U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number 33-2310-D
VIDEOLOCITY INTERNATIONAL, INC.
-------------------------------
(Exact name of small business issuer as specified in charter)
NEVADA 87-0429154
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1762-A Prospector Dr., Park City, Utah 84060
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(801) 230-0839
--------------
(Issuer's telephone number)
Not Applicable
--------------
(Former name, former address, and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
Applicable only to corporate issuers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
As of March 12, 2001, there were 42,786,860 shares of the registrant's
common stock, par value $0.001, issued and outstanding.
Transitional Small Business Disclosure Format
(Check one): Yes [ ] No [X]
VIDEOLOCITY INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-QSB
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of January 31,
2001 and October 31, 2000 4
Condensed Consolidated Statements of Operations for the
three month periods ended January 31, 2001 and from
inception through January 31, 2001 5
Condensed Consolidated Statements of Cash Flows for the
three month periods ended January 31, 2001 and from
inception through January 31, 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
2
Part I--Financial Information
Item 1. Financial Statements
The accompanying unaudited condensed consolidated balance sheets of Videolocity
International, Inc. (the "Company" or the "Issuer") at January 31, 2001 and
October 31, 2000, and the related unaudited consolidated condensed statements of
operations for the three months ended January 31, 2001 and 2000, and the period
May 26, 2000 to January 31, 2001 have been prepared by the Company's management
and they do not include all information and notes to the financial statements
necessary for a complete presentation of the financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of the Company's management, all adjustments
considered necessary for a fair presentation of the results of operations and
financial position have been included and all such adjustments are of a normal
recurring nature. The financial statements included in this report on Form
10-QSB should be read in conjunction with the Company's audited financial
statements and the notes thereto included in its annual report on Form 10-KSB
for the year ended October 31, 2000.
Operating results for the quarter ended January 31, 2001 are not necessarily
indicative of the results that may be expected for the year ending October 31,
2001.
3
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
(Development Stage Company)
CONSOLIDATED BALANCE SHEETS
January 31, 2001 and October 31, 2000
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Jan 31, Oct 31,
2001 2000
----------- ----------
ASSETS
CURRENT ASSETS
Cash $ 412,807 $ 402,934
----------- ----------
Total Current Assets 412,807 402,934
----------- ----------
EQUIPMENT - net of accumulated depreciation - Note 2 25,520 -
----------- ----------
OTHER ASSETS
Advanced deposits 31,656 10,656
Marketable securities - available-for-sale - Note 3 50,000 50,000
Patents and license agreement - Note 4 & 7 243,951 200,000
Good will - Note 5 950,638 -
----------- ----------
1,276,245 260,656
----------- ----------
$ 1,714,572 $ 663,590
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable - license agreement - Note 4 $ - $ 200,000
Accounts payable - Note 8 33,974 19,920
----------- ----------
Total Current Liabilities 33,974 219,920
----------- ----------
STOCKHOLDERS' EQUITY
Preferred stock - Notes 1 and 9
10,000,000 shares authorized, at $0.001 par value;
950,000 series A issued and 40,000 series B issued 990 -
Common stock
125,000,000 shares authorized, at $0.001 par value;
42,786,860 shares issued and outstanding on
January 31, 2001; 6,405,610 on October 31, 2000 42,786 6,406
Capital in excess of par value 1,978,731 567,043
Deficit accumulated during the development stage (341,909) (129,779)
----------- ----------
Total Stockholders' Equity 1,680,598 443,670
----------- ----------
$ 1,714,572 $ 663,590
=========== ==========
The accompanying notes are an integral part of these financial statements.
4
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
(Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended January 31,
2001 and 2000 and the Period May 26, 2000 (date
of inception) to January 31, 2001
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended May 26,
Jan 31, Jan 31, 2000 to
2001 2000 Jan 31, 2001
---------- ----------- ------------
REVENUES $ 3,257 $ - $ 3,257
---------- ----------- ----------
EXPENSES
Research and development 86,285 - 86,285
Administrative 119,843 - 249,622
Depreciation and amortization 9,259 - 9,259
---------- ----------- ----------
215,387 - 345,166
---------- ----------- ----------
NET LOSS $ (212,130) $ - $ (341,909)
========== =========== ==========
NET LOSS PER COMMON SHARE
Basic $ - $ -
---------- -----------
AVERAGE OUTSTANDING SHARES
Basic 42,786,860 -
---------- -----------
The accompanying notes are an integral part of these financial statements
5
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
(Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended January 31, 2001 and 2000
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
Jan 31, Jan 31,
2001 2000
---------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (212,130) -
Adjustments to reconcile net loss to
net cash provided by operating
activities
Change in accounts payable 12,392 -
Depreciation and amortization 9,259 -
Net Decrease in Cash From Operations (190,479) -
---------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (26,648) -
Advance deposits (21,000) -
Purchase of license agreement and patent (252,000) -
Advances on note receivable (100,000) -
---------- -------
(399,648) -
---------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common and preferred capital stock 600,000 -
---------- -------
Net Increase in Cash 9,873 -
Cash at Beginning of Period 402,934 -
---------- -------
Cash at End of Period $ 412,807 $ -
========== =======
NON CASH FLOWS FROM INVESTING ACTIVITIES
Issuance of 30,281,250 common shares for all outstanding stock
of Videolocity, Inc. $ -
----------
Issuance of 950,000 preferred shares for members' interests in
5th Digit Technologies LLC 950,000
----------
The accompanying notes are an integral part of these financial statements.
6
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION
The Company was incorporated under the laws of the State of Nevada on November
5, 1985 with authorized common stock of 50,000,000 shares at $0.001 par value
with the name "Pine View Technologies Corporation. On November 27, 2000 the name
was changed to "Videolocity International Inc." and on November 22, 2000 the
Company increased the authorized common capital stock to 125,000,000 with the
same par value and authorized preferred capital stock of 10,000,000 shares at
$.001 par value. The terms of the preferred are outlined in note 9.
During December 2000 the Company completed the acquisition of all of the
outstanding stock of Videolocity, Inc. and 5th Digit Technologies LLC. See Notes
5 and 6
The Company and its subsidiaries are in the business of developing and marketing
systems, products, and solutions for the delivery of video and other content to
end users on demand.
On December 4, 2000 the Company completed a reverse common stock split of .61
shares for each outstanding share. This report has been completed showing after
stock split shares from inception.
On December 4, 2000 the Company completed a private placement offering of
6,100,000 common shares for cash of $500,000 and an on January 22, 2001 an
offering of 40,000 shares of series B preferred for cash of $100,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Methods
The Company recognizes income and expenses based on the accrual method of
accounting.
Dividend Policy
The Company has not yet adopted a policy regarding payment of dividends.
Income Taxes
On January 31, 2001, the Company and its subsidiaries had an available net
operating loss carry forward of $336,884 resulting in a tax benefit of $101,065
from the loss carry forward. The tax benefit has been fully offset by a
valuation reserve because the use of the future tax benefit is doubtful since
the Company has not started operations. The net operating loss will expire in
2022.
Amortization of the Patents and the License Agreement
The patents are being amortized over seventeen years. The license agreement is
being amortized to expense over ten years.
7
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Equipment
Office equipment is being depreciated over five years.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share amounts are computed based on the weighted
average number of shares actually outstanding. Diluted net income (loss) per
share amounts are computed using the weighted average number of common shares
and common equivalent shares outstanding as if shares had been issued on the
exercise of any preferred share rights unless the exercise becomes antidilutive
and then only the basic per share amounts are shown in the report.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consists primarily of cash. Cash balances are
maintained in accounts that are not federally insured for amounts over $100,000
but are other wise in financial institutions of high credit quality.
Principals of Consolidation
The consolidated financial statements shown in this report includes the assets
and liabilities of Videolocity, Inc. (subsidiary) as if the acquisition of the
subsidiary by the Company was completed on October 31, 2000 and excludes the
historical operating information of the Company prior to December 4, 2000, and
the operating information of the 5th Digit Technologies, LLC (subsidiary) prior
to December 22, 2000.
All intercompany transactions have been eliminated
Financial Instruments
The carrying amounts of financial instruments, including cash, marketable
securities, advance deposits, and accounts payable, are considered by management
to be their estimated fair values.
Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of the assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing these financial statements.
8
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130. The
adoption of this standard had no impact on the total stockholder's equity.
Other Recent Accounting Pronouncements
The Company does not expect that the adoption of other recent accounting
pronouncements will have a material impact on its financial statements.
3. MARKETABLE SECURITIES - AVAILABLE - FOR - SALE
On October 27, 2000 the Company acquired 1,000,000 common shares of Merit
Studios, Inc. for $50,000. See Note 4
4. ACQUISITION OF LICENSE AGREEMENT
On October 27, 2000, the Company entered into a technology license agreement
with Merit Studios, Inc. pertaining to Merit's proprietary compression
technology as it applies to the compression and delivery of video and other
content. The term of the agreement is for five years, which is extended for
additional one-year periods unless terminated by either party. The Company is
granted exclusive rights to the technology for the first two years of the
agreement, and thereafter, the exclusive rights will be extended for additional
one-year periods as long as the Company enters into at least three sublicense
agreements for the technology during each additional year. The terms of the
agreement was $250,000, with $50,000 being allocated to the purchase price of
the 1,000,000 common shares of Merit Studios, Inc. outlined in note 3. The
license agreement was subsequently amended as described in Item 5 of this
report.
5. ACQUISITION OF ALL OUTSTANDING STOCK VIDEOLOCITY, INC.
On December 4, 2000 the Company (parent) completed the acquisition of all of the
outstanding stock of Videolocity International, Inc. ( subsidiary), by a stock
for stock exchange in which the stockholders of of the subsidiary received
30,281,250 common shares of the parent, representing 82% of the outstanding
stock of the parent. For reporting purposes, the acquisition was treated as an
acquisition of the parent by the subsidiary (reverse acquisition) and a
recapitalization of the subsidiary. For reporting purposes the assets and
liabilities of the subsidiary are shown in the balance sheet as if the
acquisition had been completed on October 31, 2000 The historical operating
statements prior to December 4, 2000 are those of the subsidiary. No good will
was recognized from the acquisition.
9
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
5. ACQUISITION OF ALL OUTSTANDING STOCK VIDEOLOCITY, INC. - Continued
The subsidiary was organized on May 26, 2000 for the purpose of developing and
marketing systems, products, and solutions for the delivery of video and other
content to end users on demand.
6. ACQUISITION OF ALL MEMBERS' INTERESTS OF 5TH DIGIT TECHNOLOGIES, LLC
On December 22, 2000 the Company (the parent) acquired all of all the
outstanding members' interest in 5th Digit Technologies LLC (the subsidiary) in
exchange for 950,000 series A preferred shares of the parent in which good will
was recognized. The historical operating statements prior to December 22, 2000
are not included in the operating statements.
The subsidiary was organized on October 10, 2000.
7. PATENTS PENDING
The Company has three patent applications pending numbered 60/226,66575,
60/218,528, 60/233,447 and described as follows.
The "Set Top Box" is a network appliance based on open hardware and software
methodologies, allowing for rapid development and deployment for different
markets.
The "Webcaster" is a ruggedized computer capable of reliably transmitting
multiple streams of internet video, whether in a studio application, or in
demanding environments.
The "Enhanced Video Compression Method" describes a method of filtering a
digitized video, much like a dedicated Time Base Corrector used on a broadcast
signal for analog video.
8. RELATED PARTY TRANSACTIONS
Officers, directors, employees and their affiliates, have acquired 71 % of the
common stock issued and 96% of the preferred stock issued. Included in the
accounts payable on January 31, 2001 are amounts due to related parties of
$8,204.
9. PREFERRED CAPITAL STOCK
During December 2000 the Company issued 950,000 shares of series A preferred
stock and 40,000 shares of series B preferred stock.
10
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
9. PREFERRED CAPITAL STOCK - continued
The terms of the series A and B are outlined as follows.
1. Voting. Each share of preferred series A and B stock shall be entitled to
one vote on all matters submitted to a vote of the shareholders.
2. Conversion.. Each share of preferred series A and B stock shall be
convertible into one share of common stock by the holders at any time upon
delivery to the Company by written notice of their election to convert.
Each share of preferred series A stock shall automatically be converted to
common shares on February 1, 2002, and each share of preferred series B
shall automatically be converted on March 1, 2002, if not converted prior
to that date.
3. Redemption. Upon written notice from the holders of the series A and B
preferred stock as provided below, the Company will redeem the preferred
stock during the 30 day period January 2, 2002 through January 31, 2002
for the preferred series A stock, and February 1, 2002 through February
28, 2002 for the preferred series B stock, at a price $5.00 per share. Any
holder of the preferred stock desiring to redeem his shares shall provide
written notice to the Company within the periods described above.
4. Call Provision. The preferred stock shall be callable by the Company until
January 31, 2002 for the preferred series A stock, and February 28, 2002
for the preferred series B stock, at a price of $5.00 per share and the
Company shall provide written notice of its intent to call not less than
30 days prior to the effective date of the call. Any holder of preferred
stock may elect to convert to common stock prior to the call with notice
of such conversion within five days prior to the effective date of the
call.
5. Liquidation.. The preferred series A and B stock shall be entitled to a
preference over the common stock of $5.00 per share in the event of
dissolution of the Company. The liquidation preference of the preferred
series B stock is subject and subordinate to the liquidation preference of
the preferred series A stock.
10. STOCK INCENTIVE PLANS
On October 1, 2000 the Company established a stock incentive plan to attract and
retain qualified people to serve as key employees. Awards made under the plan
shall be in plan units and each unit can be convertible, at the option of the
participant, into one share of the Company's common stock after the vesting
requirement has been satisfied. The Company has reserved 10,000,000 common
shares that can be issued under the plan. On the date of this report, awards
with respect to 9,093,750 shares had been made under the plan but none of such
awards had vested.
On November 15, 2000, the Company established an omnibus stock option and stock
award plan and reserved 5,000,000 shares of the Company's common stock for
issuance under the plan. As of the date of this report, no awards had been made
under such plan.
11
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
11. CONTINUING AND CONTINGENT LIABILITIES
On December 20, 2000 the Company entered into employment and consulting
agreements starting January 5, 2001 and continuing for one year which provide
for annual payments of $223,000 for three related parties.
12. LEGAL ACTIONS
On July 25, 2000 the Company entered into an exclusive license agreement to
manufacture and market all technologies, hardware and software, developed by the
vendor, which includes a movie delivery technology using a device known as a
"set-top box". The Company paid an advance deposit of $4,000, which is included
in the advance deposits in the balance sheet. After the agreement was completed
the vendor refused to comply with terms of the agreement. The company has
started a legal action against the vendor to enforce the terms of the agreement.
Management, with counsel, believes the court will enforce the terms of the
contract.
On January 2, 2001, the vendor filed a legal action in New York state against
the Company, 5th Digit Technologies, LLC, and certain individuals, alleging
tortious interference with the vendor's releationships, breaches of fiduciary
duties, and misappropriation of information and properties. The Company believes
the action to be without merit and intends to vigorously defend such action.
12
Item 2. Management's Discussion and Analysis or Plan of Operation
Plan of Operation
The following discussion should be read in conjunction with the Issuer's
unaudited financial statements included elsewhere in this report.
Videolocity's plan of operation is to use its existing capital together with the
proceeds from future financings to complete development and commence deployment
and sales of its video-on-demand system. As of January 31, 2001, Videolocity had
net cash assets in the amount of approximately $413,000. Videolocity estimates
that its minimum expenses during the next twelve months will be approximately
$1,200,000, consisting of $900,000 in payroll, $49,000 for office rent, and
$151,000 for general and administrative expenses, including legal and
accounting. Videolocity will also incur substantial additional costs in
connection with the manufacture of set-top-boxes for use with its
video-on-demand systems. Videolocity estimates that such costs will be a minimum
of $10,000,000 but plans to finance those costs based on contracts entered into
for the deployment of its video-on-demand systems.
Videolocity plans to generate revenues from the delivery of video content to the
end users of its video-on-demand systems and believes that revenues will
commence by mid-summer from contracts that are currently in negotiation.
Videolocity will charge a fee for each movie or other item of content viewed
through its system and anticipates that it will remit a portion of such fee to
the studio or other content provider. Videolocity also plans to sell or lease
the set-top boxes for use with its video-on-demand system to its viewers at a
price calculated to return its out of pocket costs and a small profit over a
period of three years.
Videolocity plans to seek additional equity financing in two or more offerings
during the next twelve months in a total amount of up to approximately
$55,000,000, which will permit it to cover its minimum expenses described above
and to accelerate the deployment of its video-on-demand systems. Videolocity has
not entered into any agreement or arrangement for the provision of such
financing and no assurances can be given that it will be able to obtain such
financing on terms acceptable to it or at all. Based on its current costs of
operation and contract commitments, Videolocity estimates that its current
assets will be sufficient to fund its cost of operation for approximately six
months and that it will be required to obtain additional financing before that
time in order to continue its operations.
Forward Looking Statements
This report contains forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. These statements reflect the views of
Videolocity International, Inc. ("Videolocity" or the "Issuer") with respect to
future events based upon information available to it at this time. These
forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from these
statements. Forward-looking statements are typically identified by the use of
the words "believe," "may," "will," "should," "expect," "anticipate,"
"estimate," "project," "propose," "plan," "intend," and similar words and
expressions. Examples of forward-looking statements are statements that describe
the proposed operation and marketing of Videolocity's video-on-demand systems,
statements that describe the functions and operations of technology it has
licensed but not tested, statements with regard to the nature and extent of
competition Videolocity may face in the future, and statements with respect to
future strategic plans, goals or objectives. Forward-looking statements are
contained in this information statement under the caption "Plan of Operation."
13
The forward-looking statements are based on present circumstances and on
Videolocity's predictions respecting events that have not occurred, that may not
occur, or that may occur with different consequences and timing than those now
assumed or anticipated. Actual events or results may differ materially from
those discussed in the forward-looking statements as a result of various
factors, including the risk factors discussed in this report. These cautionary
statements are intended to be applicable to all related forward-looking
statements wherever they appear in this report. Any forward-looking statements
are made only as of the date of this report and Videolocity assumes no
obligation to update forward-looking statements to reflect subsequent events or
circumstances.
Part II--Other Information
Item 1. Legal Proceedings
See the Issuer's annual report on Form 10-K for the year ended October 31, 2000,
and its current report on Form 8-K filed January 5, 2001, for a description of
legal proceedings involving the Company.
Item 2. Changes in Securities
Designation of Series A and B Preferred Stock
On December 22, 2000, Videolocity designated 950,000 shares of its authorized
preferred stock as Series A Voting Preferred Stock. All 950,000 of such
authorized shares of Series A Voting Preferred Stock were issued in connection
with Videolocity's acquisition of 5th Digit Technologies, LLC. The Designation
of Rights, Preferences, and Privileges for the Series A Voting Preferred Stock
was filed as an exhibit to Videolocity's current report on Form 8-K filed
January 5, 2001.
On February 1, 2001, Videolocity designated 1,000,000 shares of its authorized
preferred stock as Series B Voting Preferred Stock. As of the date of this
report, 40,000 shares of Series B Preferred Stock have been issued. The Series B
Voting Preferred Stock: is entitled to one vote per share with the Common Stock
on all matters submitted to Videolocity's shareholders; participates with the
Common Stock on all dividends; is callable by Videolocity at a price of $5.00
per share through February 28, 2002, subject to prior conversion by the holders;
is redeemable by Videolocity at the request of the holders at a price of $5.00
per share during the period from February 1, 2002 through February 28, 2002; is
convertible at any time at the option of the holders into Videolocity Common
Stock on a share-for-share basis, and will automatically be converted to Common
Stock on March 1, 2002; and is entitled to a liquidation preference of $5.00 per
share. The foregoing summary is qualified in its entirety by reference to the
Designation of Rights, Privileges, and Preferences of Series B Voting Preferred
Stock, a copy of which is included as an exhibit to this report.
Recent Sales of Unregistered Securities
On December 22, 2000, Videolocity delivered 950,000 shares of its Series A
Preferred Voting Stock to the four shareholders of 5th Digit Technologies, LLC
Inc. to acquire 5th Digit Technologies, LLC. On or about February 1, 2001, the
Issuer sold 40,000 shares of its Series B Voting Preferred Stock to one
sophisticated investor for $100,000. No underwriter was involved in the
transactions and the shares were issued or sold by the Issuer directly to the
shareholders (members) and the investor. The shares were sold without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on the exemption from such registration requirements provided
by Section 4(2) of the Securities Act for transactions not involving any public
offering. The shares were sold without general advertising or solicitation. The
14
purchasers acknowledged that they were purchasing "restricted securities" which
had not been registered under the Securities Act and which were subject to
certain restrictions on resale, and the certificates representing the shares
were imprinted with the usual and customary restricted stock legend.
Item 4. Submission of Matters to a Vote of Security Holders
The following actions were authorized and approved by shareholders holding a
majority of Videolocity's issued and outstanding shares of common stock on
November 15, 2000, the record date: (i) a .61-for-1 reverse stock split in the
issued and outstanding shares of the Issuer's common stock; (2) the acquisition
of Videolocity, Inc. in exchange for 30,281,250 post-split shares of the
Issuer's common stock pursuant to the terms of an Agreement and Plan of
Reorganization between the parties dated as of November 15, 2000; (3) the
adoption and approval of the Amended and Restated Articles of Incorporation of
Videolocity International, Inc. dated as of November 27, 2000; (4) an increase
in the size of the Company's board of directors to six persons and the election
of James P. Hill, Douglas B. Meadows, Larry R. McNeill, D. T. Norman, Jerry E.
Romney, Jr., and Lawrence Turel as directors of the Company, subject to
completion of the acquisition of Videolocity, Inc.; and (5) the adoption and
approval of the Videolocity International, Inc. 2000 Stock Option and Stock
Award Plan with respect to which 5,000,000 post-split shares of the Company's
common stock were reserved for issuance. Shareholders holding 6,350,000
pre-split shares of the Issuer's common stock, or approximately 60.47% of the
10,501,000 pre-split shares that were issued and outstanding on the record date,
approved the foregoing actions.
Item 5. Other Information
Videolocity, Inc., a wholly owned subsidiary of the Issuer, and Merit Studios,
Inc. ("Merit") had previously entered into a License Agreement (the "License
Agreement") with Merit dated as of October 27, 2000, which is described in Note
4 to the unaudited financial statements included with this report. Subsequent to
January 31, 2001, Videolocity, Inc. assigned its interest in the License
Agreement to Videolocity Direct, Inc., a wholly owned subsidiary of the Issuer
("Videolocity Direct"), and on March 6, 2001, Videolocity Direct and Merit
entered into an Amended and Restated License Agreement (the "Amended Agreement")
that superceded and replaced the License Agreement. The Amended Agreement made
the following significant changes to the License Agreement: (i) the term of the
agreement was increased to 20 years, with Videolocity Direct having an exclusive
license to the WormHole Video-On-Demand System for 10 years and a non-exclusive
license for an additional 10 years, subject to the performance of its
obligations; (ii) Merit was issued 2,500,000 shares of the authorized 10,000,000
common shares of Videolocity Direct, with the Issuer owning 5,000,000 common
shares of Videolocity Direct, and the remaining 2,500,000 authorized and
unissued shares being reserved for issuance in an initial public offering once
the Wormhole Video-On-Demand System becomes fully operational; (iv) the license
fees payable by Videolocity Direct will consist of the cash fees previously
paid, future royalty payments of 10% of Videolocity Direct's net revenue per
transaction over the WormHole Video-On-Demand System, and one-half of all
proceeds received by Videolocity Direct from the sale of sublicenses under the
Amended Agreement; (v) Videolocity Direct will pay Merit a one time compression
fee for each item of video content to be delivered through the Wormhole
Video-On-Demand System; and (vi) Videolocity Direct will be responsible for
obtaining all content for delivery through the Wormhole Video-On-Demand System.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following documents are included as exhibits to this report:
Exhibit SEC Ref.
No. No. Title of Document Location
- -------- ------ ----------------- --------
3.1 3 Designation of Rights, Preferences and This
Privileges for the Series B Voting Filing
Preferred Stock of Videolocity
International, Inc.
(b) Reports on Form 8-K
On January 5, 2001, the Issuer filed a current report on Form 8-K with respect
to its acquisition of 5th Digit Technologies LLC, its designation of Series A
Preferred Stock, and developments in legal proceedings involving the Issuer. On
March 6, 2001, the Issuer filed an amendment to such report to file financial
and pro forma financial information with respect to 5th Digit Technologies, LLC.
Signatures
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Videolocity International, Inc.
Dated: March 15, 2001 By /s/ Jerry E. Romney, Jr.
-------------------------
Jerry E. Romney, Jr.
President
Dated: March 15, 2001 By /s/ Larry R. McNeill
---------------------
Larry R. McNeill
Larry R. McNeill, Vice President and
CFO and Chief Financial Officer
(Principal Financial and Accounting
Officer)
16