committee, options or bonus stock may be granted to individuals who
are not employees, but contribute to our success as advisors or consultants.
All of our employees, officers, directors, advisors and consultants are
eligible to participate under the plan. A maximum of 500,000 shares of our
common stock are available for grant under this plan. The identification of
individuals entitled to receive awards, the terms of the awards, and the number
of shares subject to individual awards, are determined by the board or the
committee, at their sole discretion. As of June 28, 2002, a total of 467,855
shares have been granted under the plan, of which 417,855 shares have been
issued, leaving 32,155 shares remaining to be granted and issued.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information, to the best of our knowledge
as of May 31, 2002, regarding beneficial ownership of our common stock by:
* each of the named executive officers;
* each or our directors; and
* each person known to us to own beneficially more than 5% of
our common stock;
* all executive officers and directors as a group.
Beneficial ownership is determined based on the rules and regulations
of the SEC. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock subject to
options or warrants held by that person that are exercisable, or exercisable
within 60 days of June 28, 2002, are counted as outstanding. These shares,
however, are not counted as outstanding for purposes of computing the percentage
ownership of any other person. Except as may be indicated in the footnotes to
this table and pursuant to applicable community property laws, each stockholder
named in the table has sole voting and investment power with respect to the
shares set forth opposite that stockholder's name.
-42-
Unless otherwise indicated, the address for each director, executive
officer and 5% owner is c/o Videolocity International, Inc. 358 South 700 East,
Suite B604, Salt Lake City, Utah 84102.
Beneficial Ownership
Name of Beneficial Owner Shares Percent
------------------------ ----------- -------
Directors and Executive Officers:
Dan Driscoll............................................. 225,122 3.9 %
Dr. James P. Hill, Ph.D(1)............................... 650,000 11.3 %
Robert E. Holt........................................... 105,000 1.8 %
Larry R. McNeill......................................... 236,000 4.1 %
D. T. Norman............................................. 300,000 5.2 %
Martin P. Senn(2)........................................ 43,125 .8 %
Bennie L. Williams....................................... 335,000 5.8 %
5% Owners
Kirk Schneider(3)........................................ 372,000 6.5 %
Mark Schneider(4)........................................ 357,700 6.2 %
Cornell Capital Partners, L.P............................ 290,000 5.0 %
All executive officers and directors as a group (7 persons) 1,894,247 32.9 %
(1) Includes 625,000 shares held of record by a limited liability company
of which Dr. Hill is the manager.
(2) Includes 31,250 shares held of record by a limited liability company of
which Mr. Senn is the manager.
(3) Includes 250,000 shares held of record by a limited liability company
of which Kirk Schneider is the manager. Kirk Schneider's address is
1201 S. Main Street, Salt Lake City, Utah 84111. Kirk Schneider is the
brother of Mark Schneider.
(4) Includes 20,000 shares held of record by Mark Schneider's minor child
and 10,000 shares held by a family limited partnership. Does not
include 20,000 shares held by Mr. Schneider's spouse with respect to
which he disclaims beneficial ownership. Mark Schneider's address is
265 E. 100 S., Suite 250, Salt Lake City, Utah 84111. Mark Schneider is
the brother of Kirk Schneider.
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Transactions with 5% Stockholders
The following persons purchased shares of our common stock in the
private placement of 610,000 shares completed on December 4, 2000 and
immediately following the acquisition of Videolocity, Inc.: Stephen B. Cluff, a
former officer and director, 12,200 shares; Kirk Schneider, a greater than 5%
shareholder, 61,000 shares; Mark Schneider, a greater than 5% shareholder,
54,900 shares; Noland Schneider, the father of Kirk Schneider and Mark
Schneider, 122,000 shares; and Jeri Staten, the sister of Kirk Schneider and
Mark Schneider, 61,000 shares. Such persons purchased the shares at a price of
approximately $0.82 per share, which was the same price paid by the other
purchasers in the private placement. Noland Schneider provided assistance in
locating an entity to be used in the acquisition of Videolocity, Inc. and
assisted in negotiating the terms of the reorganization, but did not receive any
compensation for such activities.
Transactions with Officers and Directors
In July 2001, two of our current directors Larry R. McNeill and Bennie
L. Williams loaned to us $135,000 and $100,000, respectively, pursuant to
certain 60-day secured notes issued by us. The notes have been extended to
September 1, 2002. As additional consideration for the loans, we issued to Mr.
McNeill and Mr. Williams 67,500 shares and 50,000 shares, respectively, of
Videolocity Direct, Inc. common stock (now known as Healthcare Concierge, Inc.).
On November 9, 200, as consideration for extending the term of the notes, we
issued to Mr. McNeill and Mr. Williams 13,500 shares and 10,000 shares,
respectively, of Videolocity International, Inc. common stock. A third director,
D.T. Norman, through ISOZ, L.C. of which she is the manager, also loaned to us
in July 2001 an aggregate of $215,000 pursuant to the secured notes. ISOZ
received 107,500 shares of Videolocity Direct stock as additional consideration
for the loan. During the second quarter of fiscal 2002, Ms. Norman, on behalf of
ISOZ, L.C., voluntarily contributed back to us for cancellation, a total of
50,000 shares of Videolocity International common stock to offset some of the
additional shares that we had to issue as consideration to acquire certain loans
and extensions from other parties. All of the aforementioned notes remain
outstanding as of the date hereof, having been secured under a UCC-1 filing and
are due September 1, 2002.
-43-
Through June 28, 2002, the following officers, employees and consultant
received an aggregate of 32,559 shares of our common stock under the Videolocity
Inc. 2000 Stock Incentive Plan: Jerry E. Romney, Jr., Martin P. Senn, Luigi A.
DeAngelis, David M. Smith, Joshua L. Hamer, Wilford T. Lee, and Steven Fogarty.
On July 30, 2001 our board of directors authorized the borrowing of
$750,000 in 60 day secured notes bearing 8% simple interest. The notes are
secured by an assignment and collateral pledge of 100% of the outstanding stock
of Videolocity Technologies, Inc. (5 million shares), which holds our six
Provisional Patent Applications.
We owed certain of our affiliates approximately $320,000 which was due
as of July 29, 2001. The affiliates loaned an additional $30,000 and agreed to
convert their already outstanding loans of $320,000, wherein the affiliates
became part of the $750,000 loan package. One additional affiliate loaned
$100,000 and three independent unaffiliated individuals each loaned an
additional $100,000 bringing the total notes payable to $750,000. This provided
us with very necessary operating capital. There were certain expected funds
having been introduced and anticipated with the help of Millennium
International, LLC. that suddenly became unavailable because of the overall
market conditions created by the September 11, 2001 tragedy.
The total of $750,000, which was due and payable on or before October
31, 2001, has been continued from time to time until September 1, 2002, having
been secured under our UCC-1 filing. As bonuses for these loans and the
extensions thereof, we have issued an aggregate of 68,500 of our restricted
shares of common stock and 300,000 restricted shares of Videolocity Direct,
Inc., now known as Healthcare Concierge, Inc.
DESCRIPTION OF CAPITAL STOCK
Common Stock
We are authorized to issue 50 million shares of common stock. At June
28, 2002, there were 5,748,011 shares of common stock outstanding and held of
record by approximately 308 stockholders.
All of our shares of common stock have equal rights and privileges with
respect to voting, liquidation and dividend rights. Each share of common stock
entitles the holder thereof to:
* one non-cumulative vote for each share held of record on all
matters submitted to a vote of the stockholders;
* to participate equally and to receive any and all such
dividends as may be declared by the board of directors; and
* to participate pro rata in any distribution of assets
available for distribution upon our liquidation.
Our stockholders have no preemptive rights to acquire additional shares
of common stock or any other securities. All outstanding shares of common stock
are, and the shares offered in this prospectus will be upon issuance and sale,
fully paid and non-assessable.
Preferred Stock
We are also authorized to issue one million shares of preferred stock ,
par value $.001 per share. Our preferred shares may be issued in various series
with terms, rights, voting privileges and preferences to be determined at the
discretion of the board of directors at the time of issuance. All fully paid
shares of preferred stock of the Company shall not be liable to call or
assessment.
In December 2000, we issued 950,000 shares of series A Preferred stock
pursuant to our acquisition of 5th Digit Technologies, LLC. On February 1, 2001,
we sold 40,000 series A Preferred shares at $2.50 per share, which sale was
rescinded in March 2001 and all monies paid were returned. During 2001, the
600,000 shares of series A Preferred stock were cancelled and 180,000 shares of
our common stock were issued to the holders. Pursuant to the legal action we
filed against the holder of the remaining 350,000 preferred shares, the Court
ordered the shares to be canceled, which they were on April 12, 2002
-44-
Presently, we do not have any shares of preferred stock outstanding.
Options
As of June 28, 2002, we had outstanding options to purchase an
aggregate of 282,800 shares of our common stock at the exercise price of $1.00
per share, all of which are presently exercisable.
Registration Rights
Under the terms of the equity line of credit agreement and placement
agent agreement, Cornell Capital and Westrock Advisors have registration rights
for their shares of common stock derived from those agreements. Accordingly,
this prospectus and the registration statement to which it relates, includes the
shares of common stock of Cornell Capital and Westrock Advisors derived from
their respective agreements with us.
Indemnification Matters
As permitted by the provisions of the Nevada Revised Statutes (NRS), we
have the power to indemnify any person made a party to an action, suit or
proceeding by reason of the fact that they are or were a director, officer,
employee or agent of our company, against expenses, judgments, fines and amounts
paid in settlement actually and reasonably incurred by them in connection with
any such action, suit or proceeding if they acted in good faith and in a manner
which they reasonably believed to be in, or not opposed to, the best interest of
our company and, in any criminal action or proceeding, they had no reasonable
cause to believe their conduct was unlawful. Termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, does not, of itself, create a presumption that the
person did not act in good faith and in a manner which they reasonably believed
to be in or not opposed to our best interests, and, in any criminal action or
proceeding, they had no reasonable cause to believe their conduct was unlawful.
We must indemnify a director, officer, employee or agent of Videolocity
who is successful, on the merits or otherwise, in the defense of any action,
suit or proceeding, or in defense of any claim, issue, or matter in the
proceeding, to which they are a party because they are or were a director,
officer employee or agent of Videolocity, against expenses actually and
reasonably incurred by them in connection with the defense.
We may make provisions to pay the expenses of officers and directors
incurred in defending a civil or criminal action, suit or proceeding as the
expenses are incurred and in advance of the final disposition of the action,
suit or proceeding, upon receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that they are not entitled to be indemnified by
us.
The NRS also permits a corporation to purchase and maintain liability
insurance or make other financial arrangements on behalf of any person who is or
was a director, officer, employee or agent of Videolocity, or is or was serving
at the request of the corporation as a director, officer, employee or agent, of
another corporation, partnership, joint venture, trust or other enterprise for
any liability asserted against them and liability and expenses incurred by them
in their capacity as a director, officer, employee or agent, or arising out of
their status as such, whether or not we have the authority to indemnify them
against such liability and expenses.
Insofar as indemnification for liabilities arising under the Securities
Act, as amended, may be permitted to officers, directors or persons controlling
us pursuant to the foregoing provisions, we have been informed that in the
opinion of the SEC, such indemnification is against public policy as expressed
in such Act as is therefore unenforceable.
Amendment of Articles of Incorporation
Any amendment to our articles of incorporation must first be approved
by a majority of the board of directors and, thereafter, by a majority of the
total votes eligible to be cast by holders of our voting stock with respect to
such amendment. Approval by shareholders may be by written consent in lieu of
shareholders' meeting.
By-Law Provisions
Our By-Laws provide that a special meeting of stockholders may be
called by the board of directors or by holders of a majority of our outstanding
shares. Further, only those matters included in the notice of the special
meeting may be considered or acted upon at that special meeting, unless
otherwise provided by law. In addition, our By-Laws include advance notice and
informational requirements and time limitations on any director nomination or
any new proposal which a stock holder wishes to make at an annual meeting of
stockholders.
-45-
Transfer Agent
The transfer agent and registrar for our common stock is Colonial Stock
Transfer Company, 66 Exchange Place, Salt Lake City, Utah 84111, telephone (801)
355-5740.
SHARES ELIGIBLE FOR FUTURE SALE
If our current stockholders sell substantial amounts of our common
stock, including shares issued upon the exercise of outstanding options and/or
warrants, into the public market following this offering, the market price of
our common stock could fall. These sales also might make it more difficult for
us to sell equity or equity-related securities in the future at a time and price
that we deem appropriate.
Upon completion of this offering, we will have outstanding
approximately 27,248,011 shares of our common stock, assuming all of the shares
offered by this prospectus are issued. All of the shares sold in this offering
will be freely tradeable without restriction or further registration under the
Securities Act, unless such shares are purchased by "affiliates" as that term is
defined in Rule 144 under the Securities Act. Of the balance of the shares to be
outstanding, approximately 850,854 shares are held by public stockholders and
may also be freely traded without restriction. This leaves approximately
4,897,157 restricted shares eligible for future sale in the public market
pursuant to Rule 144 as follows:
Date Number of Shares
---- ----------------
After the date of this prospectus. 3,638,125 shares
After 180 days from the date 148,500 shares
of this prospectus (subject, in some
cases, to volume limitations)
At various times after 180 days from 1,110,532 shares
the date of this prospectus (subject, in
some cases, to volume limitations).
Lock- Up Agreements. In connection with the equity line of credit
agreement, our officers and directors have executed lock-up agreements
concerning our common stock. Each lock-up agreement provides that during the
term of the equity line of credit agreement, the officer or director may not,
without the prior written consent of Cornel Capital, sell or otherwise dispose
of their Videolocity shares except pursuant to Rule 144.
Rule 144. In general, under Rule 144 as currently in effect, beginning
90 days after the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of
* 1% of the number of shares of our common stock then
outstanding, which will equal to approximately 272,480 shares
immediately after this offering; or
* the average weekly trading volume of our common stock on a
national securities exchange and/or reported through the
automatic quotation system of a registered securities
association during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been
affiliate at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the
completion of this offering.
As of June 28, 2002, there were outstanding options to purchase an
aggregate of 282,800 shares of our common stock at the exercise price of $1.00
per share, all of which are presently exercisable. Shares of our common stock
issued upon conversion of these options would be eligible for sale under Rule
144 one year after the holders exercises the option and makes full payment for
the shares.
-46-
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
us by Leonard E. Neilson, P.C., Attorney at Law. Mr. Neilson is the beneficial
owner of 46,000 shares of our common stock and is the custodian for his children
that own 4,000 shares.
EXPERTS
The financial statements as of October 31, 2001 and 2000 included in
this prospectus have been so included in reliance on the report of Andersen
Andersen & Strong, L.C., independent accountants, given on the authority of said
firm as experts in auditing and accounting. The auditors' report contains an
explanatory paragraph relating to our ability to continue as a going concern
which is further explained in note 13 to the financial statements. We have
prepared the unaudited financial statements for the period ended April 30, 2001.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form SB-2 with the SEC for
the stock offered by this prospectus. This prospectus does not include all of
the information contained in the registration statement. You should refer to the
registration statement for additional information about us, our common stock and
this offering, including the full texts of the exhibits, some of which have been
summarized in this prospectus.
We are subject to certain reporting requirements of the Securities
Exchange Act of 1934 and, in accordance with that Act, we file reports, and
other information with the SEC. We intend to furnish our stockholders with
annual reports containing financial statements audited by independent
accountants, quarterly reports containing unaudited financial statements for the
first three quarters of each fiscal year, and other periodic reports as we may
deem appropriate or as we may be required by law.
You may inspect and copy our registration statement, reports and other
information at the SEC's public reference room at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information about
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet site that contains our registration
statement, reports and other information that was filed electronically. The
address of the SEC's Internet site is "http://www.sec.gov."
-47-
VIDEOLOCITY INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2001
F-1
VIDEOLOCITY INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountant....................................... F-3
Consolidated Balance Sheet as of October 31, 2001....................................... F-4
Consolidated Statements of Operations................................................... F-5
Statement of Changes in Stockholders' Equity............................................ F-6
Consolidated Statements of Cash Flows .................................................. F-7
Notes to Financial Statements........................................................... F-8
F-2
941 East 3300 South, Suite 202
Salt Lake City, Utah 84106
Telephone 801 486-0096
Fax 801 486-0098
ANDERSEN ANDERSEN & STRONG, L.C.
- --------------------------------
Certified Public Accountants and Business Consultants
Member SEC Practice Section of the AICPA
Board of Directors
Videolocity International Inc. and Subsidiaries
Salt Lake City, Utah
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated balance sheet of Videolocity
International Inc. and Subsidiaries (development stage company) at October 31,
2001 and the related statements of operations, stockholders' equity, and cash
flows for the year ended October 31, 2001, and the period May 26, 2000 to
October 31, 2000 and the period May 26, 2000 (date of inception - note 6 ) to
October 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statements presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Videolocity International Inc.
and Subsidiaries at October 31, 2001 and the results of operations, and cash
flows for the year ended October 31, 2001, and the period May 26, 2000 to
October 31, 2000 and the period May 26, 2000 (date of inception - note 6 ) to
October 31, 2001, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company does not have sufficient
working capital to service its debt and for its planned activity, which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 13. These financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Salt Lake City, Utah
February 8, 2002 /s/ Andersen Andersen and Strong
--------------------------------
Andersen Andersen and Strong
F-3
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
(Development Stage Company)
CONSOLIDATED BALANCE SHEET
October 31, 2001
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 411
Note receivable - net of provision for doubtful accounts - Note 3 350,000
-----------
Total Current Assets 350,411
-----------
EQUIPMENT - net of accumulated depreciation - Note 2 73,012
-----------
OTHER ASSETS
Advance deposits 4,732
-----------
$ 428,155
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - related parties - Note 5 $ 450,000
Notes payable - Note 5 300,000
Accrued interest - notes payable - Note 5 13,949
Accounts payable 143,123
-----------
Total Current Liabilities 907,072
-----------
REDEEMABLE PREFERRED CAPITAL STOCK
10,000,000 shares authorized at $0.001 par value;
950,000 series A issued - Notes 1, 9, &12 950
Capital in excess of par value - Note 9 & 12 3,957,380
-----------
3,958,330
MINORITY INTERESTS 5,038
-----------
STOCKHOLDERS' EQUITY - (deficiency)
Common stock
125,000,000 shares authorized, at $0.001 par value;
43,186,860 shares issued and outstanding 43,187
Capital in excess of par value - Note 12 (1,976,071)
Deficit accumulated during the development stage - Note 2 (2,509,401)
-----------
Total Stockholders' Equity (deficiency) (4,442,285)
-----------
$ 428,155
===========
The accompanying notes are an integral part of these financial statements.
F-4
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
( Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Year Ended October 31, 2001 and the Period
May 26, 2000 to October 31, 2000 and the Period
May 26, 2000 ( date of inception - note 6 ) to October 31, 2001
- --------------------------------------------------------------------------------
May 26, 2000
Oct 31, Oct 31, to
2001 2000 Oct 31, 2001
----------- ----------- -----------
REVENUES $ 5,578 $ -- $ 5,578
----------- ----------- -----------
EXPENSES
Administrative 1,353,710 129,778 1,483,488
Interest 201,449 -- 201,449
Depreciation and amortization 69,260 -- 69,260
----------- ----------- -----------
1,624,419 129,778 1,754,197
----------- ----------- -----------
NET LOSS - from operations (1,618,841) (129,778) (1,748,619)
----------- ----------- -----------
OTHER INCOME (LOSS)
Minority interests (4,712) -- (4,712)
Loss of good will (958,628) -- (958,628)
Net gain from sale of investment stock 338,049 -- 338,049
Net loss from transfer of license agreement - Note 3 (135,491) -- (135,491)
----------- -----------
(760,782) (760,782)
----------- ----------- -----------
NET LOSS $(2,379,623) $ (129,778) $(2,509,401)
=========== =========== ===========
LOSS PER COMMON SHARE
Basic $ (.06) $ (.02) --
----------- ----------- -----------
AVERAGE OUTSTANDING
COMMON SHARES
Basic (stated in 1000's) 43,087 6,406 --
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
F-5
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
(Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY Period May 26, 2000 ( date of inception -
note 6 ) to October 31, 2001
- --------------------------------------------------------------------------------
Capital in
Preferred Stock Common Stock Excess of Accumulated
Shares Amount Shares Amount Par Value Deficit
----------- ----------- ---------- ----------- ----------- -----------
Balance May 26, 2000 -- $ -- 6,406,098 $ 6,406 $ 79,920 $ --
Net operating loss for the period
May 26, 2000 to October 31, 2000 -- -- -- -- -- (129,778)
----------- ----------- ---------- ----------- ----------- -----------
Balance October 31, 2000 -- -- 6,406,098 6,406 79,920 (129,778)
Issuance of common stock for bonus
interest expense at $.50 - August 2001 -- -- 150,000 150 74,850 --
Issuance of common stock for
acquisition of Videolocity
International Inc. - Dec 4, 2000 -- -- 30,280,762 30,281 359,165 --
Issuance of class A preferred stock for
Acquisition of 5thDigit
Technology LLC - Dec 5, 2000 950,000 950 -- -- 949,050 --
Issuance of common stock for
cash at $.082 - Dec 7, 2000 -- -- 6,100,000 6,100 493,900 --
Issuance of common stock for incentive
stock plan at $.10 - September 2001 -- -- 50,000 50 4,950 --
Issuance of common stock for public
relations agreement at $.10 -
August 2001 -- -- 200,000 200 19,800 --
Provision for redemption value
of preferred stock - note 9 - -- -- -- -- (3,957,380) --
Net operating loss for the year
ended October 31, 2001 -- -- -- -- (2,379,623)
Less minority interest -- -- -- -- (326) --
----------- ----------- ---------- ----------- ----------- -----------
Balance October 31, 2001 950,000 $ 950 43,186,860 $ 43,187 $(1,976,071) $(2,509,401)
=========== ========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
(Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Year Ended October 31, 2001 and the Period May
26, 2000 to October 31, 2000 and the Period May
26, 2000 ( date of inception - note 6 ) to October
31, 2001
- -------------------------------------------------------------------------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Oct 31, Oct 31, May 26, 2000
2001 2000 to Oct 31, 2001
---------- ----------- -----------
Net loss $(2,379,623) $ (129,778) $(2,509,401)
Adjustments to reconcile net loss to
net cash provided by operating
activities
Minority interest 4,712 -- 4,712
Loss of good will 958,628 -- 958,628
Change in short term note receivable (350,000) -- (350,000)
Change in accounts and short term notes payable 687,152 19,920 687,152
Depreciation and amortization 69,260 -- 69,260
Issuance of common stock for services and expenses 70,000 -- 70,000
Net gain from sale of investment stock (452,558) -- (452,558)
---------- ----------- -----------
Net Decrease in Cash From Operations (1,392,429) (109,858) (1,522,207)
---------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of equipment (78,763) (6,433) (78,763)
Advance deposits 5,924 -- (4,732)
Acquisition costs of good will (8,628) -- (8,628)
Cost of investment stock and licenses 571,373 -- 595,516
---------- ----------- -----------
489,906 (6,433) 503,393
---------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from issuance of common capital stock - Note 6 500,000 519,225 1,019,225
---------- ----------- -----------
Net change in Cash (402,523) 402,914 411
Cash at Beginning of Period 402,934 -- --
---------- ----------- -----------
Cash at End of Period $ 411 $ 402,914 $ 411
========== =========== ===========
NON CASH FLOWS FROM OPERATING AND INVESTING ACTIVITIES
Issuance of 30,280,762 common shares for all outstanding stock of Videolocity Inc. $ 389,446
-----------
Issuance of 950,000 preferred shares for members' interests in 5th Digit Technologies LLC 950,000
-----------
Issuance of 150,000 common shares for expenses 75,000
-----------
Issuance of 250,000 common shares for services 25,000
-----------
The accompanying notes are an integral part of these financial statements.
F-7
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. The terms of the preferred are outlined in note 8.
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.
On December 4, 2000 the Company completed a reverse common stock split of .61
shares for each outstanding share. This report has been completed showing after
stock split shares from inception.
On December 4, 2000 the Company completed a private placement offering of
6,100,000 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 October 31, 2001, the Company and its subsidiaries had an accumulated net
operating loss available for carryforward of $2,259,401. The tax benefit of
approximately $677,820 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 2022.
Amortization of the License Agreements
- ---------------------------------------
The license agreements are being amortized to expense over ten years.
Concentration of Credit Risk
- ----------------------------
Financial instruments that potentially subject the Company to significant
concentration of credit risk consists of a note receivable. (note 3)
F-8
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Equipment
Office equipment and the digital entertainment system is being depreciated over
five years.
Office equipment $31,717
Digital entertainment system 47,046
Less accumulated depreciation (5,751)
------
73,012
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. 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
- ---------------------------
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
- ---------------------
The carrying amounts of financial instruments, including cash, a note
receivable, and accounts payable, are considered by management to be their
estimated fair values.
Estimates and Assumptions
- -------------------------
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.
Recognition of Income
- ---------------------
The Company is installing the equipment needed to deliver digital information an
entertainment content in selected hotels. 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.
F-9
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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.
Good Will
- ---------
The pronouncement regarding the valuation of good was adopted on July 1, 2001.
(Note 8)
Other Recent Accounting Pronouncements
- --------------------------------------
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 Merit
Studios, Inc. common stock was trading over the counter with a liquidation value
of $.35 per share. For reporting purposes the value of the note receivable is
shown at $350,000, the liquidation value of the security. The note receivable
has been used as partial security on a note payable given by the Company
outlined in Note 12.
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. The terms of the original license agreement of two years were amended
by an agreement entitled "Amended and Restated License Agreement", as revised
and restated, on March 6, 2001 which provides for an exclusive license for ten
years, which will continue after May 6, 2011 on a non-exclusive basis for an
additional ten years, however the Company must commence marketing of the
technology within one year, otherwise the exclusive rights may convert to
non-exclusive rights. The terms of the agreement was $250,000, with $50,000
being allocated to the purchase price of the 1,000,000 common shares of Merit
Studios, Inc. Royalties are provided at 10% of the net revenue per transaction
and 50% of all of the initial amounts received from the sales of sub-licenses.
Merit Studios, Inc. received one third of the outstanding stock of Videolocity
Direct, Inc. (a subsidiary of the Company) to which the license agreements with
Merit Studios Inc. have been assigned.
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. The
terms of the license extend for a period commencing on May 29, 2001 and
continuing through May 28, 2011. The license will continue on a non-exclusive
F-10
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
4. ACQUISITION OF LICENSE AGREEMENT - continued
basis from May 29, 2011 until the expiration or termination of the agreement.
The terms of the agreement provides for a payment of $200,000 upon execution and
future advance royalty payments. Royalties are provided at 20% of net revenues
and 40%of the initial upfront payments received by Videolocity Direct Inc. from
the sale of sublicenses of the Wormhole technology.
On October 31, 2001, which was 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. to Videolocity Direct, Inc for
cancellation, 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)
5. NOTES PAYABLE
The Company has short term financing of $750,000 and has issued notes payable,
to six individuals and companies, with a due date of February 28, 2002,
including 8% interest. The loans are secured by all of the stock of Videolocity
Technologies Inc. (subsidiary) held by the Company. During November 2001,
535,000 common shares of the Company were issued to the note holders as bonus
interest. $450,000 of the $750,000 was received from related parties.
6. ACQUISITION OF ALL OUTSTANDING STOCK VIDEOLOCITY, INC.
On December 4, 2000 the Company (parent) completed the acquisition of all of the
outstanding stock of Videolocity International, Inc. ( subsidiary), by a stock
for stock exchange in which the stockholders of of the subsidiary received
30,280,762 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.
7. RELATED PARTY TRANSACTIONS
Officers, directors, employees and their affiliates, have acquired 41 % of the
common stock issued.
Included in the notes payable outlined in note 5 is $450,000 due to related
parties.
F-11
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
8. 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, which resulted from
the conditions outlined in note 12.
5th Digit was organized on October 10, 2000 and began operations after December
22, 2000. The acquisition was recorded as a purchase and the operating
statements of 5th Digit after November 1, 2001 are included in the consolidated
operating statements. There was no contingent consideration in the merger
agreement.
9. 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.
The terms of the series A stock are outlined as follows.
(1) Voting. Each share of preferred series A stock shall be entitled to
one vote on all matters submitted to a vote of the shareholders.
2 Conversion.. Each share of preferred series A stock shall be convertible
into one share of common stock by the holders at any time upon delivery
to the Company by written notice of their election to convert.
Each share of preferred series A stock shall automatically be converted
to common shares on February 1, 2002.
(ii Redemption. Upon written notice from the holders of the series A
preferred stock as provided below, the Company will redeem the
preferred stock during the 30 day period January 2, 2002 through
January 31, 2002 at a price $5.00 per share. Any holder of the
preferred stock desiring to redeem his shares shall provide written
notice to the Company within the 30-day period described above. The
total redemption value is $4,750,000 resulting in an accretion of
$3,800,000, over the issue value, which is being amortized over one
year as an addition to the capital in excess of par value under the
redeemable preferred capital stock.
(ii Call Provision. The preferred stock shall be callable by the Company
until January 31, 2002 at a price of $5.00 per share and the Company
shall provide written notice of its intent to call not less than 30
days prior to the effective date of the call. Any holder of preferred
stock may elect to convert to common stock prior to the call with
notice of such conversion within five days prior to the effective date
of the call.
F-12
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
9. PREFERRED CAPITAL STOCK - continued
(ii Liquidation.. The preferred stock shall be entitled to a preference
over the common stock at $5.00 per share in the event of dissolution
of the Company.
Subsequent to October 31, 2001 600,000 of the outstanding series A preferred
shares were retired. ( note 12)
10. STOCK INCENTIVE PLAN
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 10,000,000 common shares
that can be issued under the plan. During August 2001, 50,000 shares had been
issued under the plan for services rendered and During December 2001 an
additional 50,000 shares were issued.
11. CONTINUING AND CONTINGENT LIABILITIES
On August 1, 2001 the Company entered into a public relations agreement with
Millennium International, LLC in which 200,000 common shares were issued during
August 2001 and an additional 100,00 shares were issued during December 2001 and
100,000 shares to be issued during February 2002. The terms of the agreement is
for 18 months after August 1, 2001.
The Company is obligated under an office lease for $6,500 per month through Dec
2002.
12. SUBSEQUENT EVENTS
On November 6, 2001 the Company entered into a stock repurchase agreement to buy
back 200,000 shares of Videolocity Direct, Inc. (subsidiary), including a new
loan to the Company of $100,000, for a note payable of $300,000, including 8%
interest. The due date of the note is the date on which the note receivable of
$600,000 is paid to the Company as outlined in Note 3. The note payable is
secured by the note receivable to the extent of amount due on the note payable.
During November 2001, 500,000 common shares of the Company were issued to the
note holder as bonus interest.
During February 2002 the Company issued 1,800,000 common shares for the
retirement of 600,000 series A preferred stock. A legal action was started
against the holder of the remaining 350,000 shares outstanding alleging
misrepresentation of the technology acquired as part of the merger with 5th
Digit Technologies, LLC as outlined in note 8. Legal council believes the
Company will be successful in its effort to have the shares returned to the
company and canceled.
F-13
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
13. GOING CONCERN
The Company does not have the working capital necessary to service its debt and
for its planned activity.
Continuation of the Company as a going concern is dependent upon obtaining
additional working capital and the management of the Company has developed a
strategy, which it believes will accomplish this objective through additional
equity funding and long term financing which will enable the Company to operate
for the coming year.
F-14
VIDEOLOCITY INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002
(Unaudited)
F-15
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
(Development Stage Company)
CONSOLIDATED BALANCE SHEETS
April 30, 2002
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 22,609
Note receivable - net of provision for doubtful accounts - Note 3 200,000
-----------
Total Current Assets 222,609
-----------
EQUIPMENT - net of accumulated depreciation - Note 2 90,282
-----------
OTHER ASSETS
Advance deposits and patents 5,292
-----------
$ 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
-----------
Total Current Liabilities 1,728,769
-----------
MINORITY INTERESTS 5,004
-----------
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)
-----------
Total Stockholders' Equity (deficiency) (1,415,590)
-----------
$ 318,183
===========
The accompanying notes are an integral part of these financial statements.
F-16
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
- --------------------------------------------------------------------------------
Three Months Six Months May 26, 2000
Apr 30, Apr 30, Apr 30, Apr 30, to
2002 2001 2002 2001 Apr 30, 2002
----------- ----------- ----------- ----------- -----------
REVENUES $ -- $ 2,961 $ -- $ 6,218 $ 5,578
----------- ----------- ----------- ----------- -----------
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
----------- ----------- ----------- ----------- -----------
NET LOSS - from operations (709,542) (423,462) (1,077,726) (635,592) (2,826,345)
----------- ----------- ----------- ----------- -----------
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)
----------- ----------- ----------- ----------- -----------
(149,980) 199,800 (149,966) 199,800 (910,748)
----------- ----------- ----------- ----------- -----------
NET LOSS $ (859,522) $ (223,662) $(1,227,692) $ (435,792) $(3,737,093)
=========== =========== =========== =========== ===========
LOSS PER COMMON SHARE
Basic $ (.18) $ (.05) $ (.25) $ (.10) --
----------- ----------- ----------- ----------- -----------
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.
F-17
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
- --------------------------------------------------------------------------------
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)
---------- ----------- -----------
Net Changes in Cash From Operations 248,228 (404,849) (1,273,979)
---------- ----------- -----------
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
---------- ----------- -----------
(226,030) (396,887) 277,363
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common capital stock -- 500,000 1,019,225
---------- ----------- -----------
Net change in Cash 22,198 (301,736) 22,609
Cash at Beginning of Period 411 402,934 --
---------- ----------- -----------
Cash at End of Period $ 22,609 $ 101,198 $ 22,609
========== =========== ===========
NON CASH FLOWS FROM OPERATING AND INVESTING ACTIVITIES
Issuance of 3,028,076 common shares for all outstanding stock of Videolocity Inc. $ 389,446
---------
Issuance of 950,000 preferred shares for members' interests in 5th Digit Technologies LLC 950,000
---------
Issuance of 15,000 common shares for expenses 75,000
---------
Issuance of 25,000 common shares for services 25,000
---------
Issuance of 180,000 common shares for retirement of 600,000 preferred shares - 2002 --
---------
Issuance of 158,500 common shares for interest expense - 2002 136,800
---------
Issuance of 29,733 common shares for services - 2002 23,787
---------
Issuance of 435,470 common shares for services and expenses - 2002 335,470
---------
The accompanying notes are an integral part of these financial statements.
F-18
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 $3,737,093. The tax benefit of
approximately $1,121,128 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
- ----------------------------
Financial instruments that potentially subject the Company to significant
concentration of credit risk consists of a note receivable. (note 3)
F-19
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Equipment
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)
---------
$ 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
- ---------------------------
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
- ---------------------
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
- -------------------------
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.
F-20
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Recognition of Income
- ---------------------
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
- --------------------------------------
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.
F-21
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
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.
F-22
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
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.
F-23
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
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.
F-24
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
13. SUBSEQUENT EVENTS
On May 28, 2002 Videolocity International, Inc. finalized an Equity Line of
Credit Agreement, with Cornell Capital Partners, L.P., 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
Capital. 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 Capital 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.
F-25
We have not authorized any dealer, salesperson or other person to provide to you
any information or make any representations about Videolocity International,
Inc. except the information or representations contained in this prospectus. You
must not rely on any additional information or representations if made.
This prospectus does not constitute an offer to sell, or a solicitation of an VIDEOLOCITY INTERNATIONAL, INC.
offer to buy any securities of Videolocity International, Inc.:
21,500,000 Shares of Common Stock
* except the common stock offered by this
prospectus;
* in any jurisdiction in which the offer or PROSPECTUS
solicitation is not authorized;
* in any jurisdiction where the dealer or other
salesperson is not qualified to make the offer or
solicitation;
* to any person to whom it is unlawful to make the
offer or solicitation; or
July _, 2002
* to any person who is not a United States resident
or who is outside the jurisdiction of the United
States.
The delivery of this prospectus or any resulting sale does not imply that:
* there have been no changes in the affairs of
Videolocity International, Inc. after the date of
this prospectus; or
* the information contained in this prospectus is correct after the date
of this prospectus.
Until _______, 2002, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters.
VIDEOLOCITY INTERNATIONAL, INC.
Part II
Item 24. Indemnification of Directors and Officers
As permitted by the provisions of the Nevada Revised Statutes (the
"NRS"), we have the power to indemnify any person made a party to an action,
suit or proceeding by reason of the fact that they are or were a director,
officer, employee or agent of our company, against expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by them in
connection with any such action, suit or proceeding if they acted in good faith
and in a manner which they reasonably believed to be in, or not opposed to, the
best interest of our company and, in any criminal action or proceeding, they had
no reasonable cause to believe their conduct was unlawful. Termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which they
reasonably believed to be in or not opposed to our best interests, and, in any
criminal action or proceeding, they had no reasonable cause to believe their
conduct was unlawful.
We must indemnify a director, officer, employee or agent of Videolocity
who is successful, on the merits or otherwise, in the defense of any action,
suit or proceeding, or in defense of any claim, issue, or matter in the
proceeding, to which they are a party because they are or were a director,
officer employee or agent of Videolocity, against expenses actually and
reasonably incurred by them in connection with the defense.
We may make provisions to pay the expenses of officers and directors
incurred in defending a civil or criminal action, suit or proceeding as the
expenses are incurred and in advance of the final disposition of the action,
suit or proceeding, upon receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that they are not entitled to be indemnified by
us.
The NRS also permits a corporation to purchase and maintain liability
insurance or make other financial arrangements on behalf of any person who is or
was a director, officer, employee or agent of Videolocity, or is or was serving
at the request of the corporation as a director, officer, employee or agent, of
another corporation, partnership, joint venture, trust or other enterprise for
any liability asserted against them and liability and expenses incurred by them
in their capacity as a director, officer, employee or agent, or arising out of
their status as such, whether or not we have the authority to indemnify them
against such liability and expenses.
Insofar as indemnification for liabilities arising under the Securities
Act, as amended, may be permitted to officers, directors or persons controlling
us pursuant to the foregoing provisions, we have been informed that in the
opinion of the SEC, such indemnification is against public policy as expressed
in such Act as is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution
Filing fee under the Securities Act of 1933........................... $ 7,500
Accountants' fees and expenses........................................ 2,500
Legal fees and related expenses....................................... 20,000
Printing and filing charges........................................... 6,500
Transfer agent and registrar fees and expenses........................ 2,500
Miscellaneous......................................................... 11,000
--------
Total.................................................... $ 50,000
=======
Item 26. Recent Sales of Unregistered Securities
The following table sets forth information relating to all previous
sales of securities by the Registrant within the past three years that were not
registered under the Securities Act of 1933, as amended.
S-1
Date
of Sale Name of Purchaser Type Number Consideration
- ------------ ----------------- ---- --------- -------------
12-04-2000 Shareholders of Moviesonline, Inc. (a) 3,028,125 In exchange for the acquisition of
Moviesonline, Inc., valued at
$389,446
12-05-2000 Owners of 5th Digit Technologies, LLC (b) 950,000 In exchange for the acquisition of
5th Digit Technologies, LLC, valued
at $950,000
12-07-2000 3 purchasers in private placement (a) 610,000 Cash of $500,000
08-03-2001 To certain debtors (Edwards and Davis) (a) 10,000 Additional interest on loans, valued
at $8,000
08-20-2001 Millennium International, LLC (a) 20,000 Consideration for services, valued
at $20,000
08-28-2001 To certain debtor (Crown Jewels, LLC) (a) 5,000 Additional interest on loan, valued
at $4,000
11-05-2001 To certain debtor (WAJ Enterprises, LLC) (a) 50,000 Additional interest on loan, valued
at $40,000
11-09-2001 To certain debtors (Davis, Edwards, (a) 30,000 Additional interest on loans, valued
McNeill and Williams) at $24,000
11-09-2001 Larry R. McNeill (a) 13,500 Additional interest on loan, valued
at $10,800
11-09-2001 Bennie L. Williams (a) 10,000 Additional interest on loan, valued
at $8,000
12-11-2001 Millennium International, LLC (a) 10,000 Consideration for Services, valued
at $8,000
02-05-2002 3 holders of Series A Preferred Stock (a) 180,000 Exchange and retirement of Series
A Preferred stock valued at
$180,000
02-05-2002 Bernard E. Driscoll (a) 5,000 Additional interest on loan, valued
at $5,000
04-01-2002 Greenwood Technology Group (a) 50,000 Additional interest on loans, valued
at $50,000
04-30-2002 Bernard E. Driscoll (a) 25,495 Conversion of promissory note and
interest, valued at $25,495
06-07-2002 Cornell Capital Partners, L.P. (a) 290,000 Additional consideration under
equity line of credit agreement,
valued at $290,000 (advance fee)
06-07-2002 Westrock Advisors, Inc. (a) 10,000 Consideration under placement
agent agreement, valued at $10,000
(advance fee)
06-10-2002 To certain directors (a) 17,000 Consideration for loans, valued at
$17,000
06-11-2002 Dan Driscoll (a) 125,122 Conversion of promissory note and
interest, valued at $125,122
S-2
Date
of Sale Name of Purchaser Type Number Consideration
- ------------ ----------------- ---- --------- -------------
06-14-2002 Greenwood Technology Group (a) 183,124 Conversion of promissory note and
interest, valued at $183,124
06-19-2002 Richard H. McCullough (a) 10,000 Consideration for loan, valued at
$10,000
- -------------
(a) Common Stock.
(b) Preferred Stock
With respect to the above issuances for services rendered, cash,
acquisitions, consideration for loans and interest, we relied on the exemptions
from registration provided by Sections 4(2) and 4(6) of the Securities Act of
1933. For issuances upon the exchange of preferred stock and conversion of
notes, we relied on the exemption from registration provided by Section 3(a)(9)
of the Securities Act. All securities issued to the aforementioned persons bear
restrictive legends preventing their transfer except in accordance with the
Securities Act and the regulations promulgated thereunder. In addition, stop
transfer instructions pertaining to these shares have been or will be lodged
with our transfer agent.
Item 27. Exhibits
(a) The following exhibits are filed with this Registration Statement:
Exhibit No. Exhibit Name
- ----------- ------------
2.1(1) Agreement and Plan of Reorganization With Pine View
Technologies, Inc. Dated as of November 15, 2000
2.2(1) Articles of Merger Between Pine View Merger Co. and
Videolocity, Inc. Dated December 1, 2000
3.1(1) Amended and Restated Articles of Incorporation
3.2(2) By-Laws
3.3(3) Designation of Rights, Preferences and Privileges for the
Series B Voting Preferred Stock of Videolocity International,
Inc.
3.4 Amendment to Articles of Incorporation
5.1 Opinion of Leonard E. Neilson, Attorney at Law, regarding
legality of securities being registered
10.1(1) License Agreement Between Videolocity, Inc. (formerly
Moviesonline, Inc.) and Merit Studios, Inc. dated October 27,
2000
10.1(a)(4) Amended and Restated License Agreement [Video] between
Videolocity Direct, Inc. and Merit Studios, Inc. dated
effective as of October 27, 2000
10.2(4) Services Agreement between Videolocity International, Inc. and
Sinclair-Davis Filing Trading Corp. dated as of April 26, 2001
10.3(5) Additional Technology License Agreement dated May 29, 2001,
between Videolocity Direct, Inc. and Merit Studios, Inc.
10.4 Equity Line of Credit Agreement with Cornell Capital Partners,
L.P.
10.5 Registration Rights Agreement with Cornell Capital Partners,
L.P. related to Equity Line of Credit Agreement
10.6 Escrow Agreement with Cornell Capital Partners, L.P., Butler
Gonzalez LLP and First Union National Bank, related to Equity
Line of Credit Agreement
10.7 Placement Agent Agreement with Westrock Advisors, Inc.,
related to Equity Line of Credit Agreement
10.8 Employment Agreement with Robert E. Holt
10.9 Employment Agreement with Martin P. Senn
S-3
Exhibit No. Exhibit Name
- ----------- ------------
10.10 Lease of Prospector Square Facility and Extension
10.11 UCC-1 Security Agreement
10.12 Amendment to Agreement of Purchase and Reassignment with Merit
Studios, Inc.
21.1 Subsidiaries
23.1 Consent of Andersen Andersen & Strong, L.C., Certified Public
Accountants
23.2 Consent of Leonard E. Neilson, Attorney at Law (included as
part of Exhibit 5)
- ------------------
(1) Incorporated by reference to the Form 10-KSB for the fiscal
year ended October 31, 2000.
(2) Incorporated by reference to the registration statement on
Form S-18 filed with the Commission, SEC file no. 33-2310-D.
(3) Incorporated by reference to the Form 10-QSB for the period
ended January 31, 2001.
(4) Incorporated by reference to the Form 10-QSB for the period
ended April 30, 2001.
(5) Incorporated by reference to the Form 10-QSB for the period
ended July 31, 2001.
(b) Financial Statement Schedules for Registrant.
Schedules other than those listed above are omitted for the
reason that they are not required or are not applicable, or
the required information is shown in the financial statements
or notes therein.
Item 28. Undertakings
(a) The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or
events which, individually or together represent a fundamental
change in the information in the registration statement; and
notwithstanding the forgoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospects filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in the volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities as at that time
to be the initial bona fide offering.
(3) File a post effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
S-4
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to directors,
officers and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) If the issuer relies on Rule 430A under the Securities Act, the
small business issuer will:
(1) For determining any liability under the Securities Act
treat the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be a part of this registration statement as of the time the Commission
declared it effective.
(2) For determining any liability under the Securities Act,
that each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
S-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Salt
Lake City, State of Utah, on this 5th day of July 2002.
VIDEOLOCITY INTERNATIONAL, INC.
(REGISTRANT)
By: /S/ ROBERT E. HOLT
---------------------------------------------
Robert E. Holt
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
By: /S/ ROBERT E. HOLT
-----------------------------------------------------
Robert E. Holt
Chief Executive Officer and Director
Date: July 5, 2002
By: /s/ BENNIE L. WILLIAMS
-----------------------------------------------------
Bennie L. Williams,
Chairman and Director
Date: July 5, 2002
By: /s/ LARRY R. MCNEILL
-----------------------------------------------------
Larry R. McNeill,
Vice President, Chief Financial Officer
and Director
(Principal Financial and Accounting Officer)
Date: July 5, 2002
By: /s/ D. T. NORMAN
-----------------------------------------------------
D. T. Norman,
Secretary, Treasurer and Director
Date: July 5, 2002
By: /s/ DR. JAMES P. HILL
-------------------------------------------------
Dr. James P. Hill,
Vice Chairman and Director
Date: July 5, 2002
By: /s/ DAN DRISCOLL
---------------------------------------------------
Dan Driscoll,
Vice President Corporate Development
and Director
Date: July 5, 2002
S-6