As filed with the Securities and Exchange Commission on July___, 2004
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Videolocity
Nevada International, Inc. 87-0429154
- ---------------------------- ------------------- -------------------
(State or Other Jurisdiction (Name of Registrant (I.R.S. Employer
of Incorporation in Our Charter) Identification No.)
or Organization)
4899
(Primary Standard Industrial
Classification Code Number)
Robert E. Holt
1762A Prospector Avenue 1762A Prospector Avenue
Park City, Utah 84060 Park City, Utah 84060
(435) 615-8338 (435) 615-8338
- ------------------------------------------- ----------------------------------
(Address and telephone number of Principal Name, address and telephone number
Executive Offices and Principal Place of of agent for service)
Business)
Copies to:
Harris C. Siskind, Esq.
Kirkpatrick & Lockhart LLP
201 S. Biscayne Boulevard, Suite 2000
Miami, Florida 33131
Telephone: (305)539-3300
Telecopier: (305)358-7095
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this registration statement becomes effective.
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 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
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Proposed Maximum
Proposed Maximum Aggregate Amount Of
Title Of Each Class Of Amount To Be Offering Price Offering Registration
Securities To Be Registered Registered Per Share (1) Price (1) Fee
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Common Stock, par value $0.001 per share 19,314,099 shares (2) $0.81 $15,644,420.19 $1,982.15
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TOTAL 19,314,099 shares (2) $0.81 $15,644,420.19 $1,982.15
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the
purposes of this table, we have used the average of the closing bid and
asked prices as of July 6, 2004.
(2) Of these shares, 18,000,000 are being registered under the Standby
Equity Distribution Agreement and 1,012,988 are being registered under
the convertible compensation debentures, 290,000 shares of common stock
received as a fee under a now terminated equity line of credit
agreement and 11,111 are being registered as a placement agent fee.
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 this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS
Subject to completion, dated July 9, 2004
VIDEOLOCITY INTERNATIONAL, INC.
19,314,099 shares of Common Stock
This prospectus relates to the sale of up to 19,314,099 shares of
Videolocity International, Inc.'s ("Videolocity") common stock by certain
persons who are stockholders of Videolocity including Cornell Capital Partners,
L.P. ("Cornell Capital Partners"). Please refer to "Selling Stockholders"
beginning on page 11. Videolocity is not selling any shares of common stock in
this offering and therefore will not receive any proceeds from this offering.
Videolocity will, however, receive proceeds from the sale of common stock under
the Standby Equity Distribution Agreement ("Standby Equity Distribution
Agreement"), which was entered into between Videolocity and Cornell Capital
Partners, and no other stockholders. All costs associated with this registration
will be borne by Videolocity. Videolocity has agreed to allow Cornell Capital
Partners to retain 5% of the proceeds raised under the Standby Equity
Distribution Agreement that is more fully described below.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board during
the term of this offering. On July 6, 2004, the last reported sale price of our
common stock was $0.80 per share. Our common stock is quoted on the
Over-the-Counter Bulletin Board under the symbol "VCTY." These prices will
fluctuate based on the demand for the shares of common stock.
The selling stockholders consists of Cornell Capital Partners, who
intends to sell up to 19,302,988 shares of common stock, 18,000,000 of which are
under the Standby Equity Distribution Agreement, 1,012,988 are under $390,000 of
convertible compensation debentures, which Cornell Capital Partners received as
a fee under the Standby Equity Distribution Agreement and 290,000 received as a
fee under a now terminated equity line of credit agreement and Newbridge
Securities Corporation, who intends to sell up to 11,111 shares of common stock.
Upon issuance, the 18,000,000 shares of common stock under the Standby Equity
Distribution Agreement would equal 54.34% of Videolocity's then-outstanding
common stock.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Cornell Capital Partners will pay
Videolocity 98% of, or a 2% discount to, the lowest closing bid price of the
common stock during the five consecutive trading day period immediately
following the notice date. In addition, Cornell Capital Partners will retain 5%
of each advance under the Standby Equity Distribution Agreement. Cornell Capital
Partners also received a one-time commitment fee in the form of $390,000
convertible compensation debenture on May 22, 2004. The 2% discount, the 5%
retainage fee and the $390,000 in convertible compensation debentures are
underwriting discounts payable to Cornell Capital Partners.
Videolocity has engaged Newbridge Securities Corporation, an
unaffiliated registered broker-dealer, to advise it in connection with the
Standby Equity Distribution Agreement. Newbridge Securities Corporation was paid
a fee of 11,111 shares of Videolocity's common stock on July 6, 2004, equal to
approximately $10,000 based on Videolocity's stock price on May 22, 2004.
Brokers or dealers effecting transactions in these shares should
confirm that the shares are registered under the applicable state law or that an
exemption from registration is available.
These securities are speculative and involve a high degree of risk.
Please refer to "Risk Factors" beginning on page 4.
With the exception of Cornell Capital Partners, L.P., which is an
"underwriter" within the meaning of the Securities Act of 1933, no other
underwriter or person has been engaged to facilitate the sale of shares of
common stock in this offering. This offering will terminate twenty-four months
after the accompanying registration statement is declared effective by the
Securities and Exchange Commission. None of the proceeds from the sale of stock
by the selling stockholders will be placed in escrow, trust or any similar
account.
The Securities and Exchange Commission and state securities regulators
have not 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 __________ __, 2004.
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................1
THE OFFERING..................................................................3
RISK FACTORS..................................................................6
FORWARD-LOOKING STATEMENTS...................................................14
SELLING STOCKHOLDERS.........................................................15
USE OF PROCEEDS..............................................................18
DILUTION.....................................................................19
STANDBY EQUITY DISTRIBUTION AGREEMENT........................................20
PLAN OF DISTRIBUTION.........................................................23
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION....................25
DESCRIPTION OF BUSINESS......................................................31
MANAGEMENT...................................................................43
PRINCIPAL STOCKHOLDERS.......................................................48
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS................................49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................50
DESCRIPTION OF CAPITAL STOCK.................................................51
EXPERTS......................................................................53
LEGAL MATTERS................................................................53
HOW TO GET MORE INFORMATION..................................................53
PART II ..................................................................II-1
EXHIBIT 5.1................................................................II-3
EXHIBIT 23.2...............................................................II-4
FINANCIAL STATEMENTS........................................................F-1
i
PROSPECTUS SUMMARY
The following is only a summary of the information, financial
statements and the notes included in this prospectus. You should read the entire
prospectus carefully, including "Risk Factors" and our Financial Statements and
the notes to the Financial Statements before making any investment decision.
Our Company
General
We are a development stage technology company that is committed to
continued development and marketing of innovative, high quality, cost effective
systems to build future ongoing revenue streams. We are currently, and intend to
remain a technology company. We have developed proprietary technologies that
reduce bandwidth requirements for numerous applications of digital content. We
are currently using advanced proprietary technologies to transmit streaming
video at speeds of 1Mbps or less. We have the technological capacity to enter
into a variety of markets that include hospitality, healthcare, residential,
security and corporate training with currently developed technologies.
To date we have been focused on the acquisition and development of our
proprietary technologies. Our current business strategy is to continue with
development of additional technologies as well as enhancements to our current
proprietary technologies to further enable their use in other markets. We also
intend to actively market our first product, the Videolocity Digital
Entertainment System(TM) (DES(TM)) in the hospitality, healthcare, residential,
and other similar markets in both wired and wireless applications. Although we
use the word international in our name, we are not currently operating outside
the U.S., except for limited marketing activities in Canada, Mexico and the
Caribbean. However, as we expand operations we fully intend to operate and
market our products wherever prudent, including internationally. We operate our
business through five subsidiaries that perform various functions strategic to
their market place or core competency.
We have started to actively market our Digital Entertainment System(TM)
(DES(TM)). DES(TM) is a complete digital entertainment system using our
proprietary technologies to deliver video on demand streaming at 1Mbps or less,
full screen, in like DVD quality. In addition to video content viewing, DES(TM)
provides high-speed Internet access, digital music on demand, games, full Web
surfing and a variety of e-commerce applications as well as customer specific
informational and educational content. The Videolocity DES(TM) can be deployed
in closed network environments such as hotels, timeshare condominiums,
hospitals, and assisted living facilities, or over wide area networks serving
intelligent communities, residences and personal digital assistants (PDAs). The
Videolocity DES(TM) is currently available using Wireless 802.11 WAN/LAN, Fiber,
Satellite, Ethernet or DSL network architectures. We tailor the user interface
and content offering specifically to each market segment and to each customer
within that market segment. Our overall delivery system design, hardware
components and software applications remain identical, or only slightly modified
to accommodate larger user bases and/or infrastructures. This gives us the
ability to customize the feature settings and tailor the local content offering
to the specific audiences for each market segment.
1
We are capable of providing a wireless system and also offer a parallel
system over wire using fiber architectures. Our DES(TM) is available on either a
Microsoft or Linux operating system in a stand-alone set top box. The flexible,
highly customizable and fully scalable delivery platforms combined with advanced
embedded software applications allow for full remote system upgrades and easy
updates of content and/or system enhancements. Our DES(TM) permits viewers to
select from an extensive library of movie titles, informational/educational
content and view their selections on their television screens, lap top computers
or PDAs. Content is owned by third parties, such as movie studios, and will be
paid for on a revenue share basis when DES(TM) is deployed and operating
commercially. 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. We have started deploying our DES(TM) into signed contracts.
About Us
Our principal executive offices are located at 1762A Prospector Avenue,
Park City, Utah 84060. Our telephone number is (435) 615-8338.
2
THE OFFERING
This offering relates to the sale of common stock by certain persons
who are the selling stockholders consisting of Cornell Capital Partners, who
intends to sell up to 19,302,988 shares of common stock, 18,000,000 of which are
under the Standby Equity Distribution Agreement, and 1,012,988 are under
convertible compensation debentures, received by Cornell Capital Partners as a
fee under the Standby Equity Distribution Agreement and 290,000 received as a
fee under a now terminated equity line of credit agreement, and Newbridge
Securities Corporation, who intends to sell up to 11,111 shares of common stock.
The commitment amount of the Standby Equity Distribution Agreement is
$20 million. At an assumed price of $0.7546 per share, Videolocity would only be
able to receive gross proceeds of $13,582,800 using the 18,000,000 shares being
registered in this registration statement under the Standby Equity Distribution
Agreement. Videolocity would be required to register 8,504,108 additional shares
at this assumed price to obtain the entire $20 million available under the
Standby Equity Distribution Agreement. Based on the limited number of available
authorized shares of common stock, Videolocity would most likely need to obtain
shareholder approval to increase the authorized shares of common stock to access
additional amounts under the Standby Equity Distribution Agreement.
Pursuant to the Standby Equity Distribution Agreement, we may, at our
discretion, periodically issue and sell to Cornell Capital Partners shares of
common stock for a total purchase price of $20 million. The amount of each
advance is subject to a maximum advance amount of $350,000, and we may not
submit any advance within seven trading days of a prior advance. Cornell Capital
Partners will pay Videolocity 98% of, or a 2% discount to, the lowest closing
bid price of the common stock during the five consecutive trading day period
immediately following the notice date. We also have a maximum advance amount of
$1,000,000 per month. Of each advance made by Videolocity, Cornell Capital
Partners shall retain 5% of each advance. In addition, Cornell Capital Partners
received a one-time commitment fee in the form of $390,000 of convertible
compensation debentures on May 22, 2004. Cornell Capital Partners intends to
sell any shares purchased under the Standby Equity Distribution Agreement at the
then prevailing market price. Among other things, this prospectus relates to the
shares of common stock to be issued under the Standby Equity Distribution
Agreement. There are substantial risks to investors as a result of the issuance
of shares of common stock under the Standby Equity Distribution Agreement. These
risks include dilution of shareholders, significant decline in Videolocity's
stock price and our inability to draw sufficient funds when needed.
There is an inverse relationship between our stock price and the number
of shares to be issued under the Standby Equity Distribution Agreement. That is,
as our stock price declines, we would be required to issue a greater number of
shares under the Standby Equity Distribution Agreement for a given advance. This
inverse relationship is demonstrated by the following table, which shows the
number of shares to be issued under the Standby Equity Distribution Agreement at
a recent price of $0.7546 per share and 25%, 50% and 75% discounts to the recent
price.
Purchase Price: $0.7546 $0.5660 $0.3773 $0.1887
No. of Shares(1): 18,000,000 18,000,000 18,000,000 18,000,000
Total Outstanding (2): 33,123,863 33,123,863 33,123,863 33,123,863
Percent Outstanding (3): 54.34% 54.34% 54.34% 54.34%
Net Cash to Videolocity:(4) $12,818,660 $9,593,600 $6,366,830 $3,141,770
(1) Represents the number of shares of common stock to be issued to Cornell
Capital Partners, L.P. under the Standby Equity Distribution Agreement
at the prices set forth in the table, assuming sufficient authorized
shares are available.
3
(2) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Cornell Capital Partners, L.P. under the
Standby Equity Distribution Agreement, not including shares issued
under the convertible compensation debentures.
(3) Represents the shares of common stock to be issued as a percentage of
the total number shares outstanding.
(4) Net cash equals the gross proceeds minus the 5% retainage and $85,000
in offering expenses.
We have engaged Newbridge Securities Corporation, a registered
broker-dealer, to advise us in connection with the Standby Equity Distribution
Agreement. Newbridge Securities Corporation was paid a fee of 11,111 shares of
Videolocity's common stock on May 22, 2004, equal to approximately $10,000 based
on Videolocity's stock price on May 22, 2004. Newbridge Securities Corporation
is not participating as an underwriter in this offering.
Common Stock Offered 19,314,099 shares by selling stockholders
Offering Price Market price
Common Stock Outstanding Before the Offering1 15,123,863 shares as of July 6, 2004
Use of Proceeds We will not receive any proceeds of the shares offered
by the selling stockholders. Any proceeds we receive
from the sale of common stock under the Standby Equity
Distribution Agreement will be used for general working
capital purposes. See "Use of Proceeds."
Risk Factors The securities offered hereby involve a high degree of
risk and immediate substantial dilution. See "Risk
Factors" and "Dilution."
Over-the-Counter Bulletin Board Symbol VCTY
- ---------------
1 Excludes $390,000 of debentures convertible into 506,494 shares of
common stock (assuming a conversion price equal to 100% of $0.77), up
to 18,000,000 shares of common stock to be issued under the Standby
Equity Distribution Agreement, 11,012,000 options, 125,661 in employee
stock plan shares and promissory notes convertible into 2,101,587
shares of common stock .
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
For the Six Months Ended For the Year Ended
April 30, October 31,
-------------------------- --------------------------
2004 2003 2003 2002
----------- ----------- ----------- -----------
Statement of Operation Data:
Revenues $ -- $ -- $ -- $ --
Total operating expenses 625,696 892,462 1,533,335 2,538,775
Operating loss (625,696) (892,462) (1,533,335) (2,538,775)
Legal settlement (97,400) -- -- --
Interest and beneficial conversion (197,111) (231,618) (456,155) (547,263)
Expense for stock options on guarantee (69,120) -- -- --
----------- ----------- ----------- -----------
Minority interest -- -- -- (172)
----------- ----------- ----------- -----------
Net loss $ (989,327) $(1,124,080) $(1,989,490) $(3,086,210)
----------- ----------- ----------- -----------
Loss per share $ (0.13) $ (0.19) $ (0.33) $ (0.61)
----------- ----------- ----------- -----------
4
As of April 30, As of October 31,
Balance Sheet Data: 2004 2003
----------- -----------
Cash $ 240,811 $ 10,385
Accounts receivable, net of allowance for bad debt of $590,000 10,000 10,000
Other assets 184,511 104,219
----------- -----------
Total current assets 435,322 124,604
----------- -----------
Property and equipment, at cost, net 658,221 64,795
Other assets 23,836 --
----------- -----------
Total current liabilities 2,690,682 3,680,227
Long-term obligations less current portion 697,201 --
Minority interest 4,866 4,866
Common stock 15,013 6,347
Paid-in capital 6,284,045 4,083,060
Accumulated deficit during the development stage (8,574,428) (7,585,101)
----------- -----------
Total stockholders' deficit (2,275,370) (3,495,694)
----------- -----------
5
RISK FACTORS
We are subject to various risks that may materially harm our business,
financial condition and results of operations. You should carefully consider the
risks and uncertainties described below and the other information in this filing
before deciding to purchase our common stock. If any of these risks or
uncertainties actually occurs, our business, financial condition or operating
results could be materially harmed. In that case, the trading price of our
common stock could decline and you could lose all or part of your investment.
Risks Related To Our Business
Risks Relating To Our Business
Our Extremely Limited Operating History Makes It Difficult To Evaluate
Our Business And Prospects
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Since commencing operations we have focused primarily on development of
our tchnologies and our DES(TM). We have conducted only minimal sales and
marketing activities since we commenced operations. As a result of our short
operating history, we have only limited financial data and business information
with which to evaluate our business strategies, past performance and an
investment in our common stock.
We Have A History Of Losses And Anticipate Future Losses
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We have not achieved any 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. As of October 31, 2002, our accumulated deficit
was approximately $5,596,000 and as of October 31, 2003 our accumulated deficit
was approximately $7,585,000. As of April 30, 2004, our accumulated deficit was
$8,574,428. We expect to continue to incur significant expenses in connection
with:
* funding for research and development;
* costs of our sales and marketing efforts; and
* increased general and administrative expenses.
Accordingly, we will 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.
If Our Technology And Developed Systems Are Not Accepted By The Market,
Our Anticipated Revenues Will Decline
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Our technology and DES(TM) system 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(TM) and related technology;
* the features, performance, and cost of installation and use of our
technology;
* availability of competing products and technologies;
* the success and development of our marketing and distribution
channels; and
* the quality of our customer service and support of our technology.
6
Failure of our existing or future technology to achieve and maintain
meaningful levels of market acceptance would materially adversely affect our
business, financial condition and results of operations and market penetration.
Our 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
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Our quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. If our operating results do not meet the expectations of
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:
* 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 technology (DES(TM));
* a decrease in the average rental prices of our content viewed on
our DES(TM);
* 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 in the future, and
period-to-period comparisons should not be relied upon as indications of future
performance.
If We Lose Key Personnel, We May Be Unable To Successfully Operate Our
Business
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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.
If We Are Unable To Attract And Retain Additional Qualified Personnel,
Our Future Business May Suffer
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Our business strategy will require 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.
7
Our Limited Ability To Protect Our Intellectual Property May Prevent Us
From Retaining Our Competitive Advantage
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Our future success and our 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
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
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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 in our market increases and the
functionality of our products is enhanced and overlaps with the 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 which could
have a material adverse effect upon our operating results. Legal action claiming
patent infringement may be commenced against us. We cannot assure you that we
would prevail in such litigation given the complex technical issues and inherent
uncertainties in patent litigation. In the event a claim against us was
successful, and we could not obtain a license to the relevant technology on
acceptable terms or 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
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To date, we have financed our operations through cash from the sale of
our stock and by borrowing money. If we do not generate necessary cash from debt
or equity funding and revenues from operations to finance our future business,
we will need to continue to raise additional funds through public or private
financing opportunities. Selling additional stock 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. We may not be able to obtain funds needed to finance our operations
at all or may be able to obtain them only on very unattractive terms.
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
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The market for our DES(TM) technologies and products is highly
competitive and rapidly changing. We are significantly smaller than the majority
8
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 are developing 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.
Risks Relating To Our Industry
We operate in a very competitive business environment, which could
adversely affect our ability to attract and retain customers
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Competition in our industry is very active and includes virtually all
aspects of the entertainment industry. Many of our competitors have greater
financial, technical and network resources than we do. Entertainment market
participants include:
* other interactive television service providers, including
international providers;
* cable television companies and direct broadcast satellite
companies;
* Internet service providers and high-speed portals and companies
offering web sites that provide on-demand movies;
* television networks and programmers;
* companies offering web sites that provide on-demand movies;
* rental companies that provide videocassettes and DVDs that can be
viewed in properly equipped hotel rooms or on other portable
viewing devices; and
* hotels that offer in-room laptops with Internet access or other
types of Internet access systems.
A number of competitors could use their existing infrastructure to
provide in-room entertainment services to the lodging industry. In addition,
with respect to hotel properties already receiving in-room entertainment or
high-speed Internet services, the incumbent provider may have certain
informational and installation cost advantages as compared to outside
competitors.
We could be adversely impacted by conditions affecting the lodging
industry's performance.
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The results for our first marketable product (DES) is closely connected
to the performance of the hotel industry, in which occupancy rates may fluctuate
as a result of various factors. Reduction in hotel occupancy resulting from
business, economic, or other events could adversely impact our business,
financial condition and results of operations.
9
Risks Relating To Ownership Of Our Common Stock
The Price Of Our Common Stock Is Extremely Volatile And Investors May
Not Be Able To Sell Their Shares At Or Above Their Purchase Price, Or
At All
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Our stock is presently traded on the Over-the-Counter Bulletin Board,
although there is no assurance that a viable market will continue. The price of
our common stock in the public market is highly volatile and may fluctuate
substantially because of:
* actual or anticipated fluctuations in our operating results;
* changes in or failure to meet market expectations;
* conditions and trends in the digital video and other technology
industries; and
* fluctuations in stock market price and volume, which are
particularly common among securities of technology companies,
particularly new start-up companies.
Our Principal Stockholders And Affiliates Own A Significant Percentage
Of Our Company And May 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
-----------------------------------------------------------------------
As of July 6, 2004, certain principal stockholders control
approximately 38.26% of our outstanding common stock. As a result, these
stockholders 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 Security Holders Lapse
-----------------------------------------------------------------------
As of July 6, 2004, we had 15,123,863 shares of common stock
outstanding. Approximately 11,078,902 shares of our total outstanding common
stock are currently subject to restrictions against 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.
10
We Have Been The Subject Of A Going Concern Opinion From Our
Independent Auditors, Which Means That We May Not Be Able To Continue
Operations Unless We Obtain Additional Funding
-----------------------------------------------------------------------
Our independent auditors have added a "going concern" statement to
their audit report for the year ended October 31, 2003, which states that we
will need additional working capital to be successful and to service our current
debt for the coming year and, therefore, our continuation as a going concern is
dependent upon obtaining the additional working capital necessary to accomplish
our objectives. Our inability to obtain adequate financing will result in the
need to curtail business operations and you could lose your entire investment.
Our financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
We Have A Working Capital Deficit, Which Means That Our Current Assets
On April 30, 2004 Were Not Sufficient To Satisfy Our Current
Liabilities On That Date
-----------------------------------------------------------------------
We had a working capital deficit of $2,255,360 at April 30, 2004, which
means that our current liabilities exceeded our current assets on April 30, 2004
by that amount. Current assets are assets that are expected to be converted into
cash within one year and, therefore, may be used to pay current liabilities as
they become due. Our working capital deficit means that our current assets on
April 30, 2004 were not sufficient to satisfy all of our current liabilities on
that date.
Risks Related To This Offering
Future Sales By Our Stockholders May Adversely Affect Our Stock Price And Our
Ability To Raise Funds In New Stock Offerings
- --------------------------------------------------------------------------------
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 15,123,863 shares of common stock outstanding as of July 6, 2004, 4,044,961
shares are, or will be, freely tradable without restriction, unless held by our
"affiliates." The remaining 11,078,902 shares of common stock which will be held
by existing stockholders, including the officers and directors, are "restricted
securities" and may be resold in the public market only if registered or
pursuant to an exemption from registration. Some of these shares may be resold
under Rule 144. In addition, we have issued compensation debentures convertible
into 506,494 shares of common stock (assuming a conversion price equal to 100%
of $0.77).
Existing Shareholders Will Experience Significant Dilution From Our Sale Of
Shares Under The Standby Equity Distribution Agreement
- --------------------------------------------------------------------------------
The sale of shares pursuant to the Standby Equity Distribution
Agreement will have a dilutive impact on our stockholders. For example, if the
offering occurred on April 30, 2004 at an assumed offering price of $0.7546 per
share (98% of a recent closing bid price of $0.77 per share), the new
stockholders would experience an immediate dilution in the net tangible book
value of $0.4352 per share. Dilution per share at prices of $0.5660, $0.3773 and
$0.1887 per share would be $0.3442, $0.2533 and $0.1623, respectively.
As a result, our net income per share could decrease in future periods,
and the market price of our common stock could decline. In addition, the lower
our stock price, the more shares of common stock we will have to issue under the
Standby Equity Distribution Agreement to draw down the full amount. If our stock
price is lower, then our existing stockholders would experience greater
dilution.
11
Under The Standby Equity Distribution Agreement Cornell Capital Partners Will
Pay Less Than The Then-Prevailing Market Price Of Our Common Stock
- --------------------------------------------------------------------------------
The common stock to be issued under the Standby Equity Distribution
Agreement will be issued at a 2% discount to the lowest closing bid price for
the five days immediately following the notice date of an advance. In addition,
Cornell Capital Partners will retain 5% from each advance. Based on this
discount, Cornell Capital Partners will have an incentive to sell immediately to
realize the gain on the 2% discount. These discounted sales could cause the
price of our common stock to decline, based on increased selling of
Videolocity's common stock.
The Selling Stockholders Intend To Sell Their Shares Of Common Stock In The
Market, Which Sales May Cause Our Stock Price To Decline
- --------------------------------------------------------------------------------
The selling stockholders intend to sell in the public market 19,314,099
shares of common stock being registered in this offering. That means that up to
19,314,099 shares may be sold pursuant to this registration statement. Such
sales may cause our stock price to decline. The officers and directors of
Videolocity and those shareholders who are significant shareholders as defined
by the SEC will continue to be subject to the provisions of various insider
trading and rule 144 regulations.
The Sale Of Our Stock Under Our Standby Equity Distribution Agreement Could
Encourage Short Sales By Third Parties, Which Could Contribute To The Future
Decline Of Our Stock Price
- --------------------------------------------------------------------------------
In many circumstances the provision of an Standby Equity Distribution
Agreement for companies that are traded on the Over-the-Counter has the
potential to cause a significant downward pressure on the price of common stock.
This is especially the case if the shares being placed into the market exceed
the market's ability to take up the increased stock or if Videolocity has not
performed in such a manner to show that the equity funds raised will be used to
grow Videolocity. Such an event could place further downward pressure on the
price of common stock. Under the terms of our Standby Equity Distribution
Agreement, Videolocity may request numerous draw downs pursuant to the terms of
the Standby Equity Distribution Agreement. Even if Videolocity uses the Standby
Equity Distribution Agreement to grow its revenues and profits or invest in
assets which are materially beneficial to Videolocity the opportunity exists for
short sellers and others to contribute to the future decline of Videolocity's
stock price. If there are significant short sales of stock, the price decline
that would result from this activity will cause the share price to decline more
so which in turn may cause long holders of the stock to sell their shares
thereby contributing to sales of stock in the market. If there is an imbalance
on the sell side of the market for the stock the price will decline.
It is not possible to predict those circumstances whereby short sales
could materialize or to what the share price could drop. In some companies that
have been subjected to short sales the stock price has dropped to near zero.
This could happen to Videolocity's stock price.
The Price You Pay In This Offering Will Fluctuate And May Be Higher Or Lower
Than The Prices Paid By Other People Participating In This Offering
- --------------------------------------------------------------------------------
The price in this offering will fluctuate based on the prevailing
market price of the common stock on the Over-the-Counter Bulletin Board.
Accordingly, the price you pay in this offering may be higher or lower than the
prices paid by other people participating in this offering.
12
We May Not Be Able To Access Sufficient Funds Under The Standby Equity
Distribution Agreement When Needed
- --------------------------------------------------------------------------------
We are dependent on external financing to fund our operations. Our
financing needs are expected to be partially provided from the Standby Equity
Distribution Agreement. No assurances can be given that such financing will be
available in sufficient amounts or at all when needed, in part, because we are
limited to a maximum draw down of $350,000 during any seven trading day period
and $1,000,000 per month. In addition, the number of shares being registered may
not be sufficient to draw all funds available to us under the Standby Equity
Distribution Agreement. Based on the assumed offering price of $0.7546 and the
18,000,000 shares we are registering, we would not be able to draw the entire
$20 million available under the Standby Equity Distribution Agreement. At this
assumed price, we will be able to draw $12,818,660 with the 18,000,000 shares
being registered. Videolocity would be required to register 8,504,108 additional
shares at this assumed price to obtain the entire $20 million available under
the Standby Equity Distribution Agreement. Based on the limited number of
available authorized shares of common stock, Videolocity would most likely need
to obtain shareholder approval to increase the authorized shares of common stock
to access additional amounts under the Standby Equity Distribution Agreement.
We May Not Be Able To Draw Down Under The Standby Equity Distribution Agreement
If The Investor Holds More Than 9.9% Of Our Common Stock
- --------------------------------------------------------------------------------
In the event Cornell Capital holds more than 9.9% of the
then-outstanding common stock of Videolocity, we will be unable to draw down on
the Standby Equity Distribution Agreement. Currently, Cornell Capital has
beneficial ownership of 5.10% of our common stock and therefore we would be able
to draw down on the Standby Equity Distribution Agreement so long as Cornell
Capital's beneficial ownership remains below 9.9%. If Cornell Capital Partner's
beneficial ownership increases to 9.9%, we would be unable to draw down on the
Standby Equity Distribution Agreement. Because Cornell Capital Partners is not
limited by a percentage ownership limitation with respect to converting the
convertible debentures, a possibility exists that Cornell Capital Partners may
own more than 9.9% of Videolocity's outstanding common stock at a time when we
would otherwise plan to make an advance under the Standby Equity Distribution
Agreement. In that event, if we are unable to obtain additional external funding
or generate revenue from the sale of our products, we could be forced to curtail
or cease our operations.
Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult
For Investors To Sell Their Shares Due To Suitability Requirements
- --------------------------------------------------------------------------------
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny
stocks are stocks:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation
system
o Nasdaq stocks that trade below $5.00 per share are deemed a "penny
stock" for purposes of Section 15(b)(6) of the Exchange Act
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years)
or $5.0 million (if in continuous operation for less than three
years), or with average revenues of less than $6.0 million for the
last three years.
13
Broker/dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Moreover, broker/dealers are required to determine whether an investment in a
penny stock is a suitable investment for a prospective investor. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline.
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus
may contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including
statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans and (e) our anticipated needs for
working capital. These statements may be found under "Management's Discussion
and Analysis or Plan of Operations" and "Description of Business," as well as in
this prospectus generally. Actual events or results may differ materially from
those discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
14
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. The selling shareholders are the entities who have assisted in or
provided financing to Videolocity. A description of each selling shareholder's
relationship to Videolocity and how each selling shareholder acquired the shares
to be sold in this offering is detailed in the information immediately following
this table.
Percentage
of
Percentage Outstanding
of Shares to be Shares to Be Percentage
Outstanding Acquired Acquired of Shares
Shares Shares under the under the Beneficially
Beneficially Beneficially Standby Standby Owned
Owned Owned Equity Equity Shares to be After
Before Before Distribution Distribution Sold in the Offering
Selling Stockholder Offering Offering (1) Agreement Agreement Offering (1)
- ----------------------- ------------ ------------ ------------ ------------- ------------ ------------
Shares Acquired in Financing Transactions with Videolocity
----------------------------------------------------------
Cornell Capital
Partners, L.P. 796,494(2) 5.10% 18,000,000 54.34% 19,302,988(3) 0%
Consultants and Others
Newbridge Securities
Corporation 11,111 * -- 0% 11,111 0%
- ----------------------- ------------ ------------ ------------ ------------- ------------ ------------
Total 807,605 5.17% 18,000,000 54.34% 19,314,099 0%
============ ============ ============ ============= ============ ============
- -----------------------------------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 15,123,863 shares of
common stock outstanding as of July 6, 2004, together with securities
exercisable or convertible into shares of common stock within 60 days
of July 6, 2004, for each stockholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with
respect to securities. Shares of common stock subject to securities
exercisable or convertible into shares of common stock that are
currently exercisable or exercisable within 60 days of July 6, 2004 are
deemed to be beneficially owned by the person holding such securities
for the purpose of computing the percentage of ownership of such
person, but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person. Note that affiliates are
subject to Rule 144 and Insider trading regulations - percentage
computation is for form purposes only.
(2) Consists of shares of common stock underlying conversion of $390,000 of
compensation debentures at a conversion price of 100% of $0.77 per
share and 290,000 shares of common stock received as a fee from the now
terminated equity line of credit agreement.
(3) Includes the shares acquired by Cornell Capital Partners under the
Standby Equity Distribution Agreement, and a good faith estimate of the
number of shares needed as a result of conversion of a total of
$390,000 of the convertible compensation debentures.
15
The following information contains a description of each selling
shareholder's relationship to Videolocity and how each selling shareholder
acquired the shares to be sold in this offering is detailed below. None of the
selling stockholders have held a position or office, or had any other material
relationship, with Videolocity, except as follows:
Shares Acquired In Financing Transactions With Videolocity
Cornell Capital Partners, L.P. Cornell Capital Partners, L.P. is the
investor under the Standby Equity Distribution Agreement and a holder of
compensation debentures. All investment decisions of, and control of, Cornell
Capital Partners are held by its general partner, Yorkville Advisors, LLC. Mark
Angelo, the managing member of Yorkville Advisors, makes the investment
decisions on behalf of and controls Yorkville Advisors. Cornell Capital Partners
acquired all shares being registered in this offering in financing transactions
with Videolocity. Those transactions are explained below:
o Standby Equity Distribution Agreement. On May 22, 2004, we
finalized an Standby Equity Distribution Agreement with Cornell
Capital Partners, L.P. Pursuant to the Standby Equity Distribution
Agreement, we may, at our discretion, periodically sell to Cornell
Capital Partners shares of common stock for a total purchase price
of up to $20.0 million. For each share of common stock purchased
under the Standby Equity Distribution Agreement, Cornell Capital
Partners will pay Videolocity 98% of, or a 2% discount to, the
lowest closing bid price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on which
our common stock is traded for the five days immediately following
the notice date. Further, Cornell Capital Partners will retain 5%
of each advance under the Standby Equity Distribution Agreement.
In connection with the Standby Equity Distribution Agreement,
Cornell Capital Partners received a one-time commitment fee in the
form of $390,000 of convertible compensation debentures as
described below. We are registering 18,000,000 shares in this
offering which may be issued under the Standby Equity Distribution
Agreement. At an assumed price of $0.7546 per share, Videolocity
would be able to receive gross proceeds of $13,582,800 using the
entire 18,000,000 shares being registered in this prospectus. We
are also registering 290,000 shares of common stock received by
Cornell Capital Partners as a fee under a now terminated equity
line of credit agreement.
o Convertible Compensation Debenture. Videolocity has outstanding
convertible compensation debentures, which were issued in the
original principal amount of $390,000. These debentures accrue
interest at a rate of 5% per year and mature three years from the
issuance date. The debentures are convertible at the holder's
option any time up to maturity at a conversion price equal to the
lower (i) of two-hundred fifty percent of the closing bid price on
the date of the debentures, or (ii) the lowest closing bid price
of the common stock for the three trading days immediately
preceding the conversion date. At maturity, Videolocity has the
option to either pay the holder the outstanding principal balance
and accrued interest or to convert the debentures into shares of
common stock at a conversion price equal to the lower of (i)
two-hundred fifty percent of the closing bid price on the date of
the debentures, or (ii) the lowest closing bid price of the common
stock for the three trading days immediately preceding the
conversion date. We are registering 1,012,988 shares of common
stock in this prospectus under the convertible compensation
debenture.
16
There are certain risks related to sales by Cornell Capital Partners,
including:
o The outstanding shares will be issued based on discount to the
market rate. As a result, the lower the stock price around the
time Cornell is issued shares, the greater chance that Cornell
gets more shares. This could result in substantial dilution to the
interests of other holders of common stock.
o To the extent Cornell sells its common stock, the common stock
price may decrease due to the additional shares in the market.
This could allow Cornell to sell greater amounts of common stock,
the sales of which would further depress the stock price.
o The significant downward pressure on the price of the common stock
as Cornell sells material amounts of common stocks could encourage
short sales by Cornell or others. This could place further
downward pressure on the price of the common stock.
Newbridge Securities Corporation is an unaffiliated registered
broker-dealer that has been retained by us. Guy Amico, Newbridge Securities
Corporation's President, makes the investment decisions on behalf of and
controls Newbridge Securities Corporation. For its services in connection with
the Standby Equity Distribution Agreement between Videolocity and Cornell
Partners, Newbridge Securities Corporation received a fee of 11,111 shares of
common stock, on May 22, 2004, equal to approximately $10,000 based on
Videolocity's stock price on May 22, 2004. These shares are being registered in
this offering.
17
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by certain selling stockholders. There will
be no proceeds to us from the sale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners under the Standby Equity Distribution Agreement. The
purchase price of the shares purchased under the Standby Equity Distribution
Agreement will be equal to 98% of the lowest closing bid price of our common
stock on the Over-the-Counter Bulletin Board for the five days immediately
following the notice date. Videolocity will pay Cornell Capital 5% of each
advance as an additional fee.
Pursuant to the Standby Equity Distribution Agreement, Videolocity
cannot draw more than $350,000 every seven trading days, more than $1,000,000
per month, or more than $20 million over twenty-four months.
For illustrative purposes only, we have set forth below our intended
use of proceeds for the range of net proceeds indicated below to be received
under the Standby Equity Distribution Agreement. The table assumes estimated
offering expenses of $85,000, plus 5% retainage payable to Cornell Capital
Partners under the Standby Equity Distribution Agreement. The figures below are
estimates only, and may be changed due to various factors, including the timing
of the receipt of the proceeds.
Gross proceeds $1,000,000 $5,000,000 $13,582,800
Net proceeds $865,000 $4,665,000 $12,818,660
No. of shares issued under the Standby Equity
Distribution Agreement at an assumed price of $0.7546 1,325,205 6,262,027 18,000,000
USE OF PROCEEDS: AMOUNT AMOUNT AMOUNT
- ------------------------------------------------------ ---------------------- --------------------- --------------------
General Working Capital $ 865,000 $ 4,665,000 $ 12,818,660
Total $ 865,000 $ 4,665,000 $ 12,818,660
====================== ===================== ===================
The Standby Equity Distribution Agreement limits Videolocity's use of
proceeds to general working capital and prohibits the use of proceeds to pay any
judgment or liability incurred by any officer, director or employee of
Videolocity, except under certain limited circumstances.
18
DILUTION
The net tangible book value of Videolocity as of April 30, 2004 was a
deficit of $2,270,504 or $(0.1511) per share of common stock. Net tangible book
value per share is determined by dividing the tangible book value of Videolocity
(total tangible assets less total liabilities) by the number of outstanding
shares of our common stock. Since this offering is being made solely by the
selling stockholders and none of the proceeds will be paid to Videolocity, our
net tangible book value will be unaffected by this offering. Our net tangible
book value and our net tangible book value per share, however, will be impacted
by the common stock to be issued under the Standby Equity Distribution
Agreement. The amount of dilution will depend on the offering price and number
of shares to be issued under the Standby Equity Distribution Agreement. The
following example shows the dilution to new investors at an offering price of
$0.7546 per share which is in the range of the recent share price.
If we assume that Videolocity had issued 18,000,000 shares of common
stock under the Standby Equity Distribution Agreement at an assumed offering
price of $0.7546 per share (i.e., the number of shares registered in this
offering under the Standby Equity Distribution Agreement), less retention fees
of $679,140 and offering expenses of $85,000, our net tangible book value as of
April 30, 2004 would have been $10,548,156 or $0.3194 per share. Note that at an
offering price of $0.7546 per share, Videolocity would receive gross proceeds of
$13,582,800, or $6,417,200 less than the entire amount available under the
Standby Equity Distribution Agreement. At an assumed offering price of $0.7546,
Cornell Capital Partners would receive a discount of $360,000 on the purchase of
18,000,000 shares of common stock. Such an offering would represent an immediate
increase in net tangible book value to existing stockholders of $0.4705 per
share and an immediate dilution to new stockholders of $0.4352 per share. The
following table illustrates the per share dilution:
Assumed public offering price per share $0.7546
Net tangible book value per share before this offering $(0.1511)
Increase attributable to new investors $0.4705
---------
Net tangible book value per share after this offering $0.3194
-------
Dilution per share to new stockholders $0.4352
=======
The offering price of our common stock is based on the then-existing
market price. In order to give prospective investors an idea of the dilution per
share they may experience, we have prepared the following table showing the
dilution per share at various assumed offering prices:
DILUTION
ASSUMED NO. OF SHARES TO BE PER SHARE
OFFERING PRICE ISSUED TO NEW INVESTORS
$0.7546 18,000,000(1) $0.4352
$0.5660 18,000,000 $0.3442
$0.3773 18,000,000 $0.2533
$0.1887 18,000,000 $0.1623
- --------------------------------------------------------------------------------
(1) This represents the maximum number of shares of common stock that are
being registered under the Standby Equity Distribution Agreement at
this time.
19
STANDBY EQUITY DISTRIBUTION AGREEMENT
Summary
On May 22, 2004, we finalized a Standby Equity Distribution Agreement
with Cornell Capital Partners, L.P. Pursuant to the Standby Equity Distribution
Agreement, we may, at our discretion, periodically sell to Cornell Capital
Partners shares of common stock for a total purchase price of up to $20.0
million. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital Partners will pay 98% of, or a 2%
discount to, the lowest closing bid price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on which our common
stock is traded for the five days immediately following the notice date. The
number of shares purchased by Cornell Capital Partners for each advance is
determined by dividing the amount of each advance by the purchase price for the
shares of common stock. Further, Cornell Capital Partners will retain 5% of each
advance under the Standby Equity Distribution Agreement. Cornell Capital
Partners is a private limited partnership whose business operations are
conducted through its general partner, Yorkville Advisors, LLC. In addition, we
engaged Newbridge Securities Corporation, a registered broker-dealer, to advise
us in connection with the Standby Equity Distribution Agreement. For its
services, Newbridge Securities Corporation received 11,111 shares of our common
stock, equal to approximately $10,000 based on Videolocity's stock price on May
22, 2004, when the shares were issued. The effectiveness of the sale of the
shares under the Standby Equity Distribution Agreement is conditioned upon us
registering the shares of common stock with the Securities and Exchange
Commission and obtaining all necessary permits or qualifying for exemptions
under applicable state law. The costs associated with this registration will be
borne by us. There are no other significant closing conditions to draws under
the equity line.
Standby Equity Distribution Agreement Explained
Pursuant to the Standby Equity Distribution Agreement, we may
periodically sell shares of common stock to Cornell Capital Partners to raise
capital to fund our working capital needs. The periodic sale of shares is known
as an advance. We may request an advance every seven trading days. A closing
will be held six trading days after such written notice at which time we will
deliver shares of common stock and Cornell Capital Partners will pay the advance
amount. There are no closing conditions imposed on Videolocity for any of the
draws other than that we have filed our periodic and other reports with the
Securities and Exchange Commission, delivered the stock for an advance, the
trading of Videolocity common stock has not been suspended, and we have given
written notice and associated correspondence to Cornell Capital Partners. We are
limited however, on our ability to request advances under the Standby Equity
Distribution Agreement based on the number of shares we have registered on this
registration statement. For example, at an assumed offering price of $0.7546, we
would not be able to draw the entire gross proceeds of $20,000,000 available
under the Standby Equity Distribution Agreement with the 18,000,000 shares we
are registering. Videolocity would be required to register 8,504,108 additional
shares at this assumed price to obtain the entire $20 million available under
the Standby Equity Distribution Agreement. Based on the limited number of
available authorized shares of common stock, Videolocity would most likely need
to obtain shareholder approval to increase the authorized shares of common stock
to access additional amounts under the Standby Equity Distribution Agreement. In
order to access all funds available to us under the Standby Equity Distribution
Agreement with the 18,000,000 shares being registered in this offering, the
average price of shares issued under the Standby Equity Distribution Agreement
would need to be $1.11.
20
We may request advances under the Standby Equity Distribution Agreement
once the underlying shares are registered with the Securities and Exchange
Commission. Thereafter, we may continue to request advances until Cornell
Capital Partners has advanced $20.0 million or 24 months after the effective
date of the this registration statement, whichever occurs first.
The amount of each advance is subject to a maximum amount of $350,000,
and we may not submit an advance within seven trading days of a prior advance.
There is also a monthly draw limit of $1,000,000. The amount available under the
Standby Equity Distribution Agreement is not dependent on the price or volume of
our common stock. Our ability to request advances is conditioned upon us
registering the shares of common stock with the SEC. In addition, we may not
request advances if the shares to be issued in connection with such advances
would result in Cornell Capital Partners owning more than 9.9% of our
outstanding common stock. Based on a recent average stock price of $0.77 Cornell
Capital Partners' beneficial ownership of Videolocity common stock is 5.10% and
therefore we would be permitted to make draws on the Standby Equity Distribution
Agreement so long as Cornell Capital Partners' beneficial ownership of our
common stock remains lower than 9.9%. Cornell Capital Partners is not limited by
a percentage ownership limitation with respect to converting the compensation
debentures and, therefore, a possibility exists that Cornell Capital Partners
may own more than 9.9% of Videolocity's outstanding common stock at a time when
we would otherwise plan to make an advance under the Standby Equity Distribution
Agreement.
We do not have any agreements with Cornell Capital Partners regarding
the distribution of such stock, although Cornell Capital Partners has indicated
that it intends to promptly sell any stock received under the Standby Equity
Distribution Agreement.
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the Standby Equity Distribution Agreement, in part,
because the purchase price of the shares will fluctuate based on prevailing
market conditions and we have not determined the total amount of advances we
intend to draw. Nonetheless, we can estimate the number of shares of our common
stock that will be issued using certain assumptions. Assuming we issued the
number of shares of common stock being registered in the accompanying
registration statement at a recent price of $0.7546 per share, we would issue
18,000,000 shares of common stock to Cornell Capital Partners for gross proceeds
of $13,582,800. These shares would represent 54.34% of our outstanding common
stock upon issuance. We will need to register additional shares of common stock
in order to fully utilize the $20.0 million available under the Standby Equity
Distribution Agreement if the average price at which we sell shares under the
Standby Equity Distribution Agreement is equal to $0.7546 per share.
There is an inverse relationship between our stock price and the number
of shares to be issued under the Standby Equity Distribution Agreement. That is,
as our stock price declines, we would be required to issue a greater number of
shares under the Standby Equity Distribution Agreement for a given advance. This
inverse relationship is demonstrated by the following table, which shows the
number of shares to be issued under the Standby Equity Distribution Agreement at
a recent price of $0.7546 per share and 25%, 50% and 75% discounts to the recent
price.
Purchase Price: $0.7546 $0.5660 $0.3773 $0.1887
No. of Shares(1): 18,000,000 18,000,000 18,000,000 18,000,000
Total Outstanding (2): 33,123,863 33,123,863 33,123,863 33,123,863
Percent Outstanding (3): 54.34% 54.34% 54.34% 54.34%
Net Cash to Videolocity:(4) $12,818,660 $9,593,600 $6,366,830 $3,141,770
21
(1) Represents the number of shares of common stock to be issued to Cornell
Capital Partners, L.P. under the Standby Equity Distribution Agreement
at the prices set forth in the table, assuming sufficient authorized
shares are available.
(2) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Cornell Capital Partners, L.P. under the
Standby Equity Distribution Agreement, not including shares issued
under the convertible compensation debentures.
(3) Represents the shares of common stock to be issued as a percentage of
the total number shares outstanding.
(4) Net cash equals the gross proceeds minus the 5% retainage and $85,000
in offering expenses.
Proceeds used under the Standby Equity Distribution Agreement will be
used in the manner set forth in the "Use of Proceeds" section of this
prospectus. We cannot predict the total amount of proceeds to be raised in this
transaction because we have not determined the total amount of the advances we
intend to draw. Cornell Capital Partners has the ability to permanently
terminate its obligation to purchase shares of common stock from Videolocity
under the Standby Equity Distribution Agreement if there shall occur any stop
order or suspension of the effectiveness of this registration statement for an
aggregate of fifty (50) trading days other than due to acts by Cornell Capital
Partners or if Videolocity fails materially to comply with certain terms of the
Standby Equity Distribution Agreement, which remain uncured for thirty (30) days
after notice from Cornell Capital Partners.
All fees and expenses under the Standby Equity Distribution Agreement
will be borne by Videolocity. We expect to incur expenses of approximately
$85,000 in connection with this registration, consisting primarily of
professional fees. In connection with the Standby Equity Distribution Agreement,
Cornell Capital Partners received a one-time commitment fee in the form of
$390,000 of convertible compensation debentures. In addition, we issued 11,111
shares of common stock to Newbridge Securities Corporation, an unaffiliated
registered broker-deal, on May 22, 2004, as compensation for its services as a
placement agent for this transaction, equal to approximately $10,000 based on
Videolocity's stock price on May 22, 2004.
22
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution
of our common stock owned by the selling stockholders may be effected directly
to purchasers by the selling stockholders as principals or through one or more
underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) on the
over-the-counter market or in any other market on which the price of our shares
of common stock are quoted or (ii) in transactions otherwise than on the
over-the-counter market or in any other market on which the price of our shares
of common stock are quoted. Any of such transactions may be effected at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at varying prices determined at the time of sale or at negotiated
or fixed prices, in each case as determined by the selling stockholders or by
agreement between the selling stockholders and underwriters, brokers, dealers or
agents, or purchasers. If the selling stockholders effect such transactions by
selling their shares of common stock to or through underwriters, brokers,
dealers or agents, such underwriters, brokers, dealers or agents may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders or commissions from purchasers of common stock for whom
they may act as agent (which discounts, concessions or commissions as to
particular underwriters, brokers, dealers or agents may be in excess of those
customary in the types of transactions involved).
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Cornell Capital Partners will pay us 98%
of, or a 2% discount to, the lowest closing bid price of our common stock on the
Over-the-Counter Bulletin Board or other principal trading market on which our
common stock is traded for the five days immediately following the advance date.
In addition, Cornell Capital Partners will retain 5% of the proceeds received by
us under the Standby Equity Distribution Agreement, and received $390,000 of
convertible compensation debentures on May 22, 2004. The 2% discount, the 5%
retainage and the $390,000 of convertible debentures are underwriting discounts.
In addition, we engaged Newbridge Securities Corporation, an unaffiliated
registered broker-dealer, to advise us in connection with the Standby Equity
Distribution Agreement. Newbridge Securities Corporation has entered into a
placement agent agreement with Videolocity pursuant to which Newbridge
Securities Corporation has reviewed the terms of the Standby Equity Distribution
Agreement and has advised Videolocity concerning these terms. Newbridge
Securities Corporation, to our knowledge, will not be participating in the
distribution of shares that may be issued under the Standby Equity Distribution
Agreement. For its services in regard to the Standby Equity Distribution
Agreement, Newbridge Securities Corporation received 11,111 shares of our common
stock, on May 22, 2004, equal to approximately $10,000 based on Videolocity's
stock price on May 22, 2004.
Cornell Capital Partners was formed in February 2000 as a Delaware
limited partnership. Cornell Capital Partners is a domestic hedge fund in the
business of investing in and financing public companies. Cornell Capital
Partners does not intend to make a market in our stock or to otherwise engage in
stabilizing or other transactions intended to help support the stock price.
Prospective investors should take these factors into consideration before
purchasing our common stock.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of common stock may not be sold unless the shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
23
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. If
any of these other expenses exists, Videolocity expects the selling stockholders
to pay these expenses. We have agreed to indemnify Cornell Capital Partners and
its controlling persons against certain liabilities, including liabilities under
the Securities Act. We estimate that the expenses of the offering to be borne by
us will be approximately $85,000. For its services, Newbridge Securities
Corporation received 11,111 shares of our common stock on May 22, 2004. The
offering expenses consist of: a SEC registration fee of $1,982.15, printing
expenses of $2,500, accounting fees of $15,000, legal fees of $50,000 and
miscellaneous expenses of $15,517.85. We will not receive any proceeds from the
sale of any of the shares of common stock by the selling stockholders. We will,
however, receive proceeds from the sale of common stock under the Standby Equity
Distribution Agreement.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Registration M, the selling stockholders or their agents
may not bid for, purchase, or attempt to induce any person to bid for or
purchase, shares of our common stock while such selling stockholders are
distributing shares covered by this prospectus. Accordingly, except as noted
below, the selling stockholders are not permitted to cover short sales by
purchasing shares while the distribution is taking place. Cornell Capital
Partners can cover any short positions only with shares received from us under
the Standby Equity Distribution Agreement. The selling stockholders are advised
that if a particular offer of common stock is to be made on terms constituting a
material change from the information set forth above with respect to the Plan of
Distribution, then, to the extent required, a post-effective amendment to the
accompanying registration statement must be filed with the Securities and
Exchange Commission.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
We are an engineering and marketing company involved in the deployment
of the DES(TM) and the further development of other digital information and
entertainment systems and uses of our technology. DES(TM) 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 are a development
stage company and have not recognized revenues from operations. To date, our
activities have been limited to developing the DES(TM) and other technologies.
We are presently commencing the initial marketing of DES(TM) into various
marketplaces in North America and the Caribbean such as hospitality (hotels and
resorts) and healthcare (hospitals, long-term care facilities and retirement
centers) industries. We are, and intend to remain, a technology company.
Plan of Operation
We intend to use our existing capital, together with proceeds from
prospective future financings, to continue marketing and deployment of our
DES(TM) and to fund development of new technologies and enhancements of existing
proprietary technologies. Management estimates that minimum expenses during the
next twelve months will be approximately $2.6 million, consisting of $1.45
million in payroll, payroll taxes, employee health insurance and other related
employee costs including the hiring of additional personnel, $160,000 for office
rent, utilities, and related costs, and $310,000 for marketing and related
expenses, and $330,000 for general and administrative expenses including legal
and accounting fees. Research and development expenses are estimated to be a
minimum of approximately $350,000 during the next twelve months. We will also
incur substantial additional costs in connection with the manufacture and
deployment of DES(TM). 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 from future long-term lease financing.
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
DES(TM) at no initial cost to the customer. It is anticipated that we will
finance the system equipment and realize the majority of the revenue stream
created by the end users. We do not presently 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 anticipate generating future revenues from the delivery of video and
other content as well as high-speed Internet access to the end users of our
DES(TM). Management believes that we will begin to realize revenues during our
third quarter of 2004 from our first installations started during the second
quarter of 2004, from contracts currently in place and 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. Although we have not
finalized our structure for content fees, the following is an estimate of
content fees that we will charge end users:
Internet access $ 6.95 to $ 11.95 each 12 or 24 hour period
Video on demand $ 5.95 to $ 12.95 per viewing
Games $ 2.95 to $ 6.95 each 1 to 4 hour period
25
All prices are subject to change and may vary depending upon property
location, usage volume and response to competition.
During the next twelve months, we plan to seek additional debt funding
in the form of credit lines and capital leases for up to approximately $15
million. This would permit us to cover our minimum expenses described above and
accelerate deployment of our DES(TM). As of the date hereof, we have not
formalized any new funding except for a Standby Equity Distribution Agreement
with Cornell Capital, L.P. We can not give any assurance that we will be able to
secure such additional funding on favorable terms to us, or otherwise.
During May we entered into a new Standby Equity Distribution Agreement
with Cornell Capital Partners, LP, a New Jersey-based domestic investment fund.
We anticipate that this agreement will provide us with adequate working capital
for at least the next 24 months. Under the equity distribution agreement,
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
million over a 24-month period. There is no minimum draw down although we may
draw up to four draws per month at a maximum $350,000 per draw and a maximum of
$1 million per month. The draw-downs are subject to an effective registration
statement with the United States Securities and Exchange Commission covering the
resale of the shares. The 24-month term commences on the effective date of the
registration statement. The purchase price of the shares will be 98% of the
lowest closing bid price of our common stock during the five consecutive trading
days immediately following receipt of notice of our intent to make a draw.
Without drawing against the Standby Equity Distribution Agreement 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 two months and that we must
obtain additional financing during that time in order to continue operations.
Results Of Operations
To date, we have not realized revenues from our operations. For the
three months ended April 30, 2004, total expenses increased approximately
$190,000 or approximately 45% as compared to the three months ended April 30,
2003. This is attributed primarily to an increase in non operating expenses
including a $97,400 charge for a legal settlement, a $69,120 charge for the
issuance of options to non-employees in a capital lease transaction, an increase
of approximately $80,000 to interest expense including the recording of stock
issuances for extensions of notes payable and interest from a new capital lease.
These increases were offset by approximately $57,000 in decreases to operational
expenses including approximately $35,000 of professional fees and consultants.
For the year ended October 31, 2003, total expenses decreased approximately 36 %
as compared to the year ended October 31, 2002. This is attributed primarily to
the approximately 40% decrease in operating expenses during 2003. Salaries,
payroll taxes and employee benefits decreased approximately 18% as management
has been able to reduce the number of employees on our payroll until such time
as we begin deployments of our DES(TM). Management has also concentrated efforts
to internalize certain professional fees and consultant fees resulting in a
decrease of approximately 78% from 2002. Rent expense decreased by approximately
42% as Videolocity operated both administratively and operationally from one
location during 2003. During 2002 Videolocity rented office space at a separate
location.
26
Management anticipates that as we scale up the installation of the
DES(TM), our expenses will increase proportionately. Our 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 three months ended April 30, 2004, our total current assets
increased approximately $299,000 and total assets increased approximately
$922,000 from approximately $195,000 to approximately $1,117,000. The increase
in current assets is primarily due to our receiving operating capital from a
$225,000 private placement, $200,000 in new notes payable and receiving
approximately $357,000 in operating capital included within a capital lease
transaction less operational expenses for the quarter. The increase in the
remaining assets is due to the completion of a leasing agreement during the
quarter that increased property and equipment by approximately $606,000.
During the three months ended April 30, 2004, total current liabilities
decreased from approximately $3,962,000 to approximately $2,691,000. This net
decrease totaling approximately $1,271,000 to our current liabilities is
attributed to completing the conversion of approximately $1,370,000 of notes
payable and approximately $217,000 in accrued interest into shares of our common
stock. We also made payments reducing prior accruals and payables by
approximately $67,000. These decreases to current liabilities offset the
following increases to current assets during the quarter: we completed a capital
lease transaction that resulted in an increase to current liabilities of
approximately $215,000, and originated approximately $180,000 in notes payable.
A total of $180,000 in non-interest bearing notes payable was
originated during the three months ended April 30, 2004. The total amount was
borrowed from several individuals and is being used for general operational
expenses. $80,000 of the new notes payable is convertible at $0.20 per share and
$100,000 of the new notes payable is convertible at $0.30 per share which was
the market value of our common stock on the date of origination. The notes have
no set maturity date and are payable until paid in full. Interest has been
imputed on all non-interest bearing notes payable from date of origination.
During the year ended October 31, 2003 our total current assets
decreased from approximately $193,000 at October 31, 2002 to approximately
$125,000 at October 31, 2003. During this same period, cash decreased from
approximately $32,000 to approximately $10,000. These changes are due primarily
to the following factors, $149,000 in additional write off of accounts
receivable offset by an increase in advance deposits of approximately $100,000
and decrease in cash of approximately $21,000. Total assets decreased from
approximately $281,000 at October 31, 2002 to approximately $189,000 at October
31, 2003.
Total current liabilities increased from approximately $2,157,000 on
October 31, 2002 to approximately $3,680,227 at October 31, 2003. The change is
attributed to an increase of notes payable from approximately $1,850,000 to
approximately $2,800,000 in additional borrowings for operations. Accounts
payable increased during the year ended October 31, 2003 from approximately
$100,000 to approximately $208,000 which is due to the increase in operational
activities as compared to the timing of additional capital coming into
Videolocity. Accrued liabilities increased from approximately $81,000 to
approximately $296,000 during the year due to officer's salaries that have been
accrued but have not been paid due to the lack of capital during the year.
27
Net Operating Loss
As of April 30, 2004, we have, together with our subsidiaries,
accumulated a net operating loss carryforward of approximately $7,554,000, with
an operating loss tax benefit of approximately $2,818,000. No tax benefit has
been recorded in the financial statements because the tax benefit has been fully
offset by a valuation reserve as the realization of the future tax benefit
cannot be established. The net operating loss will expire through 2024.
We have accumulated approximately $6,640,000 of net operating loss
carryforwards as of October 31, 2003, which may be offset against taxable income
and income taxes in future years. The use of these losses to reduce future
income taxes will depend on the generation of sufficient taxable income prior to
the expiration of the net operating loss carryforwards. The carry-forwards
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. No tax benefit has been reported in the financial statements for the
year ended October 31, 2003 because the likelihood of realization of the related
tax benefits cannot be established. Accordingly, the potential tax benefit of
the loss carryforward is offset by a valuation allowance of the same amount.
New Accounting Pronouncements
On August 16, 2001, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standards (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 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 financial statements.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145). SFAS 145 will require gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under
Statement of Financial Accounting Standards No. 4 (SFAS 4). Extraordinary
28
treatment will be required for certain extinguishments as provided in APB
Opinion No. 30. SFAS 145 also amends Statement of Financial Accounting Standards
No. 13 to require certain modifications to capital leases be treated as a
sale-leaseback and modifies the accounting for sub-leases when the original
lessee remains a secondary obligor (or guarantor). SFAS 145 is effective for
financial statements issued after May 15, 2002, and with respect to the impact
of the reporting requirements of changes made to SFAS 4 for fiscal years
beginning after May 15, 2002. The adoption of the applicable provisions of SFAS
145 did not have an effect on our financial statements.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 nullifies Emerging Issues
Task Force Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 applies to costs associated with
an exit activity that does not involve an entity newly acquired in a business
combination or with a disposal activity covered by SFAS 144. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002, with earlier application encouraged. We are currently reviewing SFAS 146
and intend to implement it in January 2004.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions-An Amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. SFAS No. 147 is an industry specific standard and is not
applicable to us; therefore, it will not have an impact on our results of
operations or financial position.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions in
SFAS No. 123 and Accounting Principles Board Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. We adopted the interim financial
reporting for interim periods beginning after December 15, 2002. The adoption of
SFAS No. 148 did not have a material impact on our results of operations or
financial position.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, which addresses the consolidation
of business enterprises (variable interest entities), to which the usual
condition of consolidation, a controlling financial interest, does not apply.
FIN 46 requires an entity to assess its business relationships to determine if
they are variable interest entities. As defined in FIN 46, variable interests
are contractual, ownership or other interests in an entity that change with
changes in the entity's net asset value. Variable interests in an entity may
arise from financial instruments, service contracts, guarantees, leases or other
arrangements with the variable interest entity. An entity that will absorb a
majority of the variable interest entity's expected losses or expected residual
returns, as defined in FIN 46, is considered the primary beneficiary of the
variable interest entity. The primary beneficiary must include the variable
interest entity's assets, liabilities and results of operations in its financial
statements. FIN 46 is immediately effective for all variable interest entities
created after January 31, 2003. For variable interest entities created prior to
this date, the provisions of FIN 46 were originally required to be applied no
later than our first quarter of Fiscal 2004. On October 8, 2003, the FASB issued
FASB Staff Position (FSP) FIN 46-6, Effective Date of FASB Interpretation No.
46, Consolidation of Variable Interest Entities. The FSP provides a limited
29
deferral (until the end of our second quarter of 2004) of the effective date of
FIN 46 for certain interests of a public entity in a variable interest entity or
a potential variable interest entity. We will continue to evaluate FIN 46, but
due to the complex nature of the analysis required by FIN 46, we have not
determined the impact on our results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, this Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
and when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. We adopted this standard for contracts
entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did
not have a material impact on our results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement requires certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity to be classified
as liabilities. We adopted this standard for financial instruments entered into
or modified after May 31, 2003. The adoption of SFAS No. 150 did not have a
material impact on our results of operations or financial position.
In December 2003, the FASB issued a revised FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities"(FIN 46R), which clarifies how a
business enterprise should evaluate whether it has a controlling interest in an
entity through means other than voting rights and accordingly should consolidate
the entity. FIN46R replaces FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" which was issued in January 2003. The application of
the requirements of FIN 46R did not have any impact on the Company's financial
position or result of operations as the Company does not have any variable
interests in variable interest entities.
30
DESCRIPTION OF BUSINESS
Organization
General
We are a development stage technology company that is committed to
continued development and marketing of innovative, high, quality, cost effective
systems to build future ongoing revenue streams. We are currently, and intend to
remain a technology company. We have developed proprietary technologies that
reduce bandwidth requirements for numerous applications of digital content. We
are currently using advanced proprietary technologies to transmit streaming
video at speeds of 1Mbps or less. We have the technological capacity to enter
into a variety of markets that include hospitality, healthcare, residential,
security and corporate training with currently developed technologies.
To date we have been focused on the acquisition and development of our
proprietary technologies. Our current business strategy is to continue with
development of additional technologies as well as enhancements to our current
proprietary technologies to further enable their use in other markets. We also
intend to actively market our first product, the Videolocity Digital
Entertainment System(TM) (DES(TM)) in the hospitality, healthcare, residential,
and other similar markets in both wired and wireless applications. Although we
use the word international in our name, we are not currently operating outside
the U.S., except for limited marketing activities in Canada, Mexico and the
Caribbean. However, as we expand operations we fully intend to operate and
market our products wherever prudent, including internationally. We operate our
business through five subsidiaries that perform various functions strategic to
their market place or core competency.
We have started to actively market our Digital Entertainment System(TM)
(DES(TM)). DES(TM) is a complete digital entertainment system using our
proprietary technologies to deliver video on demand streaming at 1Mbps or less,
full screen, in like DVD quality. In addition to video content viewing, DES(TM)
provides high-speed Internet access, digital music on demand, games, full Web
surfing and a variety of e-commerce applications as well as customer specific
informational and educational content. The Videolocity DES(TM) can be deployed
in closed network environments such as hotels, timeshare condominiums,
hospitals, and assisted living facilities, or over wide area networks serving
intelligent communities, residences and personal digital assistants (PDAs). The
Videolocity DES(TM) is currently available using Wireless 802.11 WAN/LAN, Fiber,
Satellite, Ethernet or DSL network architectures. We tailor the user interface
and content offering specifically to each market segment and to each customer
within that market segment. Our overall delivery system design, hardware
components and software applications remain identical, or only slightly modified
to accommodate larger user bases and/or infrastructures. This gives us the
ability to customize the feature settings and tailor the local content offering
to the specific audiences for each market segment.
We are capable of providing a wireless system and also offer a parallel
system over wire using fiber architectures. Our DES(TM) is available on either a
Microsoft or Linux operating system in a stand-alone set top box. The flexible,
highly customizable and fully scalable delivery platforms combined with advanced
embedded software applications allow for full remote system upgrades and easy
updates of content and/or system enhancements. Our DES(TM) permits viewers to
select from an extensive library of movie titles, informational/educational
content and view their selections on their television screens, lap top computers
or PDAs. Content is owned by third parties, such as movie studios, and will be
paid for on a revenue share basis when DES(TM) is deployed and operating
commercially. 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. We have started deploying our DES(TM) into signed contracts.
31
Business Developments
During 2001, we developed a Digital Entertainment SystemTM that
delivers true video-on-demand streaming at 1Mbps or less achieving near DVD
quality over Ethernet, DSL, or Wireless WAN and LAN network architectures.
DES(TM) is a total system for the delivery of specific digital content,
including video, application specific information and educational material to
individuals, residents, hotel guests, and also patients and attendants in the
healthcare industry. We offer streaming video-on-demand technologies that permit
viewers to select from an extensive library of movie titles and
informational/educational content. Users can view their selections on their
television screens, on-demand.
DES(TM) is designed to play videos 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 the unauthorized digital reproduction or rebroadcast of the ordered
movies and/or other content. Movies and content are streamed through a
proprietary, multi-functional DES(TM). Additionally, the system provides digital
music-on-demand, Internet games, high-speed Internet access and many other
e-commerce applications.
DES(TM) is ready for immediate deployment, although we need to obtain
capital, either long-term debt or equity, to continue the implementation of our
overall business plan. As of the date hereof, we have no assurance that we will
be able to obtain the capital necessary to continue operations, enabling us to
continue the execution of our business plan.
Patents
Videolocity Technologies, Inc., our wholly owned subsidiary, holds five
(5) Provisional Patent Applications and one Utility Patent Application
encompassing and protecting our proprietary technology that we developed during
2001 and 2002.
o Videolocity's Digital Entertainment Solution Application No.
60/297,79 Filed: June 14, 2001 - Assignment Date: August 24, 2001
Utility Patent Application No. 10/172, 175 Utility Patent Filed:
June 13, 2002 - Assignment Date: June 13, 2002
o Videolocity's Video Encoding & Compression Process Application No.
60/336,703 Filed: December 7, 2001 - Assignment Date: January 12,
2002
o Videolocity's Graphical User Interface Application No. 60/336,701
Filed: December 7, 2001 - Assignment Date: January 12, 2002
o Videolocity's Embedded Software Image Application No. 60/336,702
Filed: December 7, 2001 - Assignment Date: January 12, 2002
o Videolocity's Proprietary PCI Video Card Application No.
60/338,773 Filed: December 4, 2001 - Assignment Date: January 12,
2002
o Videolocity's Linux Solution Application filed No. 60/370,663
Filed: April 8, 2002 - Assignment Date: May 24,2002
Please Note: A provisional application for patent is a U.S. national
application for patent that allows for filing without a formal patent claim,
oath or declaration, or any information disclosure statement. It provides the
32
means to establish an early effective filing date and allows the term "patent
pending" to be applied. A provisional application lasts for 12 months from the
filing date and cannot be extended. In order to benefit from the earlier filing
date, we must file a corresponding non-provisional application for patent during
the 12- month period.
Strategic Partnerships/Suppliers
To date, we have engineered all components of our DES(TM). We have also
arranged for all sourcing and outsourcing of components including coding of
software, manufacturing of component equipment, assembly, testing and shipping.
All supplies are available and ready for shipment for US based installation. Our
selected manufacturers and assemblers are ready to produce, assemble, test and
ship all products. We do not anticipate significant delays or back orders. Our
selected manufacturers have shipped the equipment necessary to install our first
two properties under contract and we are currently installing the equipment into
our first property and are making the arrangements to begin installing our
second property.
Marketing
Our initial marketing effort is focused on hotels, hospitals, long-term
care homes, retirement centers as well as universities, resorts, multi-dwelling
units/timeshares and planned residential communities in the U.S. We are using
existing channels to pursue the hospitality and healthcare markets. We also
intend to pursue strategic alliances and partnerships with network and 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.
To date we have marketed our products to the hospitality and healthcare
industries as well as some telecommunications companies and cable TV companies.
Marketing efforts have been limited to North America and the Caribbean. Our
marketing includes live demonstrations on site and presentations at conference
and trade show exhibits. We have budgeted approximately $310,000 for marketing
expenses including personnel, which will provide for our marketing efforts for
the next year.
Competition/Industry Overview
We believe that the market for our products represents a combination of
several large existing and rapidly expanding target areas. Broadband delivery
into hotels, resorts, retirement homes, universities, hospitals, extended stay
33
facilities and residential communities enables us to deliver content to many
diverse market segments. For example, according to USA Today, there is
approximately an $8.2 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 Videolocity does 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 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.
While competition for high-end large-scale hospitality properties is
significant for both video-on-demand systems and in-room broadband access, 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. according to the American
Hotel & Motel Association.
Because our cost for deployment is far less on a per location basis
than other existing technologies, we believe we are ideally suited for the
mid-range and low-range markets. Present competition mainly comes from cable TV
or satellite pay-per-view services that currently lack the ability to provide
true video-on-demand, broadband access or easily navigated Internet access.
Competition in the hospitality sector comes mainly from LodgeNet, On-Command and
Hospitality Networks. According to published information from their respective
websites, On-Command currently has more than 1,000,000 hotel rooms worldwide.
Both companies are deploying systems that use high bandwidth formats while
Videolocity uses a more efficient format. The Videolocity DES(TM) is more
efficient as it uses a higher compression algorithm that requires less bandwidth
and storage space to provide the same or greater quality. This type of system is
readily available for purchase and represents the main technology of the
competition to our DES(TM). 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 $35,000-45,000. Our pricing
advantage is based on using commercially available servers using our
software-based technologies versus having to deploy expensive proprietary
hardware based server systems. Additionally, our higher compression ratios
reduce storage requirements with the higher compression algorithm.
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. We intend to 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 ;
34
* video stores, supermarkets, mass merchandisers, club stores, and
other retail outlets that sell video cassettes;
* providers of web-based video such as Net Flix, Movie Beam,
CinemaNow, and Movie Link
* movie theaters, live theater, sporting events, and other similar
businesses that compete for the general public's entertainment
dollar.
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 or are currently doing so.
Several major movie studios have also announced their intention to or have
started to test market systems for the delivery of movies directly to consumers.
This 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, or that new technology will not emerge
that renders our technology obsolete.
Backlog
To date, Videolocity has secured three contracts to install our DES(TM)
with several other properties reviewing contracts. On October 18, 2002 we signed
an agreement with Western States Lodging which will encompass three hotels and
approximately 255 rooms. On November 13, 2002 we signed an agreement with Hotel
Park City that includes 54 suites. On December 9, 2002 we signed an agreement
with Hotel San Remo Casino & Resort in Las Vegas, Nevada that will total
approximately 713 rooms. The terms of each of the contracts are similar
including five-year terms, installation of our DES(TM), providing content
including Internet, and maintenance during the term of the contract.
The equipment necessary to deploy our DES(TM) into the Hotel Park City
and the Hotel San Remo Casino & Resort has been received by the Company. To
date, we have installed high-speed Internet access into the 54 suites at the
Hotel Park City and have begun completing installation at the Hotel San Remo.We
anticipate beginning to install DES(TM) into individual rooms at the Hotel Park
City during the third quarter of our 2004 fiscal year with both systems becoming
operational during our third quarter of 2004.
Regulation
We are not required to obtain any government approval as a condition to
marketing our video-on-demand systems. However, such systems are required to
operate in compliance with applicable regulations of the Federal Communications
Commission and the set-top boxes used in connection with such systems may
require approval from Underwriters' Laboratories. We intend to operate in the
unlicensed spectrum and will not need FCC licensing to deploy our DES(TM). To
date, all our hardware components have been FCC approved for intended use. 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. 35
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 to
facilitate the engineering and technical development of our DES(TM) and beta
testing it, both wired and wireless, at our facilities in Park City, Utah.
Historical Information
We originally organized as a Nevada corporation on November 5, 1985 as
Pine View Technologies, Inc. In 1987, we completed a public offering of
3,965,610 shares of common stock at an offering price of $0.033 per share, from
which we realized net proceeds of approximately $103,000. On December 4, 2000,
Videolocity International, Inc. (formerly Pine View Technologies, Inc.) acquired
Videolocity, Inc., a Nevada corporation, pursuant to an Agreement and Plan of
Reorganization dated as of November 15, 2000. In connection with the
transaction, we issued 3,028,076 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 conducted subject to the
completion of the acquisition and was closed immediately following the
transaction. As a result of the acquisition, we had a total of 4,278,686 shares
of common stock issued and outstanding, of which 640,610 shares, or
approximately 15%, were held by our shareholders prior to the merger, 3,028,076
shares, or approximately 71%, were held by former shareholders of Videolocity,
Inc., and 610,000 shares, or approximately 14%, were held by purchasers in the
private placement. At the closing of the acquisition, the former management of
Videolocity (formerly Pine View Technologies, Inc.) resigned and the persons
nominated by Videolocity, Inc. were elected as the new directors of Videolocity
International, Inc. The transaction was recorded as a recapitalization with
Videolocity International, Inc. being the legal survivor and Videolocity Inc.
being the accounting survivor. Videolocity, Inc., the accounting survivor, was
organized under the name Moviesonline, Inc on May 26, 2000 for the purpose of
developing and marketing systems for the delivery of video and other content to
end users on demand. Prior to our acquisition, Videolocity Inc. conducted
research in the video-on-demand industry, developed a business plan, assembled
an experienced management team, acquired rights to proprietary technology.
On December 1, 2000, we completed a reverse stock split of our issued
and outstanding shares on a 0.61 share for one share basis. On March 1, 2002
Videolocity completed a reverse common stock split of one share for ten
outstanding shares. All financial information in this report has been completed
showing after stock split shares from inception. In connection with the
reorganization, we adopted Videolocity Inc.'s stock incentive plan and reserved
1,000,000 shares of its common stock for issuance in connection with awards made
under the plan to key employees and consultants. We also amended and restated
our articles of incorporation to make the following changes:
* change our corporate name from Pine View Technologies, Inc. to
Videolocity International, Inc.;
* increase our authorized capitalization to 125,000,000 shares of
common stock, par value $0.001, and 10,000,000 shares of preferred
stock, par value $0.001;
* limit the liability of our directors and officers to the maximum
extent permitted by Nevada law; and
* other miscellaneous items.
We also adopted an omnibus stock option and stock award plan pertaining
to 500,000 shares of our common stock. The reorganization and related proposals
were approved by the written consent of shareholders holding a majority of our
issued and outstanding shares of common stock.
36
On July 1, 2002 we amended our articles of incorporation decreasing our
authorized capitalization to 50,000,000 shares of common stock, par value
$0.001, and 1,000,000 shares of preferred stock, par value $0.001.
Significant Events
Contracts
To date, Videolocity has secured three contracts to install our DES(TM)
with several other properties reviewing contracts. On October 18, 2002 we signed
an agreement with Western States Lodging which will encompass three hotels and
approximately 255 rooms. On November 13, 2002 we signed an agreement with Hotel
Park City that includes 54 suites. On December 9, 2002 we signed an agreement
with Hotel San Remo Casino & Resort that will total approximately 713 rooms. We
have begun the installation at the Hotel San Remo and to date, we have installed
high-speed Internet access into the 54 suites at the Hotel Park City.
UCC-1 And Secured Notes
On April 30, 2002 the Company filed a UCC-1 financing statement, with
the state of Nevada, on six Provisional Patent applications held in the name of
Videolocity Technologies, Inc. in favor of certain promissory note holders
totaling $1,500,000 including $235,000 to current Board of Director members
Larry McNeill ($135,000) and Bennie L. Williams ($100,000). During the three
months ended April 30, 2004, the Company converted a total of $535,000 of notes
payable under the UCC-1 into common stock of the Company including the note
payable to Mr. McNeill ($135,000). As of April 30, 2004 there remains a total of
$965,000 of notes payable under the UCC-1. The notes payable under the UCC-1
have maturities as follows: $20,000 matured during October 2002, $435,000
matured during November 2002, $30,000 matured during January 2003 and $480,000
matured during August 2003.
On February 6th, 2003 Videolocity received a formal notice of default
from ISOZ, LC regarding the $215,000 secured note payable to ISOZ, LC.
Other Notes
At April 30, 2004 the Company has notes payable totaling
$1,629,800,including the $965,000 under the UCC-1 noted above,due to various
individuals and companies including $125,000 to current related parties
including Board of Directors and Management. Of the total, $1,264,800 is written
at 8 percent simple interest and $365,000 has no stated interest rate. Interest
has been imputed from the date of issuance on all non-interest bearing notes
payable. Of the total notes payable $592,800 is convertible at the option of the
debt holder in the following amounts: $177,800 is convertible at $1.00 per
share, $85,000 is convertible at $0.30 per share, $80,000 is convertible at
$0.25 per share, $65,000 is convertible at $0.22 per share, $125,000 is
convertible at $0.20 per share, $60,000 is convertible at $0.15 per share. The
notes payable have maturities as follows: $20,000 matured during October 2002,
$435,000 matured during November 2002, $30,000 matured during January 2003,
$729,800 matured during August 2003, $25,000 matured during November 2003,
$290,000 is callable on demand when the Company has secured between $2 million
and $5 million in new debt or equity funding and $100,000 has no set maturity
and is payable until paid in full
The Company originated approximately $200,000 in convertible
non-interest bearing notes payable during the six months ended April 30, 2004.
Of the total, $80,000 is convertible at $0.25 and $120,000 is convertible at
$0.30 which was the fair market value at the dates of origination. During the
quarter ended April 30, 2004 the Company converted $1,370,000 of existing notes
payable to common stock.
37
Videolocity originated approximately $950,000 in non-interest bearing
notes payable during the year ended October 31, 2003 with $750,000 of the total
being convertible at the option of the debt holder. The conversion amount was
less than the market price of the stock on the date of issuance for $400,000 of
the notes payable and was convertible from the date of issuance which results in
a beneficial conversion feature. The beneficial conversion feature was recorded
as an additional non-cash charge to interest expense and was recognized in the
period when the debt became convertible. For the year ended October 31, 2003 the
beneficial conversion feature resulted in an increase of interest expense of
$120,000. The $950,000 was borrowed from the following individuals/entities:
$600,000 of the $950,000 total was borrowed from Kirsten Bringhurst-Cysewski
with $250,000 due upon demand when we have received a minimum of $5 million in
debt or equity funding, $75,000 is payable on demand after December 2003,
$175,000 is payable on demand after June 5, 2004, and $100,000 has no maturity
date and is payable until paid in full. The $600,000 in notes payable have the
following additional terms: 1) granted an option to purchase 302,000 shares of
Videolocity common stock at $0.20 per share which expires when all amounts owed
are paid in full and 2) $500,000 is convertible at $0.20 per share until paid in
full and $100,000 is convertible at $0.25 per share until paid in full and 3)
3.0 % of all future net revenues, in lieu of payment to sales agent, of all
Hospitality, Healthcare, Convention, Education, Assisted Living and Timeshare
properties contracted by Videolocity within the States of Nevada, Idaho,
Montana, and Washington. $100,000 of the $950,000 total was received from WAJ
Enterprises, LLC, which was due during June 2003, $95,000 of the $950,000 total
was received from the D.W. Doc Weiner Revocable Trust, $25,000 of which was due
during November 2003 and $70,000 of which is due on demand when we have received
a minimum of five million in debt or equity funding. The $95,000 in notes
payable have the following additional terms: $50,000 is convertible at $0.22 per
share, $25,000 is convertible at $0.20 per share and $20,000 is convertible at
$0.15 per share. $85,000 of the $950,000 total was received from Andrew
Zimmerman, of which $50,000 was due during August 2003 or within five days of
one million in new funding, and $35,000 is due on demand when we have received a
minimum of five million in debt or equity funding. The $85,000 in notes payable
have the following additional terms: 1)1.0 % of the net revenues of the first
5,000 time share units installed. $50,000 of the $950,000 total was received
from Kevin M. Kelly with an option to purchase 40,000 shares at $0.15 until paid
and was due during November 2003, and $20,000 of the $950,000 total was received
from Colleen O'Callaghan Miele which is due on demand when we have received a
minimum of five million in debt or equity funding and is convertible at $0.15
until paid in full.
During the year ended October 31, 2002 we borrowed approximately
$1,455,000 from 23 individuals and/or companies represented by notes payable
bearing 8% simple interest. $450,000 of the total borrowed during the year was
included in the UCC-1 filing noted above.
Of the total borrowed during 2002, $562,800 was convertible into stock
at the option of the debt holder as follows: $412,800 was convertible at $1.00
per share and $150,000 was convertible at $0.20 per share. The conversion amount
was less than the market price of the stock on the date of issuance and was
convertible from the date of issuance which resulted in a beneficial conversion
feature. The beneficial conversion feature was recorded as an additional noncash
charge to interest expense and was recognized in the period when the debt became
convertible. For the year ended October 31, 2002 the beneficial conversion
feature resulted in an increase to interest expense of $303,900. During 2002,
approximately $355,000 of the original amounts that were convertible at $1.00
per share were converted to common stock and $55,000 of the original amount was
converted into 55,000 shares of Healthcare Concierge stock leaving a total of
approximately $207,800 that remains convertible.
38
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. At the time of the acquisition, we believed we were
acquiring three (3) Provisional Patent Applications representing exclusive
proprietary technologies that were ready to deploy. However, subsequently we
learned that 5th Digit did not own the Provisional Patent Applications. As a
result, we filed a lawsuit alleging fraud and misrepresentation. Three of the
individuals originally comprising 5th Digit ownership, settled with us in an
exchange of their Series "A" Preferred shares for common shares of Videolocity.
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 determined
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.
Subsequently the decision of the Third Judicial District Court was set
aside. On March 15, 2004, we signed a settlement agreement which includes the
issuance of 80,000 shares of common stock and payments totaling $70,000 payable
as follows: $10,000 at execution of the agreement and $5,000 per month beginning
May 1, 2004 and continuing until paid in full.
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 Studios was transferred by mutual agreement to our subsidiary
Healthcare Concierge, Inc. The License Agreement guaranteed a completed
"Wormhole" video technology on or before April 30, 2001.
On May 29, 2001 Healthcare Concierge, Inc. acquired a second "Wormhole"
license from Merit Studios for the "packing" of all data. We paid Merit Studios
and/or expended a total of approximately $600,000 intending to commercialize the
promised technology. This promised deployable "Wormhole" technology was never
demonstrated or received by Healthcare Concierge, Inc. After many months of
delay and the inability to prove the marketability of the Merit "Wormhole"
technology; Merit Studios agreed to repurchase the two "Wormhole" licenses
through the payment of $600,000 on or before March 1, 2002. Upon full payment
and receipt of the $600,000 by Videolocity, we agreed to return any and all
rights under the two "Wormhole" License Agreements.
We have had no assurance that Merit Studios would be able to fulfill
the cash obligation of $600,000 under its license repurchase agreement. However,
because of the original and continued representations as to the accuracy
concerning the "Wormhole" capabilities and the deployment dates of the
"Wormhole" technology by Merit Studios to our Company, we have aggressively
pursued the collection of the total amount due under the contract. To that end
we filed a lawsuit for the collection of the $600,000. The successful recovery
of the $600,000 will repay those sums we expended to Merit Studios and for the
"Wormhole" technology.
During June 2003 we received notification of a summary judgment from
the Third District Court of Salt Lake County. The Court ordered that judgment be
entered in our favor totaling approximately $673,000 which includes the original
note receivable plus accrued interest to date and some other small amounts. It
was further ordered that the judgment shall be augmented in the amount of
reasonable costs and attorney's fees in collecting the judgment. We are
currently working with our legal counsel pursuing collection of the judgment.
39
Greenwood Technology Group
In October 2001 we entered into an agreement with The Greenwood
Technology Group, Potomac, Maryland, 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 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. 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 were intended to retire any and all outstanding payables and
outstanding notes and, together with other funding, would finance future
operations.
From December 2001 through June 2002, Greenwood provided an aggregate
of $462,800 of the initial bridge loan. Under the terms of the loan, we agreed
to the principal plus 8% interest on or before October 1, 2002. Greenwood did
not fulfill its total commitment and we have agreed to mutually terminate the
letter of intent. Of the total provided by Greenwood, approximately $230,000 has
converted to Videolocity common stock and $55,000 converted to Healthcare
Concierge stock. The remaining notes payable to Greenwood Technologies total
$177,800 and have been extended through January 2003. To date, this note remains
outstanding.
Employees
We presently have five full-time employees and frequently outsource
projects to individual consultants as well as various consulting companies to
complete projects for the Company. We anticipate hiring 2-3 engineers and 1-2
administrative support staff over the next several months. We do not anticipate
a need to hire additional high-level employees for the next several months. We
do not anticipate that our employees will be represented by unions and consider
our relationship with our employees to be good.
During December 2004, the Board of Directors approved new employment
agreements for all officers that provide for payment of a base salary, options
under an executive stock incentive program, and also contains other customary
provisions such as vacation, medical insurance and provisions for bonuses.
Each of the above-described employment agreements are specific to the
individual's agreement but typically include the following uniform terms:
Term: The term of each of the agreements is three years.
Non-Compete: During the term of the agreements the employee agrees 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.
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.
40
Change of Control: In the event of a change of control including
beneficial ownership 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;
* severance amounting to one to two years' salary, depending on
officer;
* 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;
* 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.
Description Of Property
Our technical, marketing, and corporate offices are located at 1762 A
Prospector Avenue, Park City, Utah 84060, our telephone number is (435) 615-8338
and our fax number is (435) 615-9979. Our mailing address is PO Box 1929, Sandy,
Utah 84091-1929. The Park City offices consist of approximately 2800 square
feet. The office space was leased under a contract at $4,000 per month that
expired December 2002. We are currently renting the Park City office on a month
to month basis and evaluating the need for additional space. We may relocate our
office in the near future. The Salt Lake City and Park City areas have an
abundance of available office space and we do not anticipate that a relocation
of our office will increase our monthly costs substantially.
Legal Proceedings
During December 2000 we issued 950,000 shares of preferred stock for
the purchase of 5th Digit Technologies, LLC. During 2002, we exchanged 180,000
shares of our common stock for 600,000 shares of the preferred stock. 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 determined
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.
Subsequently, the decision of the Third Judicial District Court was set aside.
On March 15, 2004, we reached a settlement agreement which includes our issuing
80,000 shares of common stock and payments totaling $70,000 payable as follows:
$10,000 at execution of the agreement and $5,000 per month beginning May 1, 2004
and continuing until paid in full.
41
In January 2002 Videolocity filed a legal action in the Third Judicial
District Court of Salt Lake County, Utah against the holder of 350,000 shares of
Series "A" Preferred stock, together with certain other persons, asking the
court to cancel the remaining 350,000 shares outstanding from the 5th Digit
Technologies, LLC acquisition. The suit alleges misrepresentation of the
technology which induced the acquisition by Videolocity of 5th Digit
Technologies, LLC.
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 determined
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.
Subsequently, the decision of the Third Judicial District Court was set
aside. On March 15, 2004, we signed a settlement agreement which includes the
issuance of 80,000 shares of common stock and payments totaling $70,000 payable
as follows: $10,000 at execution of the agreement and $5,000 per month beginning
May 1, 2004 and continuing until paid in full.
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 the reconveyance to Merit Studios of two
license agreements. In June 2003, the Court issued a summary judgment in our
favor for approximately $673,000, which includes the original note receivable
plus accrued interest to date. The judgment will also be augmented in the amount
of reasonable costs and attorney's fees related to the collection of the
judgment.
On June 2, 2003, Videolocity signed a 10% simple interest promissory
note with an unrelated privately held company where the privately held company
was to provide $5,000,000 in operating funds to Videolocity. The terms of the
note provided that we pay a 2% fee totaling $100,000 for arranging the loan.
Terms of repayment included interest on a quarterly basis and the balance of the
note at the end of thirty-six months. Additionally, the privately held company
would receive one seat on the board of directors until such time as the
promissory note was paid in full. After weeks of delays and promises regarding
funding, the privately held company signed an addendum to the original note
promising funding of the note by September 19, 2003. When the funding was not
met according to the addendum, the privately held company signed a second
addendum promising funding of the note by November 10, 2003. After months of
delays, and the privately held company not fulfilling the terms of the original
agreement and/or the signed addendums Videolocity filed a multi count civil
complaint against the privately held company. The privately held company filed a
motion with the Court to dismiss the complaints filed by us. This motion to
dismiss was denied by the Court on March 12, 2004.
42
MANAGEMENT
Officers And Directors
The following table sets forth the names, ages, and titles of each of
our directors and executive officers and employees expected to make a
significant contribution to Videolocity.
Name Age Title
- ---- --- -----
Dan Driscoll 46 Director
Robert E. Holt 39 President / CEO / Director
Larry R. McNeill 62 Director
Cortney L. Taylor 42 CFO / Secretary / Treasurer
Bennie L. Williams 66 Chairman of the Board / Director
The term of office of each director is one year and until his or her
successor is elected at our annual shareholders' meeting and is qualified,
subject to removal by the board of directors and or shareholders.
No director, officer, or affiliate has, within the past five years,
filed any bankruptcy petition, been convicted of or been the subject of any
pending criminal proceedings, or is any such person the subject or any order,
judgment, or decree involving the violation of any state or federal securities
laws.
We have adopted certain provisions in our articles of incorporation
that limit the liability of our officers and directors and provide for
indemnification by us for our officers and directors to the fullest extent
permitted by Nevada law. Such provisions substantially limit the shareholders'
ability to hold officers and directors liable for monetary damages resulting
from breaches of their fiduciary duties.
On September 5, 2002, the board of directors accepted the resignation
of D. T. Norman as a director and secretary/treasurer of Videolocity
International Inc. for personal reasons. Also on September 5, 2002, Dr. James P.
Hill resigned as vice chairman and director of Videolocity, citing time and
travel constraints as his reason. The resignations of Douglas Meadows and Jerry
E. Romney, Jr. as officers and directors were accepted in late 2001 each having
resigned for personal reasons. Robert E. Holt and Dan Driscoll were elected to
fill the vacancies on the board of directors created by the resignations. On
December 31, 2002, Martin Senn resigned as an officer and director of certain of
our subsidiaries.
Effective September 1, 2002, Cortney Taylor became our new chief
financial officer. Mr. Taylor replaces Larry R. McNeill, who resigned as our
CFO. Mr. McNeill remains a director.
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 meetings. 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. Through
April 30, 2004, we have issued compensation shares totaling 325,000 under our
2002 Stock Incentive and Stock Award Plan and have issued a total of 1,900,000
options at the market value on the date of grant to our directors for past
service.
43
Certain biographical information of our directors and officers is set
forth below.
Dan Driscoll. Mr. Driscoll became a director in January 2002. Mr.
Driscoll was a Senior VP of Business Development of the Wireless Division of
CommScope, Inc. The CommScope Wireless Division was created in 1997; and Mr.
Driscoll was a part of the sales and business development of that division since
1998. 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 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.
Robert E. Holt. Mr. Holt joined Videolocity as President, CEO, and a
Director in January 2002. Mr. Holt acted until January 2002 as Chief Operating
Officer of Greenwood Technology Group. From December 2001 through June 2002,
Greenwood provided certain funding to Videolocity. Mr. Holt is no longer
affiliated with Greenwood. Prior to joining Greenwood Technology Group, Mr. Holt
held a variety of positions with high-tech companies including Qualcomm Inc.
from May 1997 to September 2001, where he was head of the Wireless Campus Group,
overseeing product development, marketing, and technology introduction. Mr. Holt
served as a Director of Qualcomm Ventures and Wireless Infrastructure Products
Division. He has 10 years with 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. Mr. McNeill became a director in December 2000. From
October 1998 to February 2004, Mr. McNeill was the Chief Financial Officer of
Theatre Candy Distributing Company, Inc. of Salt Lake City, Utah. In February
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. Mr. McNeill is a director of
Theatre Candy Distributing Company, Inc.; American Polymer Corp.; Water and
Wellness Centers 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. Effective September 1, 2002,
Mr. McNeill resigned as our CFO, but remained as a director. He also resigned as
CFO of Videolocity, Inc., Healthcare Concierge, Inc., Hospitality Concierge,
Inc. and Videolocity Technologies, Inc.
Cortney L. Taylor. Mr. Taylor became our new Chief Financial Officer
effective September 1, 2002. Mr. Taylor is a CPA, a member of the UACPA and
AICPA, and has served as a member of the Utah State University, School of
Accountancy Advisory Board and on the UACPA Accounting Issues Committee. From
November 1994 to August 2002, he was employed in the Utah offices of Grant
Thornton, LLP serving as an assurance senior manager in his last position with
that firm. Mr. Taylor holds B.S. in Accounting and Masters of Accounting degrees
from Utah State University.
44
Bennie L. Williams. Mr. Williams was appointed Chairman and a director
in June 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 1970 to 1987, he was Vice President of 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, a
sole proprietorship named Business Idea Company of America, which was an
investment portfolio management firm that also provided marketing, advertising
and consulting services to select clients. Business Idea Company became inactive
in the fourth quarter of 2001 and never had any business relationship with
Videolocity. 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.
Committees Of The Board Of Directors
We do not currently have an audit committee and as a result our entire
board of directors performs the duties of an audit committee. Our board of
directors will approve in advance the scope and cost of the engagement of an
auditor before the auditor renders audit and non-audit services. The board of
directors is also responsible for 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 deem
appropriate. As a result, we do not rely on pre-approval policies and
procedures.
Executive Compensation
Presently, we do not have any retirement, pension, profit sharing, or
insurance plans covering officers or directors. Also, we do not currently
compensate directors for serving in their capacities as directors, but do
reimburse such persons for expenses reasonably incurred by them in connection
with company business.
Summary Compensation Table
--------------------------
Other Annual Restricted All Other
Name and Principal Position Year Salary Bonus Compensation Stock Award Compensation
- --------------------------- ---- ------ ----- ------------ ----------- ------------
Robert E. Holt, CEO,
President, Director 2003 $240,000* $ -- $ -- $ -- $ --
Robert E. Holt, CEO,
President, Director 2002 $190,000 $ -- $ -- $ -- $ --
Martin P. Senn, Former COO
Videolocity, Inc. 2002 $141,000 $ -- $ -- $ -- $ --
* Salary for FY 2003, $120,000 of which was paid during FY 2003 with
$120,000 being accrued at October 31, 2003. As of July 6, 2004 this
amount remains accrued.
45
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option/SAR Values
Number Of Securities Underlying Value Of Unexercised
Shares Unexercised Options/SARs In-The-Money Options/SARs
Acquired On Value At FY-End At FY-End
Name And Exercise Realized (#) ($)
Principal Position (#) ($) Exercisable/ Unexercisable Exercisable/ Unexercisable
- ------------------ ----------- --------- ------------ ------------- ------------ -------------
Robert E. Holt 25,000 $5,750 -/ 47,500 -/ $11,900
CEO, President,
Director
On December 31, 2002 Martin P. Senn resigned as an officer, director
and employee of Videolocity International Inc. and/or any of its subsidiaries
and subsequently was hired as a consultant to Videolocity, Inc. continuing
through the beginning of March 2003.
Stock Incentive Plans
The Videolocity, Inc. 2000 Stock Incentive Plan was adopted in
connection with the acquisition of Videolocity, Inc. A total of 1,000,000 shares
of common stock are reserved for issuance under the plan. Plan awards with
respect to 980,784 shares have been made to date. . Through April 30, 2004 ,
plan awards that have vested and converted to stock total 906,484 shares and
plan awards subject to vesting requirements total 74,300 shares. As of April 30,
2004, plan awards with respect to 19,216 shares remain available for issuance
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
common stock on the date the vesting requirements for the plan units have been
satisfied. The shares of common stock to be issued under the plan have been
registered under the Securities Act of 1933. Awards granted to date generally
provide vesting schedules over three years. 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, any
unvested plan awards will vest on the date of such termination. The following
officers, employees and consultants have received a total of 906,484 shares
under the Videolocity Inc 2000 Stock Incentive Plan through April 30, 2004:
Robert E. Holt, Cortney L. Taylor, Mike York, Danny Osorio, Randy Moller, Jay
Muse, Aaron Smith, Shane McNeill, Jerry E. Romney, Jr., Luigi A. DeAngelis,
David M. Smith, Joshua L. Hamer, Wilford T. Lee, Martin P. Senn and Steven
Fogarty.
On March 26, 2002 we adopted an omnibus stock option and stock award
plan. A total of 500,000 shares of common stock are reserved for issuance under
the plan. Through April 30, 2004, 497,855 shares have been approved to be
awarded under the plan. The Stock Option and Stock Award Plan is to be
administered either by the board of directors or by a committee to be appointed
from time to time by the Board. Awards granted under the Stock Option and Stock
Award 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 the Videolocity. In addition, at the discretion of
the Board or the committee, options or bonus stock may be granted to individuals
who are non employees but contribute to the success of Videolocity. All of our
employees, officers, directors and consultants are eligible to participate under
the Stock Option and Stock Award Plan. Through October 31, 2003, we have issued
46
a total of 142,855 to consultants and have issued compensation shares totaling
325,000 under our 2002 Stock Incentive and Stock Award Plan to our directors for
past service rendered in 2000 and 2001. Those current and former directors
receiving shares were:
Robert E. Holt 100,000 shares
Dan Driscoll 100,000 shares
Bennie L. Williams 25,000 shares
Larry R. McNeill 25,000 shares
D. T. Norman (former director) 25,000 shares
James P. Hill (former director) 25,000 shares
Lawrence Turel (former director) 25,000 shares
On December 4, 2003, the board of directors approved a total of 30,000
shares under the plan to consultants of Videolocity. As of April 30, 2004, 2,145
shares remain available for issuance under the Plan.
On December 4, 2003, the board of directors approved a total of
9,200,000 options to employees and Directors that vest according to various
individual schedules. The options were granted at the market price on December
4, 2003.
Number of securities
to be issued upon Weighted average
exercise of outstanding exercise price of Number of securities
options, warrants and outstanding options, remaining available
Plan category rights warrants and rights for future issuance
- ------------------------------------------ ----------------------- -------------------- ---------------------
(a) (b) (c)
Equity compensation plans approved by
security holders 104,300 $ 0.81 21,361
Equity compensation plans not approved by
security holders 9,200,000 $ 0.13 -0-
47
PRINCIPAL STOCKHOLDERS
The following table provides information, to the best of our knowledge
as of July 6, 2004, regarding beneficial ownership of our common stock by:
* each person known to us to own beneficially more than 5% of our
common stock;
* each of the named executive officers;
* each of our directors; and
* all executive officers and directors as a group.
Amount and
Nature of
Beneficial Percent of
Name and Address of Beneficial Owner Ownership Class (1)
- ------------------------------------ ----------- ----------
Principal Shareholders:
Kirsten Bringhurst Cysewski (2) 2,015,000 13.32%
Marvin Erickson 1,000,000 6.61%
WAJ Enterprises LLC 1,800,985 11.91%
Cornell Capital Partners, LP 796,494 5.10%
Officers and Directors(3)
Dan Driscoll 725,122 4.58%
Robert E. Holt 5,020,000 24.92%
Larry McNeill 1,578,067 9.45%
Cortney L. Taylor 1,014,000 6.28%
Bennie L. Williams 1,035,000 6.41%
All Officers and Directors as a Group
(5 persons) as of July 6, 2004 9,372,189 38.26%
- ----------------------
(1) 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 July 6, 2004, 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.
(2) Includes 1,925,000 shares held of record by Kirsten R Bringhurst Living
Trust
(3) The address for each of Videolocity's officers and directors is PO Box
1929, Sandy, Utah 84091.
48
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
Our common stock is quoted on the Over-the-Counter Bulletin Board under
the trading symbol "VCTY." Inclusion on the Over-the-Counter Bulletin Board
permits price quotations for our shares to be published by such service. Prior
to March 2002 our shares traded under the symbol "VIDC" and prior to December
2000, our shares traded under the symbol "PVTC."
The following table sets forth the high and low bid quotations for our
common stock for the preceding two fiscal years ended October 31, 2003 and 2002
and the first two quarters of our current fiscal year. The quotations have been
adjusted to give effect to the .61-for-1 reverse stock split effected December
1, 2000 and the 1 for 10 reverse stock split effected March 1, 2002. Despite the
publication of quotations during such periods, there was no significant trading
volume and there existed no established trading market for our shares.
2004 High Bid Low Bid
---- ------------ ------------
First Quarter ended January 31, 2004 $ 0.21 $ 0.09
Second Quarter ended April 30, 2004 $ 1.18 $ 0.15
2003 High Bid Low Bid
---- ------------ ------------
First Quarter ended January 31, 2003 $ 0.50 $ 0.12
Second Quarter ended April 30, 2003 $ 0.45 $ 0.13
Third Quarter ended July 31, 2003 $ 0.30 $ 0.15
Fourth Quarter ended October 31, 2003 $ 0.51 $ 0.06
2002 High Bid Low Bid
---- ------------ ------------
First Quarter ended January 31, 2002 $ 0.98 $ 0.70
Second Quarter ended April 30, 2002 $ 1.74 $ 0.90
Third Quarter ended July 31, 2002 $ 1.56 $ 0.85
Fourth Quarter ended October 31, 2002 $ 0.90 $ 0.35
The foregoing quotations represent inter-dealer prices without retail
mark-up, mark-down, or commission, and may not represent actual transactions.
As of July 6, 2004, there were 176 holders of record of Videolocity's
common stock, including broker-dealers and clearing firms holding shares on
behalf of their clients, as reported by our transfer agent. This figure does not
take into account those individual shareholders whose certificates are held in
the name of broker-dealers or other nominees.
As of July 6, 2004 we had 15,123,863 shares of common stock issued and
outstanding.
Dividend Policy
We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future.
49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as described herein, there were no material transactions, or
series of similar transactions, during our last two fiscal years, nor are there
any currently proposed transactions, in which we were or are to be a party, in
which the amount involved exceeds $60,000, and in which any director or
executive officer, or any security holder who is known by us to own of record or
beneficially more than 5% of any class of our common stock, or any member of the
immediate family of any of the foregoing persons, has an interest.
The following persons purchased shares of our common stock in the
private placement of 610,000 shares completed on December 4, 2000 immediately
following the acquisition of Videolocity, Inc.: Stephen B. Cluff, a former
officer and director, 12,200 shares; Kirk Schneider, a former greater than 5%
shareholder, 61,000 shares; Mark Schneider, a former 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 $0.164 per share, which was the same price paid by the other
purchasers in the private placement. Noland Schneider provided assistance in
locating an entity (Pine View Technologies, Inc. which was renamed Videolocity
International, Inc during December 2000), to be used in the acquisition of
Videolocity, Inc. and assisted in negotiating the terms of the reorganization,
which was recorded as a recapitalization. Mr. Schneider did not receive any
compensation for such activities.
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
August 1, 2003 and, to date Mr. McNeill converted his note to common stock and
Mr. Williams note has not been paid and is currently past due. During the fiscal
year ended October 31, 2002 we borrowed $125,000 from Dan Driscoll and $25,000
from Robert E. Holt represented by notes payable at 8% simple interest. Dan
Driscoll subsequently converted his loan to 125,000 shares of Videolocity common
stock and, to date, we have not paid off Mr. Holt's note.
As additional consideration for the loans, we issued to Mr. McNeill and
Mr. Williams 67,500 shares and 50,000 shares, respectively, of Healthcare
Concierge, Inc. During 2002, 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 common stock. Also, during 2003, as
consideration for extending the term of his note Mr. McNeill was issued 12,000
shares of Videolocity common stock. A former director, D.T. Norman, through
ISOZ, L.C., a private entity of which she is the manager, also loaned to us in
July 2001 an aggregate of $215,000 pursuant to the secured notes. During the
fiscal year ended October 2002, former director D.T. Norman volunteered on
behalf of ISOZ, L.C. to contribute back to Videolocity a total of 50,000 shares
of common stock to offset some of the additional shares that we had issued as
consideration to acquire certain loans. Ms. Norman is no longer a director of
Videolocity and ISOZ is not otherwise affiliated with Videolocity. All of the
aforementioned notes remain outstanding as of the date hereof.
50
DESCRIPTION OF CAPITAL STOCK
Common Stock
Videolocity is authorized to issue 50,000,000 shares of Common Stock
$0.001 par value, of which 15,123,863 shares were issued and outstanding at July
6, 2004. The securities being offered hereby are common stock, with one vote per
share on all matters to be voted on by shareholders, without any right to
accumulate their votes. Shareholders have no preemptive rights and have no
liability for further calls or assessments on their shares. The shares of common
stock are not subject to repurchase by Videolocity or conversion into any other
security. All outstanding shares of common stock are, and those issued pursuant
to the Standby Equity Distribution Agreement will be fully paid and non
assessable.
Shareholders are entitled to receive such dividends as may be declared
by the board of directors of the Videolocity out of funds legally available
therefore and, upon the liquidation, dissolution or winding up of Videolocity,
are entitled to share ratably in all net assets available for distribution to
such holders after satisfaction of all of our obligations, including stock
preferences. It is not anticipated that we will pay any dividends in the
foreseeable future since we intend to follow the policy of retaining its
earnings to finance the growth of its business. Future dividend policies will
depend upon the Videolocity's earnings, financial needs and other pertinent
factors.
Preferred Stock
Videolocity is authorized to issue 1,000,000 shares of Preferred Stock,
$0.001 par value. The preferred stock may be issued in different series. All
rights and preferences of any series of preferred stock are to be set by the
board of directors upon issue.
The issuance of preferred stock may have the effect of delaying or
preventing a change in control of Videolocity. The issuance of preferred stock
could decrease the amount of earnings and assets available for distribution to
the holders of common stock or could adversely affect the rights and powers,
including voting rights, of the holders of the common stock. As of the date of
this prospectus, no shares of preferred stock will be outstanding and we
currently have no plans to issue any shares of preferred stock.
Compensation Debentures
Videolocity has outstanding convertible compensation debentures, which
were issued in the original principal amount of $390,000. These debentures
accrue interest at a rate of 5% per year and mature three years from the
issuance date. The debentures are convertible at the holder's option any time up
to maturity at a conversion price equal to the lower (i) of two-hundred fifty
percent of the closing bid price on the date of the debentures, or (ii) the
lowest closing bid price of the common stock for the three trading days
immediately preceding the conversion date. At maturity, Videolocity has the
option to either pay the holder the outstanding principal balance and accrued
interest or to convert the debentures into shares of common stock at a
conversion price equal to the lower of (i) two-hundred fifty percent of the
closing bid price on the date of the debentures, or (ii) the lowest closing bid
price of the common stock for the three trading days immediately preceding the
conversion date.
51
Options and Convertible Notes Payable
Videolocity has outstanding options, which were issued for various
purposes, as well as certain notes payable that are convertible into Videolocity
common stock.
Videolocity has 11,012,000 outstanding options to purchase Videolocity
common stock that have been issued to employees, directors, consultants, issued
for services, and issued in conjunction with borrowings/notes payable.
Videolocity has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its employee stock options as allowed under FASB Statement 123,
"Accounting for Stock-Based Compensation". Options issued to non-employees for
services and/or other purposes are being expensed at the more readily
determinable value between the service provided or the value of the option.
Options issued in conjunction with borrowings/notes payable expire upon
repayment of principle to the holders of the notes payable.
Videolocity currently has $592,800 in notes payable that are
convertible into common stock of the Company in the following amounts: $177,800
is convertible at $1.00 per share, $85,000 is convertible at $0.30 per share,
$80,000 is convertible at $0.25 per share, $65,000 is convertible at $0.22 per
share, $125,000 is convertible at $0.20 per share, $60,000 is convertible at
$0.15 per share. The notes are convertible until paid in full.
Videolocity currently has a total of 23,761 shares that remain
available for issuance under stock plans. Under the plans, 74,300 plan units
remain subject to vesting requirements and 30,000 plan units have been approved
but to date have not been issued.
Transfer Agent
The transfer agent for Videolocity common stock is Colonial Stock
Transfer Company. Its address is 60 Exchange Place, Salt Lake City, Utah 84111,
and its telephone number is (801) 355-5740.
Reports To Shareholders
We intend to furnish our shareholders with annual reports which will
describe the nature and scope of our business and operations for the prior year
and will contain a copy of our audited financial statements for its most recent
fiscal year.
Limitation Of Liability: Indemnification
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.
Anti-Takeover Effects Of Provisions Of The Articles Of Incorporation
There are no provisions in our Articles of Incorporation or Bylaws
related to preventing or restricting takeovers, mergers or acquisitions of
Videolocity by another company.
52
EXPERTS
The audited financial statements included in this prospectus and
elsewhere in the registration statement for the fiscal years ended October 31,
2003 and October 31, 2002 have been audited by Madsen & Associates, CPAs, Inc.
The report of Madsen & Associates, CPAs, Inc., is included in this prospectus in
reliance upon the authority of this firm as experts in accounting and auditing.
The report of Madsen & Associates, CPAs, Inc., contained elsewhere in this
prospectus contains an explanatory paragraph regarding its ability to continue
as a going concern.
LEGAL MATTERS
The validity of the shares offered herein will be opined on for us by
the Law Offices of Leonard Nielsen, Attorney-at-Law, Salt Lake City, Utah.
HOW TO GET MORE INFORMATION
We have filed with the Securities and Exchange Commission in
Washington, DC, a registration statement on Form SB-2 under the Securities Act
of 1933 with respect to the shares we are offering. Prior to the effective date
of the registration statement we were not subject to the information
requirements of the Securities Exchange Act of 1934 (the ("Exchange Act"). At
the time of the effectiveness of the registration statement we will become a
"reporting company" and required to file reports pursuant to the provisions of
the Exchange Act. This prospectus does not contain all of the information set
forth in the registration statement, as permitted by the rules and regulations
of the Commission. Reference is hereby made to the registration statement and
exhibits thereto for further information with respect to Videolocity and the
shares to which this prospectus relates. Copies of the registration statement
and other information filed by with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission in Washington,
DC at 450 Fifth Street, NW, Washington, DC 20549. In addition, the Commission
maintains a World Wide Web site that contains reports, proxy statements and
other information regarding registrants such as Videolocity which filed
electronically with the Commission at the following Internet address:
(http:www.sec.gov).
53
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND NOTES
TABLE OF CONTENTS
PAGE
Unaudited Consolidated Condensed Balance Sheet (April 30, 2004) F-2
Unaudited Consolidated Condensed Statement of Operations (April 30, 2004 and April 30, 2003) F-3
Unaudited Consolidated Condensed Statement of Stockholders' Deficit (Six Months Ended April 30, 2004) F-4
Unaudited Consolidated Condensed Statement of Cash Flows (Six Months Ended April 30, 2004) F-6
Notes to Consolidated Financial Statements F-7
Report of Independent Auditors dated March 16, 2004 F-17
Consolidated Balance Sheet (October 31, 2003) (Audited) F-18
Consolidated Statement of Operations (October 31, 2003 and April 30, 2003) (Audited) F-19
Consolidated Statement of Stockholders' Deficit (Six Months Ended October 31, 2003) (Audited) F-20
Consolidated Statement of Cash Flows (Six Months Ended October 31, 2003) (Audited) F-21
Notes to Consolidated Financial Statements F-23
F-1
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
April 30, 2004
ASSETS
CURRENT ASSETS
Cash $ 240,811
Accounts receivable, net of allowance for bad debts of $590,000 10,000
Other assets 184,511
-----------
Total current assets 435,322
PROPERTY AND Equipment, at cost, net 658,221
OTHER ASSETS 23,836
-----------
$ 1,117,379
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 219,487
Accrued liabilities 422,531
Accrued interest payable 203,882
Notes payable - related parties 125,000
Notes payable 1,504,800
Current portion of long term obligations 214,982
-----------
Total current liabilities 2,690,682
Long term obligations less current portion 697,201
MINORITY INTERESTS 4,866
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 50,000,000 shares
authorized, 15,012,952 issued and outstanding $ 15,013
Preferred stock, $0.001 par value; 1,000,000 shares
authorized none outstanding --
Additional paid-in capital 6,284,045
Deficit accumulated during the development stage (8,574,428)
-----------
Total stockholders' deficit (2,275,370)
-----------
$ 1,117,379
===========
The accompanying notes are an integral part of these financial statements.
F-2
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three months ended Six months ended From May 26,
----------------------------- ----------------------------- 2000
April 30, April 30, through
2004 2003 2004 2003 April 30, 2004
----------- ----------- ----------- ----------- -----------
Revenue $ -- $ -- $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
Operating expenses
Salaries, payroll taxes, and
employee benefits 193,727 202,156 464,689 393,473 3,164,874
Professional fees and consultants 28,316 63,029 33,164 124,623 1,097,284
Technology development consulting 29,594 34,258 52,937 92,808 428,411
Directors compensation through
stock plan -- -- -- -- 95,000
Rent 8,000 8,000 24,000 21,000 232,305
Provision for bad debts -- -- -- 149,000 590,000
Travel and conventions 6,108 4,586 6,943 14,991 172,952
Depreciation and amortization 6,323 6,484 12,647 12,647 131,351
Utilities 8,216 2,203 10,659 12,811 79,936
Gain on transfer of license
agreements -- -- -- -- (114,509)
Write off of goodwill -- -- -- -- 958,628
Other 18,581 34,742 20,657 71,109 508,459
----------- ----------- ----------- ----------- -----------
298,865 355,458 625,696 892,462 7,344,691
----------- ----------- ----------- ----------- -----------
Operating loss (298,865) (355,458) (625,696) (892,462) (7,344,691)
Interest income -- -- -- -- 5,578
Legal Settlement (97,400) -- (97,400) -- (97,400)
Gain on sale of stock, net -- -- -- -- 338,049
Interest and beneficial conversion
expense (141,810) (62,216) (197,111) (231,618) (1,401,978)
Expense for stock options on
guarantee (69,120) (69,120) (69,120)
Minority interests -- -- -- -- (4,866)
----------- ----------- ----------- ----------- -----------
Loss before income taxes (607,195) (417,674) (989,327) (1,124,080) (8,574,428)
Income taxes -- -- -- -- --
----------- ----------- ----------- ----------- -----------
NET LOSS $ (607,195) $ (417,674) $ (989,327) $ (1,124,080) $ (8,574,428)
=========== =========== =========== =========== ===========
Loss per common share
Basic and Diluted $(0.06) $(0.07) $(0.13) $(0.19)
Weighted-average common and
dilutive common equivalent shares
outstanding
Basic and Diluted 9,559,225 5,935,208 7,943,015 5,921,868
The accompanying notes are an integral part of these statements.
F-3
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 years ended October 31, 2001, 2002 and 2003
and for the six months ended April 30, 2004
Deficit
Accumulated
Additional during the
Preferred Stock Common Stock 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 --
Issuance of common stock for
acquisition of Videolocity,
Inc -- -- 3,028,076 3,028 386,092 --
Provision for redemption
value of preferred stock -- -- -- -- (3,957,380) --
Issuance of common stock for:
Services -- -- 20,000 20 19,980 --
Cash -- -- 610,000 610 499,390 --
Stock incentive plans -- -- 5,000 5 4,995 --
Bonus interest and extensions
of debt -- -- 15,000 15 74,985 --
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 and cancellation of
preferred stock (950,000) (950) 180,000 180 3,957,380 --
Cancellation of common stock -- -- (50,000) (50) 50 --
Interest expense recognized on
beneficial conversion
feature on notes payable -- -- -- -- 303,900 --
Issuance of common stock for:
Bonus interest and
extensions on debt -- -- 148,500 149 132,493 --
Conversion of debt -- -- 355,000 355 354,645 --
Services -- -- 419,871 419 444,453 --
Stock incentive plans -- -- 504,539 505 453,637 --
Net loss for the year -- -- -- -- -- (3,086,210)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2002 -- -- 5,876,596 5,877 3,709,355 (5,595,611)
Issuance of common stock for:
Bonus interest and
extensions on debt -- -- 335,000 335 82,914 --
Services -- -- 16,000 16 944 --
Stock incentive plans -- -- 119,400 119 169,847 --
Interest expense recognized on
beneficial conversion
feature on notes payable -- -- -- -- 120,000 --
Net loss for the period -- -- -- -- -- (1,989,490)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2003 $ -- $ -- 6,346,996 $ 6,347 $ 4,083,060 $(7,585,101)
(continued)
F-4
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 years ended October 31, 2001,2002 and 2003
and for the six months ended April 30, 2004
Balance at October 31, 2003 $ -- $ -- 6,346,996 $ 6,347 $ 4,083,060 $(7,585,101)
Issuance of common stock for:
Stock incentive plans -- -- 735,200 735 104,965 --
Net loss for the period -- -- -- -- -- (382,132)
-------- -------- ----------- ----------- ----------- -----------
Balance at January 31, 2004 $ -- $ -- 7,082,196 $ 7,082 $ 4,188,025 $(7,967,233)
Issuance of common stock for:
Bonus interest and extensions on
debt -- -- 611,500 612 128,089 --
Services -- -- 300,000 300 59,700 --
Stock incentive plans -- -- 10,200 10 11,440 --
Legal settlement -- -- 80,000 80 22,320 --
Private placement -- -- 500,000 500 224,500 --
Conversion of debt -- -- 6,429,056 6,429 1,580,851 --
Issuance of stock options for
guarantee -- -- -- -- 69,120 --
Net loss for the period -- -- -- -- -- (607,195)
-------- -------- ----------- ----------- ----------- -----------
Balance at April 30, 2004 $ -- $ -- 15,012,952 $ 15,013 $ 6,284,045 $(8,574,428)
======== ======== =========== =========== =========== ===========
The accompanying notes are an integral part of this statement.
F-5
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
From May 26,
For the six months ended 2000
April 30, (inception)
-------------------------- Through
2004 2003 April 30, 2004
----------- ----------- -----------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (989,327) $ (1,124,080) $ (8,574,428)
Adjustments to reconcile net loss to
net cash used in operating activities
Minority interests -- -- 4,866
Provision for bad debts -- 149,000 590,000
Write off of goodwill -- -- 958,628
Gain on sale of investment stock -- -- (338,049)
Gain on transfer of license -- -- (114,509)
Depreciation and amortization 12,647 12,647 131,356
Interest expense recognized on beneficial conversion -- 120,000 423,900
Issuance of common stock under stock plans 117,150 19,865 746,258
Issuance of common stock for services 60,000 -- 525,832
Issuance of common stock for interest 128,701 44,599 419,592
Options issued on guarantee 69,120 -- 69,120
Issuance of common stock for legal settlement 22,400 -- 22,400
Changes in assets and liabilities
Other assets (104,128) (8,952) (208,347)
Accounts payable and accrued liabilities 138,086 192,534 642,018
Accrued interest 44,667 86,518 421,162
----------- ----------- -----------
Total adjustments 488,643 616,211 4,294,227
----------- ----------- -----------
Net cash used in operating activities (500,684) (507,869) (4,280,201)
----------- ----------- -----------
Net cash flows from investing activities -
Investment stock and licenses, net -- -- 555,791
Increase in notes receivable -- -- (600,000)
Purchase of property and equipment -- (1,931) (119,995)
----------- ----------- -----------
Net cash flows used in investing activities -- (1,931) (164,204)
----------- ----------- -----------
Cash flows from financing activities
Increase in notes payable 200,000 490,000 3,354,800
Proceeds from lease 357,000 -- 357,000
Payments on lease (50,890) -- (50,890)
Proceeds from issuance of common stock 225,000 -- 1,024,306
----------- ----------- -----------
Net cash provided by financing activities 731,110 490,000 4,685,216
----------- ----------- -----------
Net increase (decrease) in cash 230,426 (19,800) 240,811
Cash at beginning of period 10,385 31,297 --
----------- ----------- -----------
Cash at end of period $ 240,811 $ 11,497 $ 240,811
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ -- $ -- $ --
Income taxes -- -- --
Noncash investing and financing activities
During the three months ended April 30, 2004 the Company entered into a
capital lease that resulted in an increase of property and equipment
totaling $606,073. Additionally, the Company converted $1,370,000 of notes
payable and $217,280 of accrued interest payable into common stock.
The accompanying notes are an integral part of these statements.
F-6
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING POLICIES
The information for Videolocity International Inc. (the Company) as of April 30,
2004 and for the three and six months ended April 30, 2004 and 2003 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 consolidated 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 and six months ended April 30,
2004 should be read in conjunction with the Company's annual report on Form
10-KSB for the fiscal year ended October 31, 2003. The results of operations for
the three months and six months ended April 30, 2004 may not be indicative of
the results that may be expected for the year ending October 31, 2004.
NOTE C - ORGANIZATION AND BUSINESS ACTIVITY
We are 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 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 and other products for the delivery of on demand
video, high speed internet access, and other digital content to end users such
as hotels, hospitals, residences, and condominiums.
At April 30, 2004, 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 December 1, 2000, the Company completed a reverse stock split of our issued
and outstanding shares on a 0.61 share for one share basis. 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.
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 the Company's 94 percent owned subsidiary Healthcare
Concierge Inc. All material intercompany accounts and transactions have been
eliminated in consolidation.
F-7
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - NET EARNINGS (LOSS) PER SHARE
Basic Earnings (Loss) 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 Notes J, K,
and L 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
The Company has sustained net operating losses in all periods presented. There
were no deferred tax assets or income tax benefits recorded in the financial
statements for net deductible temporary differences or net operating loss
carryforwards because the likelihood of realization of the related tax benefits
cannot be established. Accordingly, a valuation allowance has been recorded to
reduce the net deferred tax asset to zero. The increase in the valuation
allowance was approximately $213,000 for the Quarter ended April 30, 2004
(343,000 for the six months ended April 30, 2004).
As of April 30, 2004, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $7,554,000 expiring through 2024.
NOTE G - NOTE RECEIVABLE
The Company has a $600,000 non-interest bearing note receivable that was due on
or before February 28, 2002. The Company holds 1,000,000 shares of Merit
Studios, Inc. common stock as collateral valued at $15,000 at January 31, 2004.
As of April 30, 2004, the Company has recorded an allowance for bad debt
totaling $590,000 against the note receivable. The Company started a legal
action against Merit Studios, Inc. toward collection of the note receivable.
On May 29, 2003, the Company was awarded a summary judgment against Merit
Studios, Inc. totaling approximately $673,000 plus reasonable costs and
attorneys fees to collect. (Note M)
NOTE H - OTHER ASSETS
At April 30, 2004, other assets consisted of the following:
Non trade receivables $ 20,511
Prepaid services and rent 64,000
Promissory loan fee (Note M) 100,000
---------------------
$ 184,511
---------------------
Long term other assets consists of a deposit required under a capital lease
totaling $23,836.
F-8
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - PROPERTY AND EQUIPMENT
At April 30, 2004, property and equipment and estimated useful lives consist of
the following:
Amount Years
------------- -----------
Equipment $ 36,782 3-5
Digital Entertainment System 83,213 5
Equipment under capital lease 606,073 3-5
-------------
726,068
Less accumulated depreciation and amortization 67,847
-------------
$ 658,221
=============
NOTE J - NOTES PAYABLE
The Company originated approximately $200,000 in convertible non-interest
bearing notes payable during the six months ended April 30, 2004. Of the total,
$80,000 is convertible at $0.25 and $120,000 is convertible at $0.30 which was
the fair market value at the dates of origination. During the quarter ended
April 30, 2004 the Company converted $1,370,000 of existing notes payable to
common stock.
At April 30, 2004 the Company has notes payable totaling $1,629,800 due to
various individuals and companies including $125,000 to current related parties
including Board of Directors and Management. Of the total, $1,264,800 is written
at 8 percent simple interest and $365,000 has no stated interest rate. Interest
has been imputed from the date of issuance on all non-interest bearing notes
payable. Of the total notes payable $592,800 is convertible at the option of the
debt holder in the following amounts: $177,800 is convertible at $1.00 per
share, $85,000 is convertible at $0.30 per share, $80,000 is convertible at
$0.25 per share, $65,000 is convertible at $0.22 per share, $125,000 is
convertible at $0.20 per share, $60,000 is convertible at $0.15 per share. The
notes payable have maturities as follows: $20,000 matured during October 2002,
$435,000 matured during November 2002, $30,000 matured during January 2003,
$729,800 matured during August 2003, $25,000 matured during November 2003,
$290,000 is callable on demand when the Company has secured between $2 million
and $5 million in new debt or equity funding and $100,000 has no set maturity
and is payable until paid in full (Note R).
The Company has outstanding options to purchase Company stock under certain of
the notes originated in the following amounts: 20,000 shares at $0.50, 100,000
shares at $0.25, 302,000 shares at $0.20. All options granted in conjunction
with new notes payable were granted at or above fair market value on the date
the notes payable were originated.
On April 30, 2002 the Company filed a UCC-1 financing statement, with the state
of Nevada, on six Provisional Patent applications held in the name of
Videolocity Technologies, Inc. in favor of certain promissory note holders
totaling $1,500,000 including $235,000 to current related parties. During the
three months ended April 30, 2004, the Company converted a total of $535,000 of
notes payable under the UCC-1 into common stock of the Company. As of April 30,
2004 there remains a total of $965,000 of notes payable under the UCC-1. The
notes payable under the UCC-1 have maturities as follows: $20,000 matured during
October 2002, $435,000 matured during November 2002, $30,000 matured during
January 2003 and $480,000 matured during August 2003. (Note R)
F-9
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - NOTES PAYABLE (CONTINUED)
On February 6th, 2003 the Company received a formal notice of default from ISOZ,
LC regarding the $215,000 in notes payable to ISOZ, LC.
NOTE K - LONG TERM OBLIGATIONS
During February 2004, the Company signed a lease agreement that included
approximately $606,000 in equipment and approximately $357,000 in operating
capital. The lease terms require approximately $24,000 in monthly payments over
a 48 month term. The lease was guaranteed by an unrelated privately held
Company. The privately held Company was granted 1,000,000 options to purchase
common stock at $0.20 per share that expire February 4, 2006. Additionally, if
the Company's outstanding shares surpass 20,000,000 prior to February 4, 2006,
the privately held Company will be granted additional options at the then
current market price to purchase shares equal to 2.5 percent of the then
outstanding shares of the Company. The value of the options granted for the
guarantee is based on the fair value at the date of grant calculated using the
Black-Scholes option-pricing model, which is more readily determinable than the
value of the guarantee. Expense for the service was recognized at the time the
service was rendered and the options become exercisable. Expense recognized for
the period ended April 30, 2004 related to these options totaled $69,120. The
equipment was recorded as equipment under capital leases.
The following is a schedule by year of future minimum payments under long term
obligations, together with the present value of the net payments as of April 30,
2004:
Equipment Cash Total
---------- ---------- ----------
2004 $ 105,006 $ 61,853 $ 166,859
2005 180,011 106,033 286,044
2006 180,011 106,033 286,044
2007 180,011 106,033 286,044
2008 30,002 17,672 47,674
---------- ---------- ----------
Total minimum payments 675,041 397,624 1,072,665
Less amount representing interest 101,104 59,378 160,482
---------- ---------- ----------
Present value of net minimum payments 573,937 338,246 912,183
Less current portion 135,439 79,543 214,982
---------- ---------- ----------
Long-term portion $ 438,498 $ 258,703 $ 697,201
========== ========== ==========
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 April 30, 2004, the Company has 980,784
plan units that have been awarded under the plan. Of the total awarded, 906,484
plan units have met the vesting requirement and have been converted to common
stock and 74,300 plan units are subject to additional vesting requirements.
During the three months ended April 30, 2004 the Company issued 10,200 shares of
common stock in exchange for vested plan units resulting in compensation expense
of approximately $11,450.
F-11
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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. During the first quarter of 2004, the Board of Directors
approved 30,000 shares for issuance to consultants of the Company under the plan
but to date have not issued the shares. The Company has issued a total of
467,855 shares under the Plan.
Additionally, during December 2003, as an incentive and to retain current key
individuals, the Board of Directors approved a total of 9,200,000 options to
purchase stock outside of the plans to employees and directors that vest at
various times through FY 2004. The options were issued pursuant to the Restated
Articles of Incorporation approved by a majority of the stockholders on November
15, 2000. The Restated Articles of Incorporation authorizes the Board of
Directors to issue, from time to time, without any vote or other action by the
stockholders, of any or all shares of the Corporation of any class at any time
authorized, and any securities convertible into or exchangeable for such shares,
in each case to such persons and for such consideration and on such terms as the
Board of Directors from time to time in its discretion lawfully may determine,
provided that the consideration for the issuance of shares of stock of the
corporation having par value shall not be less than such par value.
Stock-based compensation costs- SFAS No. 123, "Accounting for Stock-Based
Compensation," establishes accounting and reporting standards for stock-based
employee compensation plans. As permitted by SFAS No. 123, the Company accounts
for such arrangements under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recognized for stock option grants
because the exercise price of the stock options equals the market price of the
underlying stock on the date of grant for employees and directors.
SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure," requires disclosure in interim statements of the proforma effect on
net income (loss) and earnings (loss) per share as if the Company had applied
the fair value recognition provision of SFAS No. 123 to stock-based
compensation. This disclosure is presented in the accompanying table.
F-12
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months Three months Six months Six months
ended ended ended ended
April 30, April 30, April 30, April 30,
2004 2003 2004 2003
------------ ------------ ------------- -------------
Net earnings (loss):
As reported $ (607,195) $ (417,674) $ (989,327) $ (1,124,080)
Proforma $ (942,762) $ (417,674) $ (1,420,055) $ (1,124,080)
Basic earnings (loss) per share:
As reported $ (0.06) $ (0.07) $ (0.13) $ (0.19)
Pro forma $ (0.10) $ (0.07) $ (0.18) $ (0.19)
Diluted earnings (loss) per share:
As reported $ (0.06) $ (0.07) $ (0.13) $ (0.19)
Pro forma $ (0.10) $ (0.07) $ (0.18) $ (0.19)
For purposes of pro forma disclosures, the estimated fair value of the stock
option is amortized to expense over the option's vesting period. The
weighted-average fair value of stock options granted was $0.13 for the shares
granted during the three months ended January 31, 2004. The fair value of these
stock options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
For the three months ended
---------------------------------------
April 30, April 30,
2004 2003
---------- ----------
Risk-free interest rate 2.5% 3.6%
Dividend yield 0% 0%
Volatility factor .59 .59
Expected option term life in years 2.5 2.1
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock option activity for the six months ended
April 30, 2004:
Shares subject to Weighted average
options exercise price
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at October 31, 2003 94,700 $ 1.04
Granted 9,955,000 $ 0.13
Exercised (735,200) $ 0.14
Forfeited (-) $ -
--------------------- --------------------
Outstanding at January 31, 2004 9,314,500 $ 0.14
Granted - $ -
Exercised (10,200) $ 1.12
Forfeited (-) $ -
--------------------- --------------------
Outstanding at April 30, 2004 9,304,300 $ 0.14
--------------------- --------------------
Exercisable at April 30, 2004 8,600,000 $ 0.13
--------------------- --------------------
Options outstanding at April 30, 2004 had a weighted-average remaining
contractual life of 4.7 years and exercise prices ranging from $0.13 to $1.50
per share.
F-13
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - COMMITMENTS AND CONTINGENCIES
We are engaged in various lawsuits and claims, either as plaintiff or defendant,
in the normal course of business. In the opinion of management, based upon
advice of counsel, the ultimate outcome of these lawsuits will not have a
material impact on the Company's financial position or results of operations.
Note Receivable
On August 26, 2002 the Company's 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 (Note G). During
June 2003 the Company received notification of a summary judgment from the Third
District Court of Salt Lake County. The Court ordered that judgment be entered
in the Company's favor totaling approximately $673,000 which includes the
original note receivable plus accrued interest and some other small amounts. It
was further ordered that the judgment shall be augmented in the amount of
reasonable costs and attorney's fees in collecting the judgment
Redeemable Preferred Stock
During December 2000, the Company issued 950,000 shares of series A preferred
stock for the purchase of 5th Digit Technologies, LLC. During 2002, the Company
exchanged 600,000 of the outstanding series A preferred shares for 180,000
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 determined 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. Subsequently, the decision of the Third Judicial District
Court was set aside. On March 15, 2004, we reached a settlement agreement on the
redeemable preferred stock. The settlement agreement included the Company
issuing 80,000 shares of common stock and total payments of $70,000 payable as
follows: $10,000 at execution of the agreement and $5,000 per month beginning
May 1, 2004 and continuing until paid in full.
Promissory Loan Agreement
On June 2, 2003, the Company signed a ten percent simple interest promissory
note with an unrelated privately held company where the privately held company
was to provide $5,000,000 in operating funds to the Company. The terms of the
note provided that the Company pay a two percent fee totaling $100,000 for
arranging the loan. Terms of repayment included interest on a quarterly basis
and the balance of the note at the end of thirty-six months. Additionally, the
privately held company would receive one seat on the Board of Directors until
such time as the promissory note was paid in full.
After weeks of delays and promises regarding funding, the privately held company
signed an addendum to the original note promising funding of the note by
September 19, 2003. When the funding was not met according to the addendum, the
privately held company signed a second addendum promising funding of the note by
F-14
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Promissory Loan Agreement (continued)
November 10, 2003. After months of delays, and the privately held company not
fulfilling the terms of the original agreement and/or the signed addendums the
Company filed a multi count civil complaint against the privately held company.
The $100,000 fee is included in other assets at April 30, 2004 pending outcome
of the complaint. Management, based on the advice of legal counsel, believes
that at a minimum the $100,000 is recoverable in its action against the
privately held company. The privately held company filed a motion with the Court
to dismiss the complaints filed by the Company. This motion to dismiss was
denied by the Court on March 12, 2004.
NOTE N - EQUITY LINE OF CREDIT AGREEMENT
On May 28, 2002 the Company finalized an Equity Line of Credit Agreement, with
Cornell Capital Partners, LP, a New Jersey-based domestic investment fund. Under
the Equity Line, Videolocity had 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 was no minimum draw down
although the Company could make draws, as provided below, during the term of the
Equity Line.
Pursuant to terms of the Equity Line, we were required to file with the SEC a
registration statement covering the shares to be acquired by Cornell Capital
Partners. The 24-month term commenced on the effective date of the registration
statement. The purchase price of the shares was 95% of the lowest closing bid
price of the Company's common stock during the five consecutive trading days
immediately following receipt of the Company's notice of its intent to make a
draw. The Company could 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, the
Company included in its registration statement an additional 300,000 shares
issued to Cornell Partners and the Placement Agent in connection with the
execution of the Equity Line. During May 2004, the Company signed a new
agreement with Cornell Capital Partners (Note R). The Company will be
discontinuing action on the prior Equity Line of Credit agreement and will file
a new SB-2 to register shares under the new agreement replacing the prior Equity
Line of Credit Agreement.
NOTE O - SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
Current officers and directors have made 8.0 percent loans to the Company
totaling approximately $125,000. Additionally, the Company has accounts payable
totaling approximately $58,000 due to a director. As of April 30, 2004,
Directors and Executive Officers of the Company hold approximately 14 percent of
the outstanding shares.
NOTE P - 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
F-15
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - 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. The Company's product
is ready for immediate deployment, although the Company needs to obtain capital,
either long-term debt or equity to continue the implementation of its overall
business plan. 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.
NOTE R - SUBSEQUENT EVENTS
Notes Payable
As of June 14, 2004 approximately $1,239,800 of notes payable are past due.
Management is currently in discussions with certain note holders pursuing
extensions and/or conversions.
Standby Equity Distribution Agreement
The Company entered into a new standby equity distribution agreement with
Cornell Capital Partners, LP, a New Jersey-based domestic investment fund. The
agreement was completed in May 2004. Pursuant to the terms of the funding
agreement with Cornell Capital, Videolocity has the right, but not the
obligation, to require Cornell Capital to purchase shares of the company's
common stock in amounts up to $1 million per month to a maximum of $20 million
over the 24 months following the effective date. The equity drawdowns are
entirely at Videolocity's discretion and the agreement does not require minimum
drawdowns. The drawdowns are subject to an effective registration statement with
the United States Securities and Exchange Commission covering the resale of the
shares. The effective date of the agreement is the date that the Securities and
Exchange Commission first declares a registration statement effective
registering the resale of the securities. As consideration for Cornell to enter
into the agreement the Company issued a $390,000, 5% convertible debenture. The
principal and interest are due during May 2007. At the Company's option, the
principal and interest due can be repaid or converted to common stock at a rate
of 250% of the current closing bid price of the common stock as listed on a
principal market as quoted by Bloomberg L.P. or 100% of the lowest closing bid
price of the Company's common stock for the three trading days immediately
preceding the conversion date. At the holder's option, they may convert to the
Company's stock until paid in full. The Company may redeem all or a portion of
the outstanding principal at a redemption price of 120% multiplied by the
portion of the principal sum being redeemed plus any accrued and unpaid
interest.
F-16
MADSEN & ASSOCIATES, CPA's INC. 684 East Vine St, #3
Certified Public Accountants and Business Consultants Murray, Utah 84107
Telephone 801-268-2632
FAX 801-262-3978
Board of Directors
Videolocity International, Inc. and Subsidiaries
Park City, Utah
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited the accompanying balance sheet of Videolocity International,
Inc. and Subsidiaries (development stage company) at October 31, 2003 and the
related statement of operations, stockholders' deficit. and cash flows for the
years ended October 31, 2003 and 2002 and the period May 26, 2000 (date of
inception) to October 31, 2003. 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 audit.
We conducted our audits 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 statement presentation. We believe that our audits provide 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, 2003 and the related statement of operations,
for the years ended October 31, 2003 and 2002 and the period May 26, 2000 to
October 31, 2003, 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 will need additional
working capital for its planned activity and to service its debt, which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in the notes to the financial
statements. These financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
s\ Madsen & Associates, CPA's Inc.
- ----------------------------------
Salt Lake City, Utah
March 16, 2004
F-17
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
October 31, 2003
ASSETS
CURRENT ASSETS
Cash $ 10,385
Accounts receivable, net of allowance for bad debts of $590,000 10,000
Other assets-advance deposits 104,219
-----------
Total current assets 124,604
PROPERTY AND Equipment, at cost, net 64,795
-----------
$ 189,399
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 207,701
Accrued liabilities 296,231
Accrued interest payable 376,495
Notes payable - related parties 260,000
Notes payable 2,539,800
-----------
Total current liabilities 3,680,227
MINORITY INTERESTS 4,866
COMMITMENTS AND CONTINGENCIES (Notes C, E, F, H, J, and K) --
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 50,000,000 shares authorized,
6,346,996 issued and outstanding $ 6,347
Preferred stock, $0.001 par value; 1,000,000 shares authorized,
none outstanding --
Additional paid-in capital 4,083,060
Deficit accumulated during the development stage (7,585,101)
-----------
Total stockholders' deficit (3,495,694)
-----------
$ 189,399
===========
The accompanying notes are an integral part of this statement.
F-18
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
From May 26,
2000
(inception)
Year ended Year ended Through
October 31, October 31, October 31,
2003 2002 2003
Revenue $ -- $ -- $ --
----------- ----------- -----------
Operating expenses
Salaries, payroll taxes and employee benefits 887,603 1,082,169 2,700,185
Professional fees and consultants 151,059 699,652 1,064,120
Directors compensation through stock incentive plan -- 95,000 95,000
Rent 45,000 78,000 208,305
Other 49,994 126,581 487,802
Technology development consulting 178,986 175,528 375,474
Bad debts 149,000 191,000 590,000
Write off of goodwill -- -- 958,628
Utilities 22,933 22,929 69,277
Travel and conventions 23,466 43,766 166,009
Gain on transfer of license agreement -- -- (114,509)
Depreciation and amortization 25,294 24,150 118,704
----------- ----------- -----------
Total operating expenses 1,533,335 2,538,775 6,718,995
----------- ----------- -----------
Operating loss (1,533,335) (2,538,775) (6,718,995)
Interest and beneficial conversion (456,155) (547,263) (1,204,867)
Gain on sale of investment stock, net -- -- 338,049
Interest income -- -- 5,578
Minority interests -- (172) (4,866)
----------- ----------- -----------
Loss before income taxes (1,989,490) (3,086,210) (7,585,101)
Income taxes -- -- --
----------- ----------- -----------
NET LOSS $(1,989,490) $(3,086,210) $(7,585,101)
=========== =========== ===========
Loss per share - basic and diluted (Note G) $ (0.33) $ (0.61)
=========== ===========
Weighted-average shares outstanding -
basic and diluted (Note G) 6,075,933 5,104,808
=========== ===========
The accompanying notes are an integral part of this statement.
F-19
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the period May 26, 2000 (inception) through October 31, 2000,
and for the years ended October 31, 2001, October 31, 2002 and October 31, 2003
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)
----------- ----------- ----------- ----------- ----------- -----------
BBalance at October 31, 2000 -- -- 640,610 641 85,685 (129,778)
Issuance of preferred stock 950,000 950 -- -- 949,050 --
Issuance of common stock for
acquisition of Videolocity, Inc. -- -- 3,028,076 3,028 386,092 --
Provision for redemption value of
preferred stock -- -- -- -- (3,957,380) --
Issuance of common stock for:
Services -- -- 20,000 20 19,980 --
Cash -- -- 610,000 610 499,390 --
Stock incentive plans -- -- 5,000 5 4,995 --
Bonus interest and extensions of debt -- -- 15,000 15 74,985 --
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 and cancellation of
preferred stock (950,000) (950) 180,000 180 3,957,380 --
Cancellation of common stock -- -- (50,000) (50) 50 --
Interest expense recognized on
beneficial conversion feature on
notes payable -- -- -- -- 303,900 --
Issuance of common stock for:
Bonus interest and extensions on debt -- -- 148,500 149 132,493 --
Conversion of debt -- -- 355,000 355 354,645 --
Services -- -- 419,871 419 444,453 --
Stock incentive plans -- -- 504,539 505 453,637 --
Net loss for the year -- -- -- -- -- (3,086,210)
----------- ----------- ----------- ----------- ----------- -----------
BBalance at October 31, 2002 -- -- 5,876,596 5,877 3,709,355 (5,595,611)
Interest expense recognized on
beneficial conversion feature on
notes payable -- -- -- -- 120,000 --
Issuance of common stock for:
Bonus interest and extensions on debt -- -- 335,000 335 82,914 --
Services -- -- 16,000 16 944 --
Stock incentive plans -- -- 119,400 119 169,847 --
Net loss for the year -- -- -- -- -- (1,989,490)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2003 -- $ -- 6,346,996 $ 6,347 $ 4,083,060 $(7,585,101)
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of this statement.
F-20
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
From
May 26, 2000
(inception)
Year ended Year ended Through
October 31, October 31, October 31,
2003 2002 2003
----------- ----------- -----------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $(1,989,490) $(3,086,210) $(7,585,101)
Adjustments to reconcile net loss to net cash used in operating
activities
Provision for depreciation and amortization 25,294 24,150 118,709
Provision for bad debts 149,000 191,000 590,000
Gain on sale of investment stock -- -- (338,049)
Gain on transfer of license -- -- (114,509)
Provision for write-off of goodwill -- -- 958,628
Interest expense recognized on beneficial conversion 120,000 303,900 423,900
Issuance of stock for interest, net 83,249 132,642 290,891
Issuance of stock for services 960 444,402 465,832
Issuance of stock under stock plans 169,966 454,142 629,108
Minority interests -- (172) 4,866
Changes in assets and liabilities
Other assets (101,319) 1,832 (104,219)
Accrued liabilities 214,829 81,402 296,231
Accounts payable 108,125 (43,547) 207,701
Accrued interest 250,405 111,841 376,495
----------- ----------- -----------
Total adjustments 1,020,509 1,701,592 3,805,584
----------- ----------- -----------
Net cash used in operating activities (968,981) (1,384,618) (3,779,517)
----------- ----------- -----------
Cash flows from investing activities
Purchase of property and equipment (1,931) (39,296) (119,995)
Investment stock and Licenses, net -- -- 565,190
Acquisition costs of goodwill -- -- (9,399)
Increase in notes receivable -- -- (600,000)
----------- ----------- -----------
Net cash used in investing activities (1,931) (39,296) (164,204)
----------- ----------- -----------
(continued)
F-21
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Cumulative
From
May 26, 2000
(inception)
Year ended Year ended Through
October 31, October 31, October 31,
2003 2002 2003
----------- ----------- -----------
Cash flow from financing activities
Increase in notes payable 950,000 1,454,800 3,154,800
Issuance of stock for cash -- -- 799,306
----------- ----------- -----------
Net cash provided by financing activities 950,000 1,454,800 3,954,106
----------- ----------- -----------
Net increase (decrease) in cash (20,912) 30,886 10,385
Cash at beginning of period 31,297 411 --
----------- ----------- -----------
Cash at end of period $ 10,385 $ 31,297 $ 10,385
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ -- $ -- $ --
Income taxes -- -- --
Noncash investing and financing activities
During 2002, approximately $355,000 of notes payable were converted to common
stock.
The accompanying notes are an integral part of this statement.
F-22
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
1. Organization and business activity. Videolocity International, Inc. (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 the Company
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. After the recapitalization, approximately
82 percent of the outstanding shares of the Company were held by former
shareholders of Videolocity, Inc. The Company and its subsidiaries were
established to develop and market systems for the delivery of video, high speed
internet access, and other content to end users such as hotels, hospitals, and
condominiums on demand.
At October 31, 2003 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 has
had no revenue from its planned principal operations.
On December 1, 2000, the Company completed a reverse stock split of our issued
and outstanding shares on a 0.61 share for one share basis. 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.
2. 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 the Company's 94
percent owned subsidiary Healthcare Concierge, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.
3. Use of estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenditures during the reporting periods. Actual results could
differ from those estimates.
4. Revenue recognition. The Company will be installing the equipment needed to
deliver digital entertainment, video on demand, games and informational content
to selected end users such as hotels, hospitals, and condominiums. The Company
plans to recognize pay-per-view revenue at the time of viewing, net of estimated
denials. In addition to video and games on demand, revenue from high-speed
internet access will be recognized in the period when access is provided.
Revenue from other subscriber services will be recognized in the period that
services are delivered. Revenue from the licensing of digital entertainment
systems will be recognized when the equipment is installed and operable and
there are no future obligations.
F-23
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
5. Depreciation and amortization. Property and equipment are stated at cost.
Depreciation and amortization are provided for in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated service lives.
The straight-line method of depreciation is followed for financial reporting
purposes. Accelerated methods of depreciation are used for tax purposes.
6. Cash and cash equivalents. The Company considers all highly liquid debt
instruments with an original maturity of three months or less when purchased to
be cash equivalents.
7. Fair value of financial instruments. The carrying value of the Company's
cash, accounts receivable, accounts payable, accruals and notes payable
approximate their fair values due to their short-term nature.
8. Income taxes. The Company utilizes the liability method of accounting for
income taxes. Under the liability method, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect, when the differences are expected to reverse. An
allowance against deferred tax assets is recorded, when it is more likely than
not that such tax benefits will not be realized.
9. Research and development costs. The Company conducts research and development
to develop new products or product improvements/enhancements. Research and
development costs have been charged to expense as incurred.
10. Stock options. The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options as allowed under
FASB Statement 123, "Accounting for Stock-Based Compensation" (SFAS 123).
11. Concentrations. Financial instruments that potentially subject the Company
to significant concentration of credit risk consists of a note receivable.
12. Loss per share. Basic earnings (loss) 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 Notes E and H are not included in the computation of diluted loss
per share for periods of net loss because to do so would be anti-dilutive.
13. Advertising costs. Advertising and marketing costs are expensed as incurred.
14. Reclassifications. Certain reclassifications have been made to the 2002
financial statements to conform with the 2003 presentation.
F-24
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
NOTE B - 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 sustained losses of $7,585,101 from May 26, 2000 (inception) through October
31, 2003 including a loss of $1,989,490 for the year ended October 31, 2003.
Current liabilities exceed current assets by $3,555,623 at October 31, 2003. The
Company is a development stage enterprise and has not generated revenue from
operations from May 26 (inception) through October 31, 2003, which raises
substantial doubt about the Company's ability to continue as a going concern.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
current obligations on a continuing basis, to obtain financing, to acquire
additional capital from investors, and to succeed in its future operations. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence. The Company's product is ready for immediate
deployment, although the Company needs to obtain capital, either long-term debt
or equity to continue the implementation of its overall business plan. The
Company plans on pursuing the additional capital necessary to continue its
overall business plan.
NOTE C - TRANSFER OF LICENSE AGREEMENTS AND NOTE RECEIVABLE
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 Healthcare
Concierge 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 (amended on November 2, 2001), the Company, through its
subsidiary Healthcare Concierge Inc., agreed to sell and reassign the two
license agreements to Merit Studios Inc. The terms of the agreement included a
$600,000 non-interest bearing note receivable due to Healthcare Concierge Inc.
within 120 days from October 31, 2001 and the reassignment of 1,000,000 common
shares of Merit Studios Inc. held by Videolocity Inc. The shares in Merit
Studios Inc. will be held as security until the note receivable is paid.
The $600,000 non-interest bearing note receivable that the Company received from
Merit Studios, Inc. in the reassignment of the two license agreements has been
subsequently reduced by an allowance for bad debt totaling $590,000 reducing the
note receivable to the value of the collateral. The Company started a legal
action against Merit Studios, Inc. toward collection of the note receivable.
On May 29, 2003, the Company was awarded a summary judgment against Merit
Studios, Inc. totaling approximately $673,000 plus reasonable costs and
attorneys fees to collect.
F-25
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment, at cost, and estimated useful lives are as follows:
Amount Years
------ -----
Equipment $ 36,782 3-5
Digital Entertainment System 83,213 5
---------- -----
119,995
Less accumulated depreciation and amortization 55,200
----------
$ 64,795
==========
The Company capitalized approximately $33,000 of purchased software during the
year ended October 31, 2002 that is included in Digital Entertainment System.
These costs were application development stage external direct costs to purchase
internal-used software. This software is being amortized over its useful life of
approximately 5 years. Costs incurred during preliminary project stages were
expensed as incurred.
NOTE E - NOTES PAYABLE
At October 31, 2003, the Company has notes payable totaling $2,799,800 due to
various individuals and companies including $260,000 to current related parties
including Board of Directors and Management. Of the total, $1,749,800 is written
at 8 percent simple interest, $100,000 is written at 12 percent simple interest
and $950,000 has no stated interest rate. Of the total notes payable $1,077,800
is convertible at the option of the debt holder at the following amounts:
$177,800 is convertible at $1.00 per share, $100,000 is convertible at $0.25 per
share, $65,000 is convertible at $0.22 per share, $675,000 is convertible at
$0.20 and $60,000 is convertible at $0.15 per share. The notes payable have
maturities or have been extended as follows: $20,000 matured during October
2002, $435,000 matured during November 2002, $30,000 matured during January
2003, $100,000 matured during July 2003, $1,264,800 matured during August 2003,
$75,000 matured during November 2003, $75,000 matures during April 2004,
$175,000 matures during June 2005, $375,000 is callable on demand when the
Company has secured five million in new debt or equity funding and $250,000 has
no set maturity and is payable until paid in full.
The Company originated approximately $950,000 in non-interest bearing notes
payable during the year ended October 31, 2003 with $750,000 of the total being
convertible at the option of the debt holder. The conversion amount was less
than the market price of the stock on the date of issuance for $400,000 of the
notes payable and was convertible from the date of issuance which results in a
beneficial conversion feature. The beneficial conversion feature was recorded as
an additional non-cash charge to interest expense and was recognized in the
period when the debt became convertible. For the year ended October 31, 2003 the
beneficial conversion feature resulted in an increase of interest expense of
$120,000 ($303,900 in 2002). The Company also granted options to purchase
Company stock under certain of the notes originated during 2003 in the following
amounts: 20,000 shares at $0.50, 100,000 shares at $0.25, 302,000 shares at
$0.20, and 40,000 shares at $0.15. All options granted in conjunction with new
notes payable were granted at or above fair market value on the date the notes
payable was originated. Interest has been imputed from the date of issuance on
the non-interest bearing notes payable.
F-26
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
On April 30, 2002 the Company filed a UCC-1 financing statement, with the state
of Nevada, on six Provisional Patent applications held in the name of
Videolocity Technologies, Inc. in favor of certain promissory note holders
totaling $1,500,000 including $235,000 to current related parties. The notes
payable under the UCC-1 have maturities or have been extended under the UCC-1 as
follows: $20,000 matured during
October 2002, $435,000 matured during November 2002, $30,000 matured during
January 2003 and $1,015,000 matured during August 2003.
On February 6th, 2003 the Company received a formal notice of default from ISOZ,
LC regarding the $215,000 in notes payable to ISOZ, LC.
NOTE F - INCOME TAXES
The Company has sustained losses in all periods presented. Consequently, there
is no income tax provision or benefit for the periods presented. Reconciliation
of income taxes computed at the federal statutory rate and income tax expense
are as follows:
Cumulative from
May 28,
2000 (inception)
Year ended Year ended Through
October 31, October 31, October 31,
2003 2002 2003
----------- ----------- -----------
Current
Federal income taxes at statutory rate $ (676,427) $(1,049,252) $(2,578,934)
State income taxes net of federal benefit (61,591) (91,811) (250,308)
Change in valuation allowance 696,048 1,037,737 2,688,336
Other 41,970 103,326 140,906
Deferred -- -- --
----------- ----------- -----------
Total $ -- $ -- $ --
=========== =========== ===========
F-27
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
Deferred taxes consist of the following:
Year ended Year ended
October 31, October 31,
2003 2002
------------ -----------
Current deferred taxes
Allowance for doubtful accounts $ 220,070 $ 164,493
------------ -----------
Total 220,070 164,493
Less valuation allowance (2,688,336) (1,992,288)
------------ -----------
Total (2,468,266) (1,827,795)
Long term deferred taxes
Accumulated depreciation (8,267) (7,054)
Net operating losses 2,476,533 1,834,849
------------ -----------
Total $ 2,468,266 $ 1,827,795
------------ -----------
-- --
============ ===========
There were no deferred tax assets or income tax benefits recorded in the
financial statements for net deductible temporary differences or net operating
loss carryforwards because the likelihood of realization of the related tax
benefits cannot be established. Accordingly, a valuation allowance has been
recorded to reduce the net deferred tax asset to zero. The increase in the
valuation allowance was $696,048 for the year ended October 31, 2003,
($1,037,737 for the year ended October 31, 2002, $885,842 for the year ended
October 31, 2001 and $2,688,336 for the period May 28, 2000 (inception) through
October 31, 2003).
As of October 31, 2002, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $6,640,000 expiring through 2023.
NOTE G - LOSS PER SHARE
The following data show the amounts used in computing net earnings (loss) per
common share, including the effect on net earnings (loss) for preferred stock
dividends. For 2001, earnings (loss) applicable to common stock includes a
noncash imputed dividend to the preferred shareholders. The imputed dividend
equals the accretion of the redemption value on the Preferred Stock.
F-28
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
May 26,
2000 (inception)
Through
Year ended October 31, October 31,
2003 2002 2003
---------------------------- ------------
Net earnings (loss) $ (1,989,490) $ (3,086,210) $ (7,585,101)
Imputed dividends on preferred stock -- -- (3,957,380)
------------ ------------ ------------
Net earnings (loss) applicable to common stock $ (1,989,490) $ (3,086,210) $(11,542,481)
============ ============ ============
The following data was used in computing loss per share:
May 26,
2000
(inception)
Year ended Year ended Through
October 31, October 31, October 31,
2003 2002 2003
--------- --------- ---------
Shares outstanding entire period 5,876,596 4,318,686 4,278,686
Net weighted-average shares issued during period 199,337 786,122 769,242
--------- --------- ---------
Weighted average number of common shares
and dilutive potential common shares
used in diluted EPS 6,075,933 5,104,808 5,047,928
========= ========= =========
Shares issued in connection with the recapitalization have been included in the
calculation of loss per share as though they were outstanding from inception.
All common shares with dilutive potential described in Notes E and H are not
included in the computation of diluted loss per share for periods of net loss
because to do so would be anti-dilutive.
Earnings (loss) per share - basic and diluted
Year ended Year ended From May 26, 2000
October 31, October 31, Through
2003 2002 Oct. 31, 2003
------------ ------------ -----------
Earnings (loss) before imputed dividend $ (0.33) $ (0.61) $ (1.51)
Imputed dividend - (accretion) -- -- (0.78)
------------ ------------ -----------
Earnings (loss) per share attributable to common shareholders
- basic and diluted $ (0.33) $ (0.61) $ (2.29)
============ ============ ===========
F-29
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
NOTE H - STOCK INCENTIVE PLANS
On October 1, 2000 the Company established a stock incentive plan to attract and
retain qualified key employees. The Company reserved 1,000,000 common shares
that can be issued under the plan. Awards made under the plan are issued in
units with each unit being convertible into one share of common stock at the
option of the holder. The plan units vest, generally, over three years as
specified in each individual grant. The individual units are issued with a
strike price of $0.00. Accordingly, compensation expense is incurred by the
Company over the vesting periods and is calculated using the stock price on the
grant date times the number of shares vesting. During 2003, the Company
recognized approximately $170,000 ($37,500 during 2002) of compensation expense
with the issuance of 119,400 (36,684 during 2002) shares of stock under vesting
schedules. Changes in the Company's stock incentive plan units are as follows:
Weighted-
grant date
fair value
Plan units per plan unit
----------- -------------
Outstanding at May 26 (inception) -- $ --
Granted -- --
Vested -- --
Canceled or expired -- --
----------- -----------
Outstanding at October 31, 2000 -- --
Granted 490,833 1.13
Vested (5,000) 1.00
----------- -----------
Outstanding at October 31, 2001 485,833 1.14
Granted 185,400 1.08
Vested (36,684) 1.35
Canceled or expired (416,249) 1.01
----------- -----------
Outstanding at October 31, 2002 218,300 1.30
Granted -- --
Vested (119,400) 1.45
Canceled or expired (4,200) 1.40
----------- -----------
Outstanding at October 31, 2003 94,700 1.04
===========
F-30
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
The plan units vest at various dates ranging from May 2003 through November
2005. A further summary of information related to options outstanding at October
31, 2003 is as follows:
Weighted Average Weighted Average
Range of Exercise Number Remaining Contractual Exercise Price
Prices Outstanding / Exercisable Life (Years) Outstanding / Exercisable
- --------------------- ------------------------- --------------------- -------------------------
$0.70 to 1.00 34,000 / - 2.00 $0.70 / -
1.01 to 1.30 55,000 / - 1.25 1.20 / -
1.31 to 1.57 5,700 / - 1.50 1.50 / -
------------- ------------- -------------
94,700 / - 1.54 1.04 / -
As permitted under accounting principles generally accepted in the United States
of America, grants to employees under the Plan and other grants to employees of
options are accounted for following APB Opinion No. 25 and related
Interpretations. Had compensation cost for the Plan been determined based on the
grant date fair values of awards using the Black-Scholes option pricing model,
reported net earnings (loss) and earnings (loss) per common share would have
been changed to the pro forma amounts shown below.
Cumulative
from
May 28,
2000
inception)
Year ended Year ended Through
October 31, October 31, October 31,
2002 2001 2002
----------- ----------- -----------
Net earnings (loss):
As reported $(1,989,490) $(3,086,210) $(7,585,101)
Proforma $(1,989,490) $(3,086,210) $(7,585,101)
Basic earnings (loss) per share:
As reported $(0.33) $(0.61) $(2.29)
Pro forma $(0.33) $(0.61) $(2.29)
Diluted earnings (loss) per share:
As reported $(0.33) $(0.61) $(2.29)
Pro forma $(0.33) $(0.61) $(2.29)
Weighted average fair value per plan unit granted during the year $ - $ 1.08
F-31
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
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
records expense as options vest based on the fair market value of the stock at
the date of individual grants. The Company issued 467,855 shares under the Plan
during the year ended October 31, 2002 and recorded approximately $417,000 of
expense related to the issuance. At October 31, 2003 there are no additional
shares granted.
NOTE I - RELATED PARTY TRANSACTIONS
As of October 31, 2003 the Company has 8% notes payable to current directors,
and officers totaling $260,000. Additionally, the Company has 8% notes payable
totaling $215,000 to a private entity of which a former director is the manager.
The Company also has accounts payable totaling $57,750 due to directors at
October 31, 2003 ($17,500 at October 31, 2002). Additionally, the Company has
included approximately $219,000 of accrued payroll due to certain officers of
the Company within accrued liabilities at October 31, 2004. As of October 31,
2003 officers and directors of the Company own approximately 15% of the
outstanding stock.
During the fiscal year ended October 31, 2002 the Company paid approximately
$32,500 to a former director for office space ($22,500 in the fiscal year ended
October 31, 2001).
A former director of the Company caused the voluntary contribution and
cancellation of 50,000 shares.
F-32
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
NOTE J - 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.
NOTE K - COMMITMENTS AND CONTINGENCIES
Redeemable Preferred Stock
During December 2000 the Company issued preferred stock for the purchase of 5th
Digit Technologies, LLC. During 2002, the Company exchanged 600,000 of the
outstanding preferred shares for 180,000 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 350,000
then outstanding 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.
Subsequently, the decision of the Third Judicial District Court was set aside
(Note L).
Promissory Loan Agreement
On June 2, 2003, the Company signed a ten percent simple interest promissory
note with an unrelated privately held Company where the privately held Company
was to provide $5,000,000 in operating funds to the Company. The terms of the
note provided that the Company pay a two percent fee totaling $100,000 for
arranging the loan. Terms of repayment included interest on a quarterly basis
and the balance of the note at the end of thirty-six months. Additionally, the
privately held Company would receive one seat on the Board of Directors until
such time as the promissory note was paid in full.
F-33
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
After weeks of delays and promises regarding funding, the privately held Company
signed an addendum to the original note promising funding of the note by
September 19, 2003. When the funding was not met according to the addendum, the
privately held Company signed a second addendum promising funding of the note by
November 10, 2003. After months of delays, and the privately held Company not
fulfilling the terms of the original agreement and/or the signed addendums the
Company filed a multi count civil complaint against the privately held company.
The $100,000 fee is included in advance deposits at October 31, 2003 pending
outcome of the complaint. Management, based on the advice of legal counsel,
believes that at a minimum the $100,000 is recoverable in its action against the
privately held company (Note L).
The Company is engaged in various other lawsuits and claims, either as plaintiff
or defendant, in the normal course of business. In the opinion of management,
based upon advice of counsel, the ultimate outcome of these lawsuits will not
have a material impact on the Company's financial position or results of
operations.
NOTE L - SUBSEQUENT EVENTS
Notes Payable
As of February 29, 2004 approximately $1,924,800 of notes payable are past due.
Management is currently in discussions with the note holders pursuing extensions
and/or conversions. During March 2004, $600,000 of notes payable was converted
to 2,900,000 shares of common stock pursuant to the convertible terms of the
notes payable.
Operating lease
During February 2004, the Company signed an operating lease agreement totaling
approximately $989,000 which includes approximately $632,000 in equipment and
approximately $357,000 in operating capital. The lease terms require
approximately $25,000 in monthly payments over a four year term. The lease was
guaranteed by an unrelated privately held Company. The privately held Company
was granted 1,000,000 options to purchase common stock at $0.20 per share that
expire February 4, 2006. Additionally, if the Company's outstanding shares
surpass 20,000,000 prior to February 4, 2006, the privately held Company will be
granted additional options at the then current market price to purchase shares
equal to 2.5 percent of the then outstanding shares of the Company.
Promissory Loan Agreement (Note K)
The privately held company filed a motion with the Court to dismiss the
complaints filed by the Company. This motion to dismiss was denied by the Court
on March 12, 2004.
On March 15, 2004, we reached a settlement agreement on the redeemable preferred
stock referred to in Note K of the consolidated financial statements. The
settlement agreement includes the Company issuing 80,000 shares of common stock
and payments totaling $70,000 payable as follows: $10,000 at execution of the
agreement and $5,000 per month beginning May 1, 2004 and continuing until paid
in full.
F-34
Stock incentive Plans
On December 4, 2003, the Board of Directors approved the issuance of 725,000
plan units to employees and consultants under the Videolocity, Inc. 2000 Stock
Incentive Plan (Note H). The Board of Directors also approved the issuance of
30,000 shares to consultants under the Videolocity International, Inc. 2002
Stock option and stock award plan (Note H). Additionally, the Board of Directors
approved a total of 9,200,000 options to employees and Directors that vest
according to various individual employee contracts.
F-35
==================================================================================================
We have not authorized any dealer, salesperson or
other person to provide any information or make
any representations about Videolocity except the
information or representations contained in this
prospectus. You should not rely on any additional
information or representations if made.
-----------------------
This prospectus does not constitute an offer to ---------------------
sell, or a solicitation of an offer to buy any
securities: PROSPECTUS
o except the common stock offered by this ---------------------
prospectus;
o in any jurisdiction in which the offer or
solicitation is not authorized;
o in any jurisdiction where the dealer or
other salesperson is not qualified to 19,314,099 Shares of Common Stock
make the offer or solicitation;
o to any person to whom it is unlawful to
make the offer or solicitation; or VIDEOLOCITY INTERNATIONAL, INC.
o 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
accompanying sale does not imply that:
o there have been no changes in the affairs
of Videolocity Solutions after the date ______________, 2004
of this prospectus; or
o the information contained in this
prospectus is correct after the date of
this prospectus.
-----------------------
Until _________, 2004, 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.
=================================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation include an indemnification provision
under which we have agreed to indemnify directors and officers of Videolocity
from and against certain claims arising from or related to future acts or
omissions as a director or officer of Videolocity. Insofar as indemnification
for liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of Videolocity pursuant to the
foregoing, or otherwise, Videolocity has been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered. Videolocity will pay all expenses in connection with this
offering.
Securities and Exchange Commission Registration Fee $ 1,982.15
Printing and Engraving Expenses $ 2,500.00
Accounting Fees and Expenses $ 15,000.00
Legal Fees and Expenses $ 50,000.00
Miscellaneous $ 15,517.85
TOTAL $ 85,000.00
ITEM 26. SALES OF UNREGISTERED SECURITIES
During the past three years the registrant has issued the following
securities without registration under the Securities Act of 1933:
On December 4, 2000, we issued 3,028,076 shares of common stock to the
27 shareholders of Videolocity, Inc. to acquire that entity. On December 4,
2000, we also sold an aggregate of 610,000 shares of common stock to ten
sophisticated investors for $500,000. The proceeds were used to further our
business plan and for general corporate expenses. No underwriter was involved in
the transactions and the shares were issued or sold by us directly to the
shareholders and investors. In August 2001, we issued 15,000 shares of common
stock as additional consideration and bonus interest on certain secured notes
issued by us. Also in August 2001, we issued 20,000 shares to Millennium
International LLC, a Company that provides business consulting and advisor
services to various Companies, for services pursuant to a public relations
agreement. The services provided by Millenium were provided in full and we no
longer have an agreement with Millenium International.
In November 2001, we issued 50,000 shares to WAJ Enterprises L.C. as
additional consideration for a $300,000 loan to Videolocity. Also in November
2001, we issued 53,500 shares to five individuals including two of our Board of
Directors as consideration and bonus interest for extending the due date of
secured notes. In December 2001, we issued an additional 10,000 shares to
Millennium International pursuant to its agreement for services. In February
2002, we issued an aggregate of 180,000 shares of our common stock to three
II-1
persons in exchange for 600,000 shares of our Series A Preferred Stock,
initially issued pursuant to our acquisition of 5th Digit Technologies, LLC. In
March we issued 50,000 shares to Greenwood Tech pursuant to its agreement to
provide assistance, introductions, and coordination for services related to our
fund-raising. In June and July 2002, we issued a total of 45,000 shares of our
common stock to seventeen persons/companies as consideration and bonus interest
for extending the due date of the secured notes. Also, in June 2002 we issued
325,000 shares to three persons/companies pursuant to agreements for services.
In August 2002 we issued 355,000 shares to two persons for conversion of notes
payable.
During November 2002, we issued 24,000 shares to eight people as
consideration and bonus interest for extending the due date of notes payable.
During March 2003, we issued 50,000 shares to an individual, during April 2003,
we issued 83,500 shares to twelve people/companies, during May 2003, we issued
20,000 shares, and during June 2003 we issued 157,500 shares as consideration
and bonus interest for origination and/or extending the due date of notes
payable. During August 2003, we issued 16,000 shares to Ballard Investments LLC
pursuant to an agreement to provide advertising services to Videolocity. The
services were provided in full during FY 2003.
Subsequent to October 31, 2003, we have issued 565,000 shares as
consideration for and/or bonus interest under notes payable. We have also issued
2,900,000 shares upon conversion of convertible notes payable that existed at
October 31, 2003.
During the three months ended April 30, 2004, we issued an aggregate of
7,930,756 shares of common stock. Of that total, 611,500 shares were issued as
consideration for and/or bonus interest under notes payable to 15 entities
and/or individuals, 300,000 shares were issued as consideration for services,
80,000 shares were issued as partial payment under a legal settlement, and
500,000 shares were issued to an accredited investor in a private placement. We
also issued 6,429,056 shares of stock in conversion of notes payable and related
accrued interest to eight individuals/entities.
All of the aforementioned shares were issued without registration under
the Securities Act of 1933 in reliance on the exemption from such registration
requirements provided by Section 4(2) of that Act. The shares were issued
without general advertising or solicitation and purchasers acknowledged that
they were acquiring restricted securities which had not been registered under
the Securities Act. Certificates representing the shares bear the usual and
customary restricted stock legend.
Additionally, during the three months ended April 30, 2004 we issued
10,200 shares to employees under the Videolocity, Inc. 2000 Stock Incentive
Plan. These shares were subject to a registration statement filed with the SEC
on July 31, 2001.
All of the aforementioned shares were issued without registration under
the Securities Act of 1933 in reliance on the exemption from such registration
requirements provided by Section 4(2) of that Act. The shares were issued
without general advertising or solicitation and purchasers acknowledged that
they were acquiring restricted securities which had not been registered under
the Securities Act. Certificates representing the shares bear the usual and
customary restricted stock legend.
II-2
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.1(1) Agreement and Plan of Reorganization With Pine View
Technologies, Inc. Dated as of November 15, 2000
2.2(2) Articles of Merger Between Pine View Merger Co. and
Videolocity, Inc. Dated December 1, 2000
3.1(3) Amended and Restated Articles of Incorporation
3.2(4) By-Laws
3.3(5) Designation of Rights, Preferences and Privileges for the
Series B Voting Preferred Stock of Videolocity
International, Inc.
5.1(9) Opinion of Counsel
10.1(6) 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(6) Equity Line of Credit Agreement with Cornell Capital
Partners, L.P.
10.5(6) Registration Rights Agreement with Cornell Capital Partners,
L.P. related to Equity Line of Credit Agreement
10.6(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(6) Placement Agent Agreement with Westrock Advisors, Inc.,
related to Equity Line of Credit Agreement
10.8(6) Employment Agreement with Robert E. Holt
10.9(6) Employment Agreement with Martin P. Senn
10.10(6) Lease of Prospector Square Facility and Extension
10.11(6) UCC-1 Security Agreement
10.12(6) Amendment to Agreement of Purchase and Reassignment with
Merit Studios, Inc.
10.13(6) Employment Agreement with Cortney Taylor
10.14(6) Settlement Agreement with 5th Digit, LLC and Istream TV
10.15(6) Strategic Alliance Agreement with OnSat Network
Communications
II-3
10.16(6) Tech Flex Funding Dealer Marketing Agreement
10.17(6) Value Added Reseller Agreement with Viator Networks, Inc.
10.18(6) Specimen promissory note
10.19(8) Standby Equity Distribution Agreement
10.20(8) Compensation Debenture
10.21(8) Registration Rights Agreement
10.22 (9) Placement agent agreement with Newbridge Securities
Corporation
16.1(7) Letter regarding change in certifying accountant
23.1(10) Consent of Leonard Neilson, Esq.
23.2(9) Consent of Madsen & Associates, CPAs, Inc.
- --------------------------------------
(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.
(6) Filed as exhibit to Form 10-SB registration statement.
(7) Filed as exhibit to Form 8-K Current Report Dated March 10, 2004.
(8) Incorporated by reference to the Form 10-QSB for the period ended April 30,
2004.
(9) Provided herewith.
(10) Incorporated by reference to Exhibit 5.1.
II-4
Item 28. Undertakings
The undersigned registrant 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 Sections
10(a)(3) of the Securities Act of
1933 (the "Act");
(ii) Reflect in the prospectus any facts or events
arising after the effective date of
the Registration Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding the
foregoing, 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 prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement;
(iii) Include any additional or changed material
information on the plan of
distribution;
(2) That, for the purpose of determining any liability
under the Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the bona fide
offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities that remain unsold at the end of
the offering.
Insofar as indemnification for liabilities arising under the 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 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 Act and
will be governed by the final adjudication of such issue.
II-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
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, on July 9, 2004, 2004.
Date: July 9, 2004 VIDEOLOCITY INTERNATIONAL, INC.
By: /s/ Robert E. Holt
-------------------------
Name: Robert E. Holt
-------------------------
Title: President
-------------------------
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
Signature Title Date
- --------- ----- ----
By: /s/ Bennie Williams Chairman and Director July 9, 2004
---------------------------------
Bennie Williams
By: /s/ Larry R. McNeill Director July 9, 2004
---------------------------------
Larry R. McNeill
By: /s/ Robert E. Holt President and Director July 9, 2004
--------------------------------------- (Principal Executive Officer)
Robert E. Holt
By: /s/ Dan Driscoll.. July 9, 2004
---------------------------------
Dan Driscoll Director
By: /s/ Cortney L. Taylor C.F.O. July 9, 2004
--------------------------------- (Principal Financial and Accounting Officer)
Cortney L. Taylor
II-6