UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Quarter Ended July 31, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 33-2310-D
VIDEOLOCITY INTERNATIONAL, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 87-0429154
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1762-A Prospector Avenue, Park City, Utah 84060
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(address of principal executive officers)
Issuer's telephone number: (435) 615-8338
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practicable date:
Class Outstanding as of August 31, 2002
- ------------------------------------- ----------------------------------
Common Stock, 5,826,596
Par Value $0.001 par value
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
VIDEOLOCITY INTERNATIONAL, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Financial Statements............................................ 3
Item 2. Management's Discussion and Analysis or Plan of Operation....... 14
PART II
Item 1. Legal Proceedings............................................... 17
Item 2. Changes in Securities and Use of Proceeds....................... 17
Item 3. Defaults Upon Senior Securities................................. 18
Item 4. Submissions of Matters to a Vote of Security Holders............ 18
Item 5. Other Information............................................... 18
Item 6. Exhibits and Reports on Form 8-K................................ 19
Signatures............................................. 20
-2-
PART I
Item 1. Financial Statements
The following unaudited Financial Statements for the period ended July
31, 2002, have been prepared by the Company.
Videolocity International, Inc.
Consolidated Financial Statements
July 31, 2002
(Unaudited)
-3-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
July 31, October 31,
2002 2001
----------- -----------
CURRENT ASSETS
Cash $ 154,538 $ 411
Note receivable, net 200,000 350,000
----------- -----------
Total current assets 354,538 350,411
PROPERTY AND Equipment, at cost, net 86,182 73,012
Other assets 5,292 4,732
----------- -----------
$ 446,012 $ 428,155
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 51,897 $ 143,123
Accrued interest payable -- 13,949
Notes payable 1,699,800 750,000
----------- -----------
Total current liabilities 1,751,697 907,072
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE PREFERRED CAPITAL STOCK
12,500,000 shares authorized, $0.001 par value, none outstanding at July 31,
2002, 950,000 series A issued
and outstanding at October 31, 2001 -- 950
Capital in excess of par value -- 3,957,380
----------- -----------
-- 3,958,330
MINORITY INTERESTS 4,965 5,038
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 12,500,000 shares
authorized, 5,826,596 issued and outstanding at
July 31, 2002 (4,318,686 at October 31, 2001) 5,827 4,319
Additional paid-in capital 3,069,863 (1,937,203)
Deficit accumulated during the development stage (4,386,340) (2,509,401)
----------- -----------
Total stockholders' deficit (1,310,650) (4,442,285)
----------- -----------
$ 446,012 $ 428,155
=========== ===========
The accompanying notes are an integral part of these statements.
-4-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three months ended Nine months ended From
July 31, July 31, May 26, 2000
-------------------------- -------------------------- through
2002 2001 2002 2001 July 31, 2002
----------- ----------- ----------- ----------- -----------
Revenue $ -- $ -- $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
Operating expenses
Administrative expenses 512,915 356,613 1,389,642 951,351 2,873,130
Write off of good will -- -- -- -- 958,628
Loss on transfer of license
agreement, net -- -- 150,000 -- 285,491
Depreciation and amortization 4,100 29,815 12,300 76,003 81,560
----------- ----------- ----------- ----------- -----------
517,015 386,428 1,551,942 1,027,354 3,576,893
----------- ----------- ----------- ----------- -----------
Operating loss (517,015) (386,428) (1,551,942) (1,027,354) (3,576,893)
Gain on sale of stock, net -- 112,275 -- 312,075 338,049
Interest income -- -- 5,334 5,578
Other expense - interest (132,271) (163,900) (325,070) (163,900) (526,519)
Minority interests 39 6,859 73 6,859 (4,639)
----------- ----------- ----------- ----------- -----------
Loss before income taxes (649,247) (431,194) (1,876,939) (866,986) (4,386,340)
Income taxes -- -- -- -- --
----------- ----------- ----------- ----------- -----------
NET LOSS $ (649,247) $ (431,194) $(1,876,939) $ (866,986) $(4,386,340)
=========== =========== =========== =========== ===========
Loss per common share
Basic and Diluted $ (0.12) $ (0.10) $ (0.38) $ (0.20)
Weighted-average common and dilutive common
equivalent shares outstanding
Basic and Diluted 5,477,835 4,298,700 4,900,399 4,298,700
The accompanying notes are an integral part of these statements.
-5-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT
For the period May 26, 2000 (inception) through October 31,
2000, the year ended October 31, 2001, and for the nine
months ended July 31, 2002
Deficit
accumulated
Preferred stock Common stock Additional during the
-------------------------- -------------------------- paid-in development
Shares Amount Shares Amount capital stage
----------- ----------- ----------- ----------- ----------- -----------
Balance at May 26, 2000
(inception) -- -- -- $ -- $ -- $ --
Issuance of common stock -- -- 640,610 641 85,685 --
Net loss for the period -- -- -- -- -- (129,778)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2000 -- -- 640,610 641 85,685 (129,778)
Issuance of Series A preferred
stock 950,000 950 -- -- 949,050 --
Provision for redemption
value of preferred stock -- -- -- -- (3,957,380) --
Issuance of common stock -- -- 3,678,076 3,678 985,442 --
Net loss for the year -- -- -- -- -- (2,379,623)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2001 950,000 950 4,318,686 4,319 (1,937,203) (2,509,401)
Redemption of preferred stock (600,000) (600) 180,000 180 2,208,320
Cancellation of preferred stock (350,000) (350) -- -- 1,748,880 --
Cancellation of common stock -- -- (50,000) (50) 50 --
Issuance of common stock for
compensation and incentive stock
plan -- -- 798,559 799 471,045 --
Issuance of common stock on conversion -- -- 579,351 579 578,771 --
of debt and interest
Net loss for the period -- -- -- -- -- (1,876,939)
----------- ----------- ----------- ----------- ----------- -----------
Balance at July 31, 2002 -- -- 5,826,596 $ 5,827 $ 3,069,863 $(4,386,340)
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
-6-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the nine months ended From
July 31, May 26, 2000
-------------------------- through
2002 2001 July 31, 2002
----------- ----------- -----------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $(1,876,939) $ (873,845) $(4,386,340)
Adjustments to reconcile net loss to
net cash used in operating activities
Minority interests (73) -- 4,965
Loss from transfer of license agreement 150,000 -- 285,491
Depreciation and amortization 12,300 76,003 81,560
Write off of goodwill -- -- 940,059
Issuance of common stock for services and interest 690,888 182,500 1,267,284
Changes in assets and liabilities
Other assets (560) -- (68,800)
Accounts payable and accrued liabilities (91,226) 366,389 51,897
----------- ----------- -----------
Total adjustments 761,329 624,892 2,562,456
----------- ----------- -----------
Net cash used in operating activities (1,115,610) (248,953) (1,823,884)
----------- ----------- -----------
Net cash flows from investing activities -
Purchase of license agreement -- (476,500) (476,500)
Advance deposits -- (31,407)
Purchase of property and equipment (25,470) (30,782) (104,234)
----------- ----------- -----------
Net cash flows used in investing activities (25,470) (538,689) (580,734)
----------- ----------- -----------
Cash flows from financing activities
Increase in notes payable 1,295,207 -- 2,059,156
Proceeds from issuance of common stock -- 500,000 500,000
----------- ----------- -----------
Net cash provided by financing activities 1,295,207 500,000 2,559,156
----------- ----------- -----------
Net increase (decrease) in cash 154,127 (287,642) 154,538
Cash at beginning of period 411 402,934
----------- ----------- -----------
Cash at end of period $ 154,538 $ 115,292 $ 154,538
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ -- $ -- $ --
Income taxes -- -- --
Noncash investing and financing activities
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During the nine months ended July 31, 2002, the Company issued 180,000
shares of common stock on conversion of 600,000 shares of preferred stock
resulting in a reclassification from redeemable preferred capital stock
totaling $2,208,480. The Company also cancelled 350,000 shares of preferred
stock resulting in a reclassification from redeemable preferred capital
stock totalling $1,748,880. The Company converted loans and accrued interest
totaling $359,356 to common stock.
The accompanying notes are an integral part of these statements.
-7-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING POLICIES
The information for Videolocity International Inc. (VII) at July 31, 2002 and
for the three months ended July 31, 2002 and 2001 is unaudited, but includes all
adjustments (consisting only of normal recurring adjustments) which in the
opinion of management, are necessary to state fairly the financial information
set forth therein in accordance with accounting principles generally accepted in
the United States of America.
NOTE B - UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been prepared by
the Company in accordance with accounting principles generally accepted in the
United States of America for interim financial reporting and the instructions to
Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared
under accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such regulations. This report on Form
10-QSB for the three months ended July 31, 2002 should be read in conjunction
with the Company's annual report on Form 10-KSB for the fiscal year ended
October 31, 2001. The results of operations for the three months ended July 31,
2002, may not be indicative of the results that may be expected for the year
ending October 31, 2002.
NOTE C - ORGANIZATION AND BUSINESS ACTIVITY
The Company is a Nevada corporation organized on November 5, 1985 under the name
Pine View Technologies. On November 27, 2000 the Company's name was changed to
Videolocity International Inc. On December 4, 2000, the Company acquired
Videolocity Inc. in a transaction recorded as a recapitalization of VII with the
Company being the legal survivor and Videolocity Inc. being the accounting
survivor and the operating entity. Videolocity, Inc., the accounting survivor
was founded on May 26, 2000. The Company and its subsidiaries were established
to develop and market systems, products, and solutions for the delivery of
video, high speed internet access, and other content to end users such as
hotels, hospitals, and condominiums on demand.
At July 31, 2002 and October 31, 2001, the Company was considered a development
stage company as its activities had principally been related to market analysis,
capital raising, development and other business planning activities and as such
the Company had no revenue from its planned principal operations.
On March 1, 2002 the Company completed a reverse common stock split of one share
for ten outstanding shares. This report has been completed showing after stock
split shares from inception.
-8-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE D - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and operations of the
Company and its wholly owned subsidiaries, Videolocity, Inc., Videolocity
Technologies Inc., Hospitality Concierge, Inc., Videolocity Direct Inc., Fifth
Digit Technologies, LLC. and its 93.5 percent owned subsidiary Healthcare
Concierge, Inc. All material intercompany accounts and transactions have been
eliminated in consolidation.
NOTE E - NET EARNINGS (LOSS) PER SHARE
Basic Earnings Per Share (EPS) are calculated by dividing net earnings (loss)
available to common shareholders by the weighted-average number of common shares
outstanding during each period. Diluted EPS are similarly calculated, except
that the weighted-average number of common shares outstanding includes common
shares that may be issued subject to existing rights with dilutive potential.
All common shares with dilutive potential described in Note M are not included
in the computation of diluted loss per share for periods of net loss because to
do so would be anti-dilutive.
NOTE F - INCOME TAXES
On July 31, 2002, the Company and its subsidiaries had an accumulated net
operating loss available for carryforward of approximately $4,315,000. The tax
benefit of approximately $1,295,000 has been fully offset by a valuation reserve
because the use of the future tax benefit is doubtful since the Company is in
the development stage and has not began its intended operations. The net
operating loss will expire through 2023.
NOTE G - NOTE RECEIVABLE
The Company has a $600,000 non-interest bearing note receivable (Note H) due on
or before February 28, 2002. The Company holds 1,000,000 shares of Merit
Studios, Inc. common stock as security valued at approximately $300,000 at July
31, 2002. The Company has recorded an allowance for bad debt totaling $400,000
against the note.
NOTE H - ACQUISITION OF LICENSE AGREEMENTS
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.
-9-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE H - ACQUISITION OF LICENSE AGREEMENTS - CONTINUED
On October 31, 2001 (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 G). Videolocity Direct, Inc. changed its name to Healthcare
Concierge Inc. on December 31, 2001.
NOTE I - ACQUISITION OF PATENTS
On April 6, 2002 a Provisional Patent Application was filed with the United
States Patent and Trademark Office for the "Videolocity Digital Entertainment
System - Linux Version", which as given an Application No. 60/370,663. On May
20, 2002 an Assignment of Provisional Patent Application No. 60/370,663 was
filed on behalf of Videolocity Technologies, Inc.
NOTE J - NOTES PAYABLE
The Company has notes payable totaling $1,699,800, to various individuals and
companies including related parties (Note P), with extended maturities from
September 2002 through November 2002 and interest rates ranging from 6% through
20 %.
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. in favor of certain promissory note holders, as
security, in exchange for an extension of maturity dates to September 2002 on
promissory notes totaling $1,050,000.
NOTE K - RECAPITALIZATION
On December 4, 2000, the Company (formerly Pine View Technologies, Inc.)
acquired Videolocity Inc. The combination of Videolocity Inc. and the Company
was recorded as a recapitalization of Videolocity Inc. with the Company being
the legal survivor and Videolocity Inc. being the accounting survivor.
Videolocity, Inc. the accounting survivor, was founded on May 26, 2000. After
the recapitalization, approximately 82 percent of the outstanding shares of the
Company were held by former stockholders of Videolocity, Inc.
-10-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE L - 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 for the purchase of 5th
Digit Technologies, LLC. During March 2001 the sale of the series B preferred
stock was rescinded and all monies paid were returned. During 2002, the Company
exchanged 600,000 of the outstanding series A preferred shares for 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 purchase of 5th Digit Technologies, LLC.
On January 24, 2002 the outstanding 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.
On April 11, 2002 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.
NOTE M - 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. As of July 31, 2002, the Company has 301,234
outstanding plan units subject to vesting requirements. During the nine months
ended July 31, 2002 the Company issued 24,959 shares of common stock in exchange
for vested plan units resulting in compensation expense of approximately
$25,000. The Company has issued 29,959 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. 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 417,855 shares under the Plan.
-11-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES
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 a 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.
NOTE O - EQUITY LINE OF CREDIT AGREEMENT
On May 28, 2002 Videolocity International, Inc. finalized an Equity Line of
Credit Agreement, with Cornell Capital Partners, LP, a New Jersey-based domestic
investment fund. Under the Equity Line, Videolocity has the right, but not the
obligation, to require Cornell Capital to purchase shares of Videolocity common
stock up to a maximum amount of $20,000,000 over a 24-month period. There is no
minimum draw down although Videolocity may make draws, as provided below, during
the term of the Equity Line.
Pursuant to terms of the Equity Line, Videolocity is required to file with the
SEC a registration statement covering the shares to be acquired by Cornell
Partners. The 24-month term commences on the effective date of the registration
statement. The Company is currently working toward completion of the
registration. The purchase price of the shares will be 95% of the lowest closing
bid price of Videolocity common stock during the five consecutive trading days
immediately following receipt of the Company's notice of its intent to make a
draw. Videolocity may make up to four draws per month at a maximum $250,000 per
draw. In addition to the shares to be issued under the Equity Line, Videolocity
will include in its registration statement an additional 300,000 shares being
issued to Cornell Partners and the Placement Agent in connection with the
execution of the Equity Line.
-12-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE P - 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
totaling approximately $628,000 with interest rates ranging from 6.0% to 8.0%.
A director of the Company caused the voluntary contribution and cancellation of
50,000 shares as manager of ISOZ, LC.
NOTE Q - 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
NOTE R - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. However, the Company
has incurred losses since its inception and has not yet been successful in
establishing profitable operations. These factors raise substantial doubt about
the ability of the Company to continue as a going concern. In this regard,
management is proposing to raise necessary additional funds not provided by its
planned operations through loans and/or through additional sales of its common
stock. The financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
-13-
Item 2. Management's Discussion and Analysis or Plan of Operation
The following information should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Form 10-QSB.
Forward-Looking Information
This report on Form 10-QSB includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements may relate to
such matters as anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products and services, anticipated
market performance and similar matters. When used in this report, the words
"may," "will," expect," anticipate," "continue," "estimate," "project,"
"intend," and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 regarding events, conditions,
and financial trends that may affect the Company's future plans of operations,
business strategy, operating results, and financial position. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. To comply with the terms of the safe harbor, we
caution readers that a variety of factors could cause our actual results to
differ materially from the anticipated results or other matters expressed in
forward-looking statements. These risks and uncertainties, many of which are
beyond our control, include (i) the sufficiency of existing capital resources
and the Company's ability to raise additional capital to fund cash requirements
for future operations; (ii) uncertainties involved in the rate of growth of the
Company's business and acceptance of the Company's products and services; (iii)
volatility of the stock market, particularly within the technology sector; and
(iv) general economic conditions. Although the Company believes the expectations
reflected in these forward-looking statements are reasonable, such expectations
may prove to be incorrect.
Plan of Operation
We are a solution engineering and marketing company involved in the
deployment of the Videolocity "Digital Entertainment SystemTM" (DES) and other
advanced digital information and entertainment solutions. DES delivers
video-on-demand in near DVD quality, including movies and other videos, medical
information and educational material to individuals, residents, hotel guests,
and patients and attendants in the healthcare industry.
We operate our business through five subsidiaries which perform various
functions, strategic to their market place or core competency. A sixth
subsidiary is inactive. To date, our activities have been limited to developing
the DES and other technologies. We are presently commencing the initial
marketing of DES into various marketplaces in the U.S. such as hospitality
(hotel and resorts) and healthcare (hospitals, long-term care facilities and
retirements centers) industries..
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.
-14-
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. We anticipate
funding payroll expenses with proceeds from the equity line of credit agreement
that we entered into with Cornell Capital Partners, L.P. 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.
Our subsidiary, Videolocity, Inc., has executed a non-exclusive
agreement dated May 11, 2002 with Tech Flex Funding Inc. of Mission Viejo,
California. Pursuant to this relationship, Tech Flex will provide funding for
production and installation of the DES and other products on a lease back
program without recourse to us. 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. Additionally, the
companies have agreed in writing to represent each other as business partners.
No other affiliation or contract between the two parties currently exist and no
revenues have been generated to date.
Currently, we do not intend to sell any hardware or software. Our
business plan is to manufacture or purchase hardware and software and deploy our
systems at no cost to the customer. It is anticipate that we will finance the
system equipment and realize the majority of the revenue stream created by the
end users. Presently, we do not anticipate any significant purchase or sale of
plant or equipment. Additionally, we do not anticipate the addition of large
numbers of employees because our business model calls for outsourcing any and
all functions that would be directly related to the number of deployments. We
are, and intend to remain, a technology company.
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 that we will begin to realize revenues by December
31, 2002 from contracts currently being negotiated with hotel and healthcare
properties. 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. As of the date hereof, we have not formalized any new
funding except for the line of credit with Cornell Capital. We can not give you
any assurance that we will be able to secure such additional funding on
favorable terms to us, or otherwise. We have entered into a $20 million equity
line of credit agreement with Cornell Capital, which we anticipate will provide
us with adequate working capital for at least the next 24 months. Without
drawing against the line of credit and based on current costs of operation,
contract commitments, and availability of credit, management estimates that our
current assets will be
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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 nine months ended July 31, 2002, we have received $949,800,
net, in loans from various individuals, including approximately $178,000 from
related parties. These loans are evidenced by 8% - 20% notes. 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 $1.5 million to September 1, 2002. The filing also
includes a note payable of $300,000 due to WAJ Enterprises LLC, which releases a
prior collateral security assignment of our Merit Studios, Inc. note receivable,
and a provision for the inclusion of additional future loans of $450,000 under
the security agreement.
On April 30, 2002, 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.
Healthcare Concierge is 92.3% owned by Videolocity International, Inc. and the 1
million shares to be sold are currently issued and outstanding. Although we
still intend to follow through with the sale of Healthcare Concierge shares, to
date we have not taken any action to sell the shares.
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.
To date, we have not realized revenues from our operations. For the
nine months ended July 31, 2002, total expenses increased 116% as compared to
the nine months ended July 31, 2001. This is attributed primarily to the 46%
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 $325,070 for the nine month ended July 31, 2002 compared to
$163,900 for the nine months ended July 31, 2001, reflecting our financing
activities in 2002. Management anticipates that as we scale up the installation
of the DES, our expenses will increase proportionately. The Company's plan of
operation will depend on its ability to raise substantial additional capital, of
which there can be no assurance.
Liquidity and Capital Resources
During the first nine months of fiscal 2002 our total current assets
increased from approximately $350,000 at October 31, 2001 to approximately
$355,000 at July 31, 2002. During this same period, cash increased from
approximately $400 to approximately $155,000. Total assets increased from
approximately $428,000 at October 31, 2001 to approximately $446,000 at July 31,
2002, due primarily to the increase in cash received from short-term borrowings
combined with the reduction in notes receivable.
Total current liabilities increased from approximately $907,000 on
October 31, 2001 to approximately $1,752,000 at July 31, 2002. The change is
attributed to the increase from $750,000 in notes payable to approximately
$1,670,000 during the nine months ended July 31,2002 due to
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additional borrowing. Accounts payable decreased during the nine months ended
July 31, 2002 from approximately $143,000 to $52,000 due to the Company making
payments toward accounts payable from cash received from the increase in
short-term borrowings.
Inflation
In the opinion of management, inflation has not and will not have a
material effect on our operations in the immediate future.
Net Operating Loss
At July 31, 2002, the Company and its subsidiaries had accumulated a
net operating loss carryforward of approximately $4,315,000, with a tax benefit
of approximately $1,295,000. 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 through 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.
PART II
Item 1. Legal Proceedings
During January 2002 we filed an action in the Third District Court of
Salt Lake County, Utah against the holder of 350,000 shares of Series "A"
Preferred stock, together with certain other persons. The complaint asked the
court to cancel the remaining 350,000 shares outstanding from the 5th Digit
Technologies, LLC acquisition. The suit alleges fraud and misrepresentation
which induced our acquisition of 5th Digit Technologies, LLC. The remaining
350,000 shares were tendered for liquidation at $5.00 per share on January 24,
2002, however, they were deposited with the Court.
On April 11, 2002 the Court entered a Default Judgment against the
holder of the outstanding 350,000 preferred shares, ordering cancellation of the
shares. It was further adjudged and decreed that any and all redemption or other
rights vested in and related to the shares be voided. The 350,000 preferred
shares were cancelled on April 12, 2002.
On August 26, 2002 our subsidiary, Healthcare Concierge, Inc., filed an
action in the Third District Court of Salt Lake County, Utah against Merit
Studios, Inc. The action seeks $600,000 that is owed by Merit Studios to
Healthcare Concierge pursuant to a promissory note executed in consideration for
the reconveyance to Merit Studios of two license agreements. The action is in
the initial stages and, accordingly, we are no able to assess our likelihood of
success at this time.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During our third fiscal quarter ended July 31, 2002, we issued an
aggregate of 764,161 shares of common stock. Of the 764,161 shares issued,
404,356 shares, valued at approximately $1.00 per share, were issued to various
individuals upon the conversion of loans and accrued interest. We also issued
342,855 shares valued at approximately $1.00 for services provided to us and for
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compensation. These issuances were made in private transactions and,
accordingly, we relied upon the exemption from registration under the Securities
Act of 1933 provided by Section 4(2) of the Act. These shares are deemed to be
restricted securities.
Also during the third quarter, we issued 16,950 vesting shares to
employees under the Videolocity, Inc. 2000 Stock Incentive Plan. These shares
were issued to seven employees and were subject to a registration statement
filed with the SEC on July 31, 2001.
Item 3. Defaults Upon Senior Securities
This Item is not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
This Item is not applicable.
Item 5. Other Information
Reverse Stock Split
On March 1, 2002, we effected a reverse stock split of our issued and
outstanding shares of common stock on a one (1) share for ten (10) shares basis.
The reverse stock split also affects the conversion of any of our outstanding
convertible securities. In connection with the stock split, the NASD issued a
new trading symbol of "VCTY" for the trading of our shares on the OTC Bulletin
Board.
Equity Line of Credit
On May 28, 2002 we entered into an equity line of credit agreement with
Cornell Capital Partners, LP. Under the equity line, we have the right, but not
the obligation, to require Cornell Capital to purchase shares of our common
stock up to a maximum amount of $20 million over a 24-month period. There is no
minimum draw, although we may, at our discretion, make up to four draws per
month at a maximum of $250,000 per draw, or $1million per month.
Under the terms of the equity line, we are required to file with the
SEC a registration statement covering the shares issued under the equity line.
The 24-month term commences on the effective date of the registration statement.
Cornell Capital's purchase price will be 95% of the lowest closing bid price of
our common stock during the five consecutive trading days immediately following
receipt of our notice to make a draw. In addition to the shares to be issued
under the equity line, we will include in the registration statement an
additional 290,000 shares issued to Cornell Capital, and 10,000 shares issued to
Westrock Advisors to act as our exclusive placement agent in connection with the
equity line.
The total amount of shares issuable under the equity line is based upon
the number of draws we make and the sale price of the shares. We filed on July
5, 2002 the initial registration statement covering the equity line shares and
are presently preparing for filing the first amendment to that registration
statement. Upon effectiveness of the registration statement, we will be able to
begin drawing against the equity line.
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Resignation of Directors and Appointment of Officers
On September 5, 2002, the Board of Directors accepted the resignation
of George Norman, chairman of and a director of four of our subsidiaries,
Videolocity, Inc., Videolocity Technologies, Inc. Hospitality Concierge, Inc.,
Videolocity Direct, Inc. Mr. Norman cited health reasons for his resignation.
Concurrent with Mr. Normans resignation, the Board also accepted the resignation
of D. T. Norman, wife of Mr. Norman, as a director and secretary / treasurer of
Videolocity International for personal reasons. Ms. Norman also resigned as a
director and secretary / treasurer of Videolocity, Inc., Videolocity
Technologies, Inc., Healthcare Concierge, Inc., Hospitality Concierge, Inc. and
Videolocity Direct, Inc. Also on September 5, Dr. James P. Hill resigned as vice
chairman and director of Videolocity International, citing time and travel
constraints as his reason.
Effective September 1, 2002, Cortney Taylor became our new chief
financial officer. Mr. Taylor is a CPA, a member of the UACPA and AICPA, and a
member of the Utah State University, School of Accountancy Advisory Board. Prior
to joining our company Mr. Taylor was the Assurance Department Resource
Management Director for the Utah offices of Grant Thornton, LLP. Mr. Taylor
replaces Larry R. McNeill as our CFO. Mr. McNeill remains a director.
Also in September 2002, we employed Jay Muse as Vice President of
technology. Mr. Muse was formerly senior technologist at Iomega, Inc., where he
advised that company on technical issues regarding product roadmap, competitive
intelligence, patent applications and market strategy. Prior to joining Iomega,
Mr. Muse worked at General Electric Corporate Research.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following documents are included attached as exhibits to this report.
Exhibit 99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.3 Certification of CEO Pursuant to Section 302 of the Sarbanes-oxley
Act of 2002
Exhibit 99.4 Certification of CFO Pursuant to Section 302 of the Sarbanes-oxley
Act of 2002
(b) Reports on Form 8-K
On May 29, 2002, we filed a Current Report on Form 8-K
reporting under Item 5 that we had entered into the equity line of
credit agreement with Cornell Capital and the basic terms of that
agreement.
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SIGNATURES
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In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VIDEOLOCITY INTERNATIONAL, INC.
BY: /S/ ROBERT E. HOLT
-------------------------------
ROBERT E. HOLT
President, C.E.O. and Director
Date: September 23, 2002
BY: /S/ CORTNEY TAYLOR
CORTNEY TAYLOR
Chief Financial Officer
(Principal accounting Officer)
Date: September 23, 2002
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