FILED PURSUANT TO RULE NO. 424(b)(3)
REGISTRATION NO. 33-2310-D
SUPPLEMENT TO PROSPECTUS
DATED APRIL 13, 2006
Videolocity International, Inc.
SHARES OF COMMON STOCK
19,314,099
Attached hereto and hereby made part of the prospectus is: (1) the
Company's Annual Report on Form 10-KSB for the year ended October 31, 2005 as
filed with the U.S. Securities and Exchange Commission on February 14, 2006, (2)
the Company's Quarterly Report on Form 10-QSB for the quarter ended January 31,
2005 as filed with the U.S. Securities and Exchange Commission on March 22,
2006, (3) the Company's current report on Form 8-K as filed with the U.S.
Securities and Exchange Commission on December 16, 2004 and (4) the Company's
current report on Form 8-K as filed with the U.S. Securities and Exchange
Commission on September 21, 2004, respectively. Prospective investors in our
common stock should carefully read each of these documents and the related
financial information prior to making any investment decision.
--------------------------
You should only rely on the information provided in the prospectus, this
prospectus supplement or any additional supplement. We have not authorized
anyone else to provide you with different information. The common stock is not
being offered in any state where the offer is not permitted. You should not
assume that the information in the prospectus or this prospectus supplement or
any additional supplement is accurate as of any date other than the date on the
front of those documents.
--------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus or this prospectus supplement. Any
representation to the contrary is a criminal offense.
--------------------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS APRIL 13, 2006
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended October 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 33-2310-D
VIDEOLOCITY INTERNATIONAL, INC.
----------------------------------------------
(Name of small business issuer in its charter)
Nevada 87-0429154
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1762A Prospector Avenue, Park City, Utah 84060
(Address of principal executive offices) (Zip Code)
Issuer's telephone no.: (435) 615-8338
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year. $ 114,420
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and ask prices of such stock as of a specified date within 60 days.
$438,047 ($0.03 per share on January 31, 2006 and 14,601,577 shares held by
non-affiliates).
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding as of January 31, 2006
- ----------------------------- ----------------------------------
Common Stock, $.001 par value 23,456,699
DOCUMENTS INCORPORATED BY REFERENCE NONE
Transitional Small Business Disclosure Format. Yes [ ] No [X]
VIDEOLOCITY INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I
Item 1. Description of Business...................................... 3
Item 2. Description of Property...................................... 18
Item 3. Legal Proceedings............................................ 18
Item 4. Submission of Matter to a Vote of Security Holders........... 20
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........ 20
Item 6. Management's Discussion and Analysis or Plan of Operation....... 22
Item 7. Financial Statements............................................ 25
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 26
Item 8A. Controls and Procedures......................................... 26
Item 8B. Other Information............................................... 27
PART III
Item 9. Directors, Executive Officers, Promoters and Control persons;
Compliance with Section 16(a) of the Exchange Act............ 27
Item 10. Executive Compensation.......................................... 29
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.............................. 31
Item 12. Certain Relationships and Related Transactions.................. 33
Item 13. Exhibits........................................................ 33
Item 14. Principal Accountants Fees and Services......................... 35
Signatures...................................................... 32
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PART I
Item 1. Description of Business
In this Annual Report on Form 10-KSB, "Videolocity", the "Company," "we," "our"
and "us" refer to Videolocity International, Inc. and its consolidated
subsidiaries, unless the context otherwise require.
Forward-Looking and Cautionary Statements
This report contains certain forward-looking statements. These statements relate
to future events or our future performance and involve known and unknown risks
and uncertainties. Actual results may differ substantially from such
forward-looking statements, including, but not limited to, the following:
o our ability to fully develop and successfully market our
proprietary products;
o our ability to meet our cash and working capital needs;
o our ability to maintain our corporate existence as a viable
entity; and
o other risks detailed in our periodic report filings with the SEC.
In some cases, you can identify forward-looking statements by terminology such
as "may," "will" "should," "expects," "intends," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "continue," or the negative of
these terms or other comparable terminology.
These statements are only predictions. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
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 standard
definition video at speeds of 1Mbps or less and high definition at approximately
1.5 Mbps. We are also streaming video to mobile and wireless devices at speeds
of 25 Kpbs to 512 kpbs depending on frames per second and resolution. We have
technological capacity to enter into a variety of markets that include
hospitality, healthcare, residential, security and corporate training with
currently developed technologies.
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, the Caribbean and
Latin America. 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 are actively marketing 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
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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 a 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 wired 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 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 is paid for based
upon a set fee to the content provider for each use by the end customer. 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.
Business Developments
During 2001, we developed a Digital Entertainment System 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 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. Since 2001, we have developed additional uses for the core
technologies and currently 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, desk top and laptop computers, PDAs, and mobile phones.
on-demand.
DES is designed to play videos in quality equivalent to DVD, in real-time,
full-screen, and full-motion. DES is also capable of HD resolution depending on
network architecture. 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. Additionally, the system provides digital music-on-demand,
Internet games, high-speed Internet access and many other e-commerce
applications.
DES 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 holds one utility patent application that encompasses five
previously filed provisional patents and has related foreign patent applications
pending. The inventions claimed in those patents and patent applications cover
aspects of Videolocity's current and possible future products, and related
technologies. The DES is currently patent pending in the United states and
Europe.
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We have obtained United States federal trademark registration for the
Videolocity wordmark and the DES logo mark. We have pending registrations for
five other related marks in the United States. We believe that the establishment
of the Videolocity and DES marks in the United States are material to our
operations. Videolocity has also applied for or obtain registration of the
Videolocity mark and other marks in several other key countries and within
Europe. Videolocity has several additional inventions and processes, as well as,
several related trademarks that it intends to file applications for in the near
future.
Strategic Partnerships/Suppliers
To date, the Company has engineered all components of our DES. We have also
arranged for the manufacture of all components, assembly, testing and shipping.
All supplies are available and ready for shipment and 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.
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, Mexico, the Caribbean and
Latin America. Our marketing includes live on-site demonstrations and
presentations at conferences and trade show exhibits. We have budgeted
approximately $125,000 for marketing expenses including personnel which will
provide for our marketing efforts for the next year. The funding for our
marketing strategy and other operations will come from draws on our Standby
Equity Agreement or sought in the form of additional debt or equity funding
and/or credit lines.
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
facilities and residential communities enables us to deliver content to many
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diverse market segments. According to USA Today, there is 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 could 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 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
currently 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 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 competition's main technology
compared to our DES. Comparable cost for these systems typically starts at
approximately $150,000 to $200,000, not including set-top-boxes. The equivalent
for our system would be approximately $35,000 to $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;
* video rental distribution companies such as Netflix and Redbox;
* providers of video entertainment over cable and satellite networks,
such as DirectTV, Dish Network, and AT&T ;
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* video stores, supermarkets, mass merchandisers, club stores, and other
retail outlets that sell video cassettes;
* web-based video channels; and
* movie theaters, live theater, sporting events, and other similar
businesses that compete for the general public's entertainment dollar.
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. However,
to the best of our knowledge, no such systems are available for widespread
public use as of this date. Several major movie studios, including Sony, Walt
Disney Co. and 20th Century Fox have also announced their intention to 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, the Company has secured three contracts to install our DES. 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 totals approximately 713 rooms. The terms of each of the contracts are
similar including five-year terms, installation of our DES, providing content
including Internet, and maintenance during the term of the contract.
To date we have installed our DES into the Hotel San Remo Casino & Resort, now
known as The Hooters Casino Hotel, and have installed high-speed internet access
into the 54 suites at the Hotel Park City.
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. We intend to operate in the unlicensed spectrum and will not need
FCC licensing to deploy our DES. 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.
Research and Development
We have devoted the majority of our resources to developing technologies,
conducting beta testing, engineering, supporting our wireless delivery
platforms, and deploying infrastructures. For the past three years, we have
spent substantial resources to facilitate the engineering and technical
development of our DES and beta testing it, both wired and wireless, at our
facilities in Park City, Utah.
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Historical Information
We originally organized as a Nevada corporation on November 5, 1985 as Pine View
Technologies, Inc. and in 1987, we completed a public offering of our common
stock. In December 2000, we changed our name to Videolocity International, Inc.
Significant Events
Joint Venture
-------------
On December 1, 2005, the Company entered into an operating agreement with E.
Oliver Capital Group LLC toward the formation of a joint venture between
Videolocity International, Inc. and E. Oliver Capital Group LLC.
The finalization of the agreement is contingent on shareholder approval and
Videolocity obtaining extensions of all outstanding notes payable. Toward that
goal, we have forwarded a proposal to certain shareholders and have been in
discussions with the holders of all notes payable. We did not solicit proxies
and submitted the proposal to shareholders holding at least a majority of the
outstanding shares of the company. To date, we have received verbal commitments
representing a majority of the voting shares approving the proposal but are
currently waiting for the signed documents from the individual shareholders.
Additionally, to date, the Company has received extensions of notes payable
totaling approximately $1,405,000, reached a payback agreement on $215,000 and
has received commitments on an additional $920,000 which the company is
currently waiting for the signed documents, and management is currently in
discussions with the holders of the remaining $10,000 of notes payable.
Terms of the JV operating agreement if finalized with shareholder approval and
extensions of notes payable would be as follows:
1) Officers. Robert Holt, CEO of Videolocity, shall be the Chief Executive
Officer of the LLC. The Manager may, if he deems it appropriate,
appoint other officers for the LLC. Any officers of the LLC shall
consist of such officers or agents as may be determined from time to
time by the Manager. The officers shall act in the name of the LLC and
shall supervise its operation under the direction and management of the
Manager and shall hold office at the pleasure of the Manager.
2) Videolocity International, Inc. Videolocity International, Inc. shall
contribute, transfer and irrevocably assign to the LLC all of its
intellectual property technology ("Intellectual Property Technology")
which shall include (i) its Videolocity Digital Entertainment System
(DES tm) and related services, trade secrets, patents, copyrights and
any other intellectual property rights, including High Speed Internet
Access together with digital streaming video technology, and (ii) its
existing license agreements and agreements for Video-On-Demand
programming for the DES, including digital movie titles, other content
and entertainment (including music and gaming content). The LLC shall
continue developing and licensing the Intellectual Property Technology,
including the current license to E Oliver Capital Group LLC.
3) E Oliver Capital Group LLC. E Oliver Capital Group LLC shall contribute
from time to time such funds as are necessary to operate and deploy the
intellectual property technology, including necessary salaries and
other operating expenses and capital expenditures of the LLC. Upon the
execution of this Agreement, E Oliver Capital Group LLC will advance
Videolocity International, Inc. the aggregate sum of US$ required for
Videolocity to maintain all corporate functions including SEC
reporting, legal, audit, public relations, investors relations and
general business based on the budgets provided by Videolocity
International, Inc. In addition, if distributions by the LLC to
Videolocity International, Inc. are not sufficient to fund the costs of
maintaining a CFO of Videolocity International, Inc. through December
31, 2007, E Oliver Capital Group LLC from time to time will advance
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Videolocity International, Inc. such amounts as are necessary to fund
the costs of maintaining such CFO. All amounts advanced by E Oliver
Capital Group LLC to Videolocity International, Inc. will be recouped
from distributions by the LLC to Videolocity International, Inc. via
license fees and residual revenues.
4) Videolocity International, Inc. shall receive (i) all technical
transfer fees (the mark up over cost and installation of equipment
deployed) and the first 5% of the net licensing fees derived by the LLC
in licensing the Intellectual Property Technology from the current
version 1 of the Intellectual Property Technology and (ii) twenty-five
percent (25%) of the technical transfer fees and the first 5% of the
net licensing fees derived by the LLC in licensing version 2 of the
intellectual property technology currently in development. E Oliver
Capital Group LLC is advancing Videolocity International, Inc. the
aggregate sum of US$ and may advance additional amounts to Videolocity
International, Inc., all of which will be first recouped from
distributions by the LLC to Videolocity International, Inc. prior to
Videolocity International, Inc. receiving payment of distributions.
5) E Oliver Capital Group LLC shall receive any remaining revenues of the
LLC from the development and licensing of the Intellectual Property
Technology.
6) Members Have No Exclusive Duty to LLC. The Members shall not be
required to participate in the LLC as their sole and exclusive
business. Members may have other business interests and may participate
in other investments or activities in addition to those relating to the
LLC. Neither the LLC nor any other Member shall have any right, by
virtue of this Agreement, to share or participate in another Member's
business interests, investments or activities or the income or proceeds
derived therefrom. No Member shall incur liability to the LLC or to any
other Member by reason of participating in any such other business,
investment or activity.
7) Withdrawal by E Oliver Capital Group LLC. If E Oliver Capital Group LLC
at any time prior to December 31, 2012 withdraws from the LLC, all
rights to the Intellectual Property Technology shall be reassigned to
Videolocity International, Inc., provided that E Oliver Capital Group
LLC shall continue to have a non-exclusive license to utilize the
Intellectual Property Technology and any new versions or improvements
thereof throughout the World.
UCC-1 and Secured Notes
-----------------------
On July 30, 2001 our Board of Directors authorized the borrowing of $750,000 in
60 day secured notes bearing 8% simple interest. The notes are secured by an
assignment and collateral pledge of 100% of the outstanding stock of our
subsidiary, Videolocity Technologies, Inc. (5 million shares), which holds our
Patent Applications. 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, as security, in exchange for an extension of
maturity dates on the notes payable to September 2002. The filing included the
original $750,000 together with $300,000 due to WAJ Enterprises LLC, and also
included $450,000 to be named. A total of $235,000 of the secured notes were
held by Board of Director member Bennie L. Williams ($100,000). During the year
ended October 31, 2004 $535,000 of the total was converted to common stock of
the Company which included $135,000 to former Board of Director member Larry
McNeill.
The remainder of the notes totaling $965,000 remain outstanding as of the date
hereof. As of October 31, 2005, the secured notes payable had maturities 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 $480,000 matured
during August 2003.
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While obtaining extensions on notes payable for the finalization of the joint
venture, the Company obtained extensions of all the notes payable under the
UCC-1 with the exception of one note that a re-payment schedule was agreed upon.
Further, the company received releases from each of the UCC-1 note holders in
all security interest in the Company's intellectual property and assets,
including proceeds and products of collateral.
Other Notes
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.
During the year ended October 31, 2003, the Company originated approximately
$950,000 in notes payable from 6 individuals and/or companies 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.
During the year ended October 31, 2004, the Company originated approximately
$1,040,000 in notes payable from 12 individuals and/or companies with $205,000
being convertible at the option of the debt holder as follows: $40,000 is
convertible at $0.72 per share, $85,000 is convertible at $0.30 per share, and
$80,000 is convertible at $0.25 per share. Additionally, of the total
originated, $400,000 is due on a set schedule of $20,000 per week using the
proceeds from advances under the Company's Standby Equity Line. During the year
the Company also converted approximately $1,370,000 of notes payable to common
stock at the request of the note holder including $535,000 of the UCC-1 notes
discussed above.
During the year ended October 31, 2005, the Company originated approximately $
595,000 in notes payable from three individuals and/or companies with $95,000
being convertible at the option of the debt holder as follows: $15,000 is
convertible at $0.12 per share and $80,000 is convertible at $0.04 per share.
Additionally, of the total originated $250,000 is due on a set schedule of
$10,000 per week using the proceeds from advances under the Company's Standby
Equity Line.
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)
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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 reached a settlement agreement which included our issuing
80,000 shares of common stock and cash 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. As of October 31, 2004 we had a
remaining balance of $25,000 and during the year ended October 31, 2005 the
Company fulfilled its obligations under the agreement.
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.
We 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 the Company's 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. Our
legal counsel is currently working on collection of the judgment.
Employees
We have typically entered into employment agreements with all employees.
Agreements generally have provided for payment of a base salary, a grant of plan
units under the Videolocity, Inc. 2000 Stock Incentive Plan, the provision of
medical insurance, vacation and other benefits, and contain other customary
provisions.
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We have entered into employment agreements with all officers that generally
provides for payment of a base salary, bonus provisions upon receipt of a
minimum of four million in funding, a grant of plan units under the Videolocity,
Inc. 2000 Stock Incentive Plan, the provision of medical insurance, vacation and
other benefits, and contain other customary provisions.
We have entered into an employment agreement with our President/CEO, Robert Holt
that includes the following additional considerations:
Pursuant to his employment agreement dated December 1, 2003, Mr. Holt has
been serving as our Chief Executive Officer. Mr. Holt has received an
annual base salary of $260,000. His employment has an initial term of three
years ending November 30, 2006. Mr. Holt is entitled to 350,000 plan units
under our 2000 Stock Incentive Plan, of which, to date, all have vested. In
addition, Mr. Holt also received 4,500,000 options to purchase common stock
of the Company at the market price on the date of grant, of which, to date,
all have vested. Additionally, Mr. Holt is eligible to receive a $240,000
bonus as special consideration, for personal loss and liability, upon
receipt of the Company securing a minimum of $4,000,000 in debt or equity
funding. On February 24, 2005, an addendum to the employment agreement was
approved that extended the term of the original agreement through November
30, 2008 and also granted Mr. Holt 1,000,000 additional options to purchase
common stock that vests through February 2006. Additionally, Mr. Holt was
granted 1,000,000 shares of restricted common stock which, to date, have
not been issued.
Non-Compete: During the term of his agreement with us and for three years
after the expiration of Mr. Holt's agreement, the employee agrees to not:
* 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
o solicit the employment of any of our full-time executives or
employees as of the date of termination of the agreement.
Each of the above-described employment agreements are specific to the
individual's agreement but typically include the following uniform terms:
Assignment of Inventions: During the terms of the employment agreements,
any invention, discovery, concepts and ideas, whether or not patentable or
subject to copyright protection, which the employee discovers or conceives,
will become our sole property.
Change of Control: In the event of a change of control of our company,
whether by merger, acquisition, consolidation, reorganization, liquidation
or otherwise, the employee will be entitled to voluntarily terminate his
agreement and receive certain benefits set forth below:
* the annual base salary through the date of termination, to the
extent not theretofore paid;
* reimbursement for any monies advanced by employee through the date
of termination;
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* all other payments and benefits to which the employee is entitled
through the date of termination;
* a lump sum cash payment equal to two times the sum of the
employee's annual base salary and the average of the annual
bonuses paid to the employee for the two years prior
* for two years after the termination date, continued health and
medical insurance coverage; and
* all unvested plan units under the stock incentive plan will vest.
Effective October 31, 2005 Mr. Holt resigned with cause and was immediately
hired by the Board of Directors as interim CEO.
We presently have five full-time employees and use several consultants on an as
needed basis. We do not anticipate a need to hire additional high-level
employees for the next several months. We do anticipate the need for additional
marketing and sales support and additional administrative support staff. We do
not anticipate that our employees will be represented by unions.
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.
Risk Factors
You should carefully consider the risks and uncertainties described below
and the other information in this report. If any of the following risks or
uncertainties actually occur, our business, financial condition and operating
results, would likely suffer. Additional risks and uncertainties, including
those that are not yet identified or that we currently believe are immaterial,
may also adversely affect our business, financial condition or operating
results.
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
technology and our DES. We have conducted only limited 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
--------------------------------------------------------
We have achieved only nominal 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, 2004, our accumulated deficit
was approximately $3,465,000 and as of October 31, 2005 our accumulated deficit
was approximately $7,114,000. We expect to continue to incur significant
expenses in connection with:
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* 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 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 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.
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);
* a decrease in the average rental prices of our content;
* changes in costs of components; and
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* 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.
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
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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
------------------------------------------------
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 bringing a new technology to market and are 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 technologies and products is highly competitive and
rapidly changing. We are significantly smaller than the majority of our
competitors and we face such competition on a local, regional and international
basis. If we compete with them for the same geographical markets, their
financial strength could prevent us from capturing those markets. New
technologies we 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 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
------------------------------------------------------------------------
Our stock is presently traded on the OTC 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.
-16-
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.
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As of January 31, 2006 certain principal stockholders and affiliates control
approximately 38 % 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
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As of January 31, 2006 we had 23,456,699 shares of common stock
outstanding. Approximately 11,485,000 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.
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
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Our independent auditors have added a "going concern" statement to their audit
report for the year ended October 31, 2005, 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
October 31, 2005 were not sufficient to satisfy our current liabilities on
that date.
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We had a working capital deficit of $6,986,131 at October 31, 2005, which means
that our current liabilities exceeded our current assets on October 31, 2005 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
October 31, 2005 were not sufficient to satisfy all of our current liabilities
on that date.
Possible "Penny Stock" regulation
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Trading of our common stock on the OTC Bulletin Board may be subject to certain
provisions of the Securities Exchange Act of 1934, commonly referred to as the
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"penny stock" rule. A penny stock is generally defined to be any equity security
that has a market price less than $5.00 per share, subject to certain
exceptions. If our stock is deemed to be a penny stock, trading in our stock
will be subject to additional sales practice requirements on broker-dealers.
These may require a broker dealer to:
* make a special suitability determination for purchasers of penny
stocks;
* receive the purchaser's written consent to the transaction prior to the
purchase; and
* deliver to a prospective purchaser of a penny stock, prior to the first
transaction, a risk disclosure document relating to the penny stock
market.
Consequently, penny stock rules may restrict the ability of broker-dealers to
trade and/or maintain a market in our common stock. Also, many prospective
investors may not want to get involved with the additional administrative
requirements, which may have a material adverse effect on the trading of our
shares.
Item 2. Description of Property
Our technical, marketing, and corporate offices have been 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 have consisted of approximately 2800
square feet. The office space was leased under a contract at $4,000 per month
that expired December 2002. We have been renting the Park City office on a
month-to-month basis. We are currently in negotiations on new office space in
Park City, Utah, which we should move into during February 2006. Our mailing
address will remain at PO Box 1929 Sandy, Utah 84091 and our phone and fax
numbers will remain the same after our move. Based on the current negotiations
on new office space, we do not anticipate that a relocation of our office will
increase our monthly costs.
Item 3. 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 included our issuing
80,000 shares of common stock and payments totaling $70,000 as follows: $10,000
at execution of the agreement and $5,000 per month beginning May 1, 2004 and
continuing until paid in full. During the year ended October 31, 2005 the
Company fulfilled its obligations under the agreement.
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 sought $600,000 that is owed by Merit Studios to Healthcare Concierge
-18-
pursuant to a promissory note executed in consideration for the reconveyance to
Merit Studios of two license agreements. 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. The Company's attorney, working with the
courts, is attempting to identify assets of Merit Studios in order to enforce
the judgment.
On June 2, 2003, we 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
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 we
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 the Company. This motion to dismiss was denied by the Court on March
12, 2004. 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. However, based on the anticipated costs to recover the $100,000, the
Company has written off the fee during the year ended October 31, 2005.
On October 19, 2005, the Company's attorney received notification that a default
judgment was filed with the third district court on June 21, 2005 totaling
approximately $318,000 including principal, accrued interest, and legal fees,
together with interest from that date until paid in full regarding a note
payable in the amount of $215,000. Prior to October 19, 2005 the Company was
unaware of the judgment and did not have knowledge that a complaint had been
filed because the Company had not been served. Accordingly, being unaware of the
complaint the Company did not respond. On November 30, 2005, with an addendum
signed on December 5, 2005, the Company and the note holder reached an agreement
to settle the note payable, in total, with twenty four monthly payments of
$5,000 per month beginning January 5, 2006 and ending on December 5, 2007 for
the aggregate amount of $120,000. The note holder has agreed to stay any actions
to enforce or collect upon the judgment during the repayment term. At any time
the Company fails to meet its required payment, the note holder will have the
right to proceed with all legal remedies to collect upon and satisfy the
judgment and note payable. The Company has the right to prepay all or a portion
of the total at its discretion. The settlement agreement also provided that the
Company release the note holder, ISOZ, LC, and its employees, agents,
representatives and affiliates and assigns, from any and all actions, judgments,
claims or causes of action and from any claim or allegation previously made by
the Company against the note holder.
We are 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 our financial position or results of operations.
-19-
Item 4. Submission of Matters to a Vote of Security Holders
During December 2005, the Board of Directors approved for submission to the
Company's shareholders a proposal to enter into a joint venture with E. Oliver
Capital Group LLC. The Company did not solicit proxies and submitted the
proposal to shareholders holding at least a majority of the outstanding shares
of the Company. To date, the Company has received verbal commitments
representing a majority of the voting shares approving the proposal but is
currently waiting for the signed documents from the individual shareholders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Our common stock is quoted on the OTC Bulletin Board under the trading symbol
"VCTY." Inclusion on the OTC Bulletin Board permits price quotations for our
shares to be published by such service.
The following table sets forth the high and low bid quotations for our common
stock for the preceding two fiscal years ended October 31, 2005 and 2004.
Despite the publication of quotations during such periods, there was no
significant trading volume and there existed no established trading market for
our shares.
High Bid Low Bid
2005
First Quarter ended January 31, 2005 $ 0.350 $ 0.060
Second Quarter ended April 30, 2005 $ 0.150 $ 0.021
Third Quarter ended July 31, 2005 $ 0.050 $ 0.030
Fourth Quarter ended October 31, 2005 $ 0.045 $ 0.006
2004
First Quarter ended January 31, 2004 $ 0.50 $ 0.12
Second Quarter ended April 30, 2004 $ 0.45 $ 0.13
Third Quarter ended July 31, 2004 $ 0.30 $ 0.15
Fourth Quarter ended October 31, 2004 $ 0.51 $ 0.06
The foregoing quotations represent inter-dealer prices without retail
mark-up, mark-down, or commission, and may not represent actual transactions.
As of January 31, 2006, there were 174 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 January 31, 2006, we had 23,456,699 shares of common stock issued and
outstanding. Of the total outstanding shares, 11,971,576 may be sold,
transferred or otherwise traded in the public market without restriction, unless
held by an affiliate or controlling shareholder. A total of 11,485,123 shares
are considered restricted securities.
Under Rule 144 as currently in effect, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least one year,
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including any person who may be deemed to be an "affiliate" as defined under the
Act, is entitled to sell, within any three-month period, an amount of shares
that does not exceed the greater of (i) the average weekly trading volume in the
security as reported through the automated quotation system of a registered
securities association, during the four calendar weeks preceding such sale or
(ii) 1% of the shares then outstanding. A person who is not deemed to be an
"affiliate" and has not been an affiliate for the most recent three months, and
who has held restricted shares for at least two years would be entitled to sell
such shares without regard to the resale limitations of Rule 144.
Dividend Policy
---------------
We have never paid cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future.
Penny Stock Regulations
-----------------------
The ability of an individual shareholder to trade their shares in a particular
state may be subject to various rules and regulations of that state. A number of
states require that an issuer's securities be registered in their state or
appropriately exempted from registration before the securities are permitted to
trade in that state. Presently, we have no plans to register our securities in
any particular state. Further, our shares will most likely be subject to the
provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of
1934, commonly referred to as the "penny stock" rule. Section 15(g) sets forth
certain requirements for transactions in penny stocks and Rule 15g-9(d)(1)
incorporates the definition of penny stock as that used in Rule 3a51-1 of the
Exchange Act.
The SEC generally defines penny stock to be any equity security that has a
market price less than $5.00 per share, subject to certain exceptions. Rule
3a51-1 provides that any equity security is considered to be a penny stock
unless that security is: registered and traded on a national securities exchange
meeting specified criteria set by the Commission; authorized for quotation on
The Nasdaq Stock Market; issued by a registered investment company; excluded
from the definition on the basis of price (at least $5.00 per share) or the
issuer's net tangible assets; or exempted from the definition by the SEC. If our
shares are deemed to be a penny stock, trading in the shares will be subject to
additional sales practice requirements on broker-dealers who sell penny stocks
to persons other than established customers and accredited investors, generally
persons with assets in excess of $1,000,000 or annual income exceeding $200,000,
or $300,000 together with their spouse.
For transactions covered by these rules, broker-dealers must make a special
suitability determination for the purchase of such securities and must have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document relating to the penny stock market. A broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, and current quotations for the securities. Finally,
monthly statements must be sent disclosing recent price information for the
penny stocks held in the account and information on the limited market in penny
stocks. Consequently, these rules may restrict the ability of broker-dealers to
trade and/or maintain a market in our common stock and may affect the ability of
shareholders to sell their shares.
Recent Sales of Unregistered Securities
During December 2004 we issued 12,098 shares on conversion of notes payable.
During January 2005 we issued 733,334 shares on conversion of notes payable.
-21-
During March 2005 we issued 30,000 shares under a legal settlement that was
negotiated and accrued in the financial statements in a prior year and settled
with common stock in the current year. During April 2005 we issued 16,667 shares
under an agreement negotiated under a note payable. During May 2005 we issued
10,000 shares in an agreement negotiated under a note payable. During October
2005, we issued 10,000 shares under an agreement negotiated under a note
payable.
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 that had not been registered under the
Securities Act. Certificates representing the shares bear the usual and
customary restricted stock legend.
Transfer Agent
Colonial Stock Transfer Company, 66 Exchange Place, Salt Lake City, Utah 84111,
telephone (801) 355-5740, serves as our transfer agent and registrar.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following information should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-KSB.
Overview
We are an engineering and marketing company involved in the deployment of the
DES and the further development of other digital information and entertainment
systems and uses of our technology. DES delivers video-on-demand in near DVD
quality, including movies and other videos, medical information and educational
material to individuals, residents, hotel guests, and patients and attendants in
the healthcare industry. We are a development stage company. To date, our
activities have been limited to developing the DES and other related
technologies and limited marketing of the DES. We are presently commencing
marketing of DES into various marketplaces in North America 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 limited existing capital, together with support and
revenues generated from our proposed joint venture, along with cash proceeds
from our Standby Equity Line of credit, as well as, proceeds from prospective
future financings, to continue marketing and deployment of our DES. Management
estimates that to move forward with our planned operations we will incur
expenses during the next twelve months of approximately $2.6 million, consisting
of $1.45 million in payroll, payroll taxes, employee health insurance and other
related employee costs, $160,000 for office rent, utilities, and related costs,
$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. These expenses will be directed at further
development of the DES integration into additional markets and the use of our
intellectual property into new products. We will also incur substantial
additional costs in connection with the manufacture and deployment of DES.
Management further estimates that such costs will be a minimum of $10 million,
but we are optimistic that we will be able to cover most of those costs from
future long-term lease financing.
-22-
Currently, we do not intend to sell any hardware or software. Our business plan
is to manufacture or purchase/lease hardware and deploy our systems at no 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. Presently,
we do not anticipate any significant purchase or sale of plant or equipment.
Additionally, we do not anticipate the addition of large numbers of employees
because our business model calls for outsourcing any and all functions that
would be directly related to the number of deployments.
We anticipate generating future revenues from the delivery of video and other
content to the end users of our DES, together with high-speed Internet access.
We have installed our first DES and management believes that we will begin to
install our DES into additional locations during the second to third quarters of
the current calendar year into 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. Our
structure for content fees, although subject to change based on location, usage,
and competition is estimated to be as follows:
Internet access: $ 4.95 to $ 12.95 for one hour to 24 hour period
Video-on-demand: $ 3.95 to $ 12.95 per viewing
Games: $ 2.95 to $ 6.95 for each 1 to 4 hour period
During the next twelve months, we plan to seek additional debt and/or equity
funding, and capital leases for up to approximately $10 million. This would
permit us to cover our minimum expenses described above and accelerate
deployment of our DES. As of the date hereof, we have not formalized any new
funding. We have a Standby Equity Distribution Agreement with Cornell Capital
noted below which has been used to maintain operations during the last fiscal
year while we review additional funding alternatives. We can not give assurance
that we will be able to secure such additional funding on favorable terms to us,
or otherwise.
During May 2004 we entered into a 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
through its expiration during July 2006. We will be looking to renew the line
of credit at that time. 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 down up to
four times 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 registration statement was declared effective by the
Securities and Exchange Commission on July 22, 2004. 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 or receiving
funds from the proposed joint venture 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 operations for
approximately the next month and that we must obtain additional financing during
that time in order to continue operations.
-23-
Results of Operations
To date, we have been a development stage company. We are now beginning to
realize revenue from our planned operations. We generated approximately $114,000
during fiscal year 2005in revenue primarily from content viewed through our DES
in one hotel installation as compared to $10,225 in fiscal year 2004. The system
was installed and just beginning to realize revenues during the last two months
of fiscal year 2004. During the fourth quarter of FY 2005 and continuing through
the first quarter of FY 2006 the hotel was undergoing a major renovation, which
has limited the revenues being generated. The DES has been shut down at various
times during this renovation for weeks at a time.
Operational expenses increased approximately 158 percent from FY 2004 to FY
2005. Salaries, payroll taxes and employee benefits increased approximately 279
percent primarily due to the accrual and expensing of approximately $1,800,000
during the fourth quarter of fiscal year 2005 as the result of amounts owed
under contract as a result of two officers resigning with cause. Additional
increases to salaries, payroll taxes and employee benefits were due to increased
personnel as we continued to work on version two of our DES. Professional fees
decreased approximately 56 percent as we incurred additional professional fees
in the prior year due to legal work in regard to our SB-2 filing as well as
consulting work in regard to acquiring digital content. Additionally, the Board
of Directors approved an amount of $50,000 per year, per director for service on
the Board. For the year ended October 31, 2005, loss before income taxes
increased approximately 97 percent as compared to the year ended October 31,
2004. This is attributed primarily to the items noted above in the discussion on
operational expenses combined with a decrease in interest expense and a $100,000
write off of a prepaid loan fee.
Management anticipates that as we scale up the installation of the DES, our
expenses will increase proportionately. The Company's plan of operation will
depend on its ability to raise substantial additional capital, of which there
can be no assurance.
Liquidity and Capital Resources
During the year ended October 31, 2005 our total assets decreased from
approximately $1,132,000 at October 31, 2004 to approximately $659,000 at
October 31, 2005. These changes are due primarily to the following factors; (i)
a decrease to long term other assets of approximately $100,000 due to the
write-off of a prepaid loan fee. (ii) a decrease to property and equipment
primarily from depreciation and (iii) an increase to short term other assets of
approximately $38,000 primarily from the expensing of prepaid assets that were
prepaid at October 31, 2004 and were expensed during the year ended October 31,
2005 as the services were rendered. During this same period, cash decreased from
approximately $186,000 to approximately $2,000 as it was used for operational
purposes.
Total current liabilities increased from approximately $3,563,000 on October 31,
2004 to approximately $7,024,000 at October 31, 2005. The change is attributed
to an accounts payable increase of approximately $7,000, an increase to accrued
interest payable of approximately $220,000 and an increase in accrued
liabilities of approximately $3,133,000. Accrued liabilities increased from the
accrual of salaries to officers and other employees during the year and
approximately $1,800,000 in salaries and related payroll taxes from the
resignation of two officers. The resignations were with cause, requiring that
the amounts under contract are paid in a lump sum which required the accrual.
Accrued liabilities also increased by the accrual of $200,000 in Board of
Director compensation, $17,000 in consultant compensation and approximately
$247,000 of cash that was paid on the company's behalf by the guarantor of our
capital lease. Also during the year ended October 31, 2005 notes payable
increased by the net amount of $80,000. This amount was made up from the receipt
of approximately $615,000 from notes payable, offset primarily by the conversion
of notes payable to common stock totaling approximately $515,000.
-24-
Net Operating Loss
We have accumulated approximately $9,900,000 of net operating loss carryforwards
as of October 31, 2005, 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 2024. 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, 2005 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
In January 2003 and as revised in December 2003, the FASB issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities." This
interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," addresses consolidation by business enterprises of variable
interest entities. Prior to this interpretation, two enterprises generally had
been included in consolidated financial statements because one enterprise
controls the other through voting interests. This interpretation defines the
concept of "variable interests" and requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse the risks among the parties involved. Our
adoption of this interpretation did not have an impact on our financial position
or results of operations.
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. 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. The adoption of SFAS No. 150 did not have a material impact on our
results of operations or financial position.
In December 2004 the FASB issued revised SFAS No. 123R, "Share-Based Payment."
SFAS No. 123R sets accounting requirements for "share-based" compensation to
employees and requires companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation. SFAS
No. 123R is effective in interim or annual periods beginning after June 15, 2005
for companies that do not file as small business issuers and December 15, 2005
for companies that file as small business issuers. We will be required to adopt
SFAS No. 123R in our first quarter of fiscal 2006 and currently disclose the
effect on net (loss) income and (loss) earnings per share of the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." We are currently evaluating the impact of the adoption of SFAS
123R on our financial position and results of operations, including the
valuation methods and support for the assumptions that underlie the valuation of
the awards.
-25-
In December 2004 the FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets -
An Amendment of APB Opinion No. 29." SFAS No. 153 amends APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. SFAS No. 153 is to be applied
prospectively for nonmonetary exchanges occurring in fiscal periods beginning
after June 15, 2005. Our adoption of SFAS No. 153 is not expected to have a
material impact on our financial position or results of operations.
Item 7. Financial Statements
Our financial statements, as of and for the fiscal years ended October 31, 2005
and October 31, 2004, have been examined to the extent indicated in its report
by Madsen & Associates CPA's, independent certified accountants, and have been
prepared in accordance with generally accepted accounting principles and
pursuant to Regulation S-B promulgated by the SEC. The aforementioned financial
statements are included herein in response to Item 7 of this Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On March 5, 2004, our Board of Directors met and unanimously approved a
resolution to dismiss Andersen Andersen & Strong, L.C. from its position as our
independent certifying accountants.
The audit report of Andersen Andersen & Strong, L.C. for the year ended October
31, 2002, contained a modification expressing substantial doubt as to Company's
ability to continue as a going concern. The audit report contained no other
adverse opinion, disclaimer of opinion or modification as to uncertainty, audit
scope or accounting principle. In connection with its audits for the prior two
fiscal years and review of unaudited financial statements through July 31, 2003,
and through the date of dismissal on March 5, 2004, there were no disagreements
with Andersen Andersen & Strong L.C. on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which if not resolved to the satisfaction of Andersen Anderson & Strong L.C.,
would have caused them to make reference thereto on the financial statements.
Also on March 5, 2004, our Board of Directors unanimously approved a resolution
to engage Madsen & Associates, CPAs, Inc. to audit our financial statements for
the year ended October 31, 2003. During the two most recent fiscal years and
prior to March 5, 2004, we had not consulted with Madsen & Associates regarding
(i) the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the our financial statements, and no written report or oral advice was provided
to us by concluding there was an important factor to be considered by us in
reaching a decision as to an accounting, auditing or financial reporting issue;
or (ii) any matter was either the subject of a disagreement, as that term is
defined in Item 304(a)(1)(iv) of Regulation S-B and the related instructions
thereto, or a reportable event, as set forth in Item 304(a)(1)(iv) of Regulation
S-B.
Item 8A. Controls and Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934. Based upon that evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures are effective to cause the material information required to be
disclosed by us in the reports that we file or submit under the Exchange Act to
be recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. There have been no significant changes
in our internal controls or in other factors which could significantly affect
internal controls subsequent to the date we carried out our evaluation.
-26-
Item 8B. Other Information
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
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 the Company.
Name Age Title
Dan Driscoll 49 Chairman of the Board / Director
Robert E. Holt 41 President / CEO / Director
Cortney L. Taylor 44 CFO / Secretary / Treasurer
Bennie L. Williams 69 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. The term of office for
each officer is determined by individual contract, subject to removal by the
board of directors.
On August 15, 2005, Larry McNeill resigned from the Board of Directors. Mr.
McNeill cited the time necessary to focus on additional business pursuits and
personal reasons as the basis for his resignation. Mr. McNeill did not have any
disagreements with the Board of Directors or Company management on any matter
relating to the Company's operations, policies and practices at the time of his
resignation.
On September 16, 2005 the Company's Chief Financial Officer, Cortney Taylor,
resigned with cause and on October 31, 2005 the Company's Chief Executive
Officer, Robert Holt, resigned with cause. By contract, the Company had 30 days
to cure the cause of the resignations. If not cured within 30 days, the Officers
are entitled to immediate vesting in all options and/or shares previously
granted which have not vested to date and are also entitled to receive their
normal salary through the end of the current contract in a lump sum
distribution. The Board of Directors immediately hired Mr. Holt as Interim CEO
and hired Mr. Taylor as a consultant. During February 2006 the Board of
Directors rehired Mr. Taylor in his previous roles, with finalization of his new
contract scheduled for the next Board of Directors Meeting prior to the end of
February 2006.
No director, officer, affiliate has, within the past five years, filed any
bankruptcy petition, been convicted in 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.
Presently, we do not provide cash compensation to directors for serving on our
board of directors or the boards of our subsidiaries, or for attendance at board
or committee meetings. However, we have compensated members of the Board of
-27-
Directors by issuing stock. During February 2005, the Board of Directors
approved a set amount of $50,000 per year for service on the Company's Board of
Directors to be issued in restricted stock. As of October 31, 2005, the Company
has accrued $200,000 as director compensation that will be converted to stock
based upon the price of stock on the date of Board approval. The shares will be
issued when administratively possible. We anticipate that as we acquire adequate
funding, we will consider instituting a policy to compensate our directors
monetarily. In that event, we believe that any proposed compensation will be
equivalent to that of companies of similar size and stature as ours.
Certain biographical information of our directors and officers is set
forth below.
Dan Driscoll. Mr. Driscoll became a director in January 2002 and Chairman during
February 2005. Mr. Driscoll was Senior VP of Business Development of the
Wireless Division of CommScope, Inc. Mr. Driscoll was a part of the sales and
business development of that division. 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 16 years and previously played football in the CFL and NFL.
Robert E. Holt. Mr. Holt joined Videolocity International, Inc. as President and
Chief Executive Officer and Director in January 2002. Robert has concentrated on
wireless services and technology businesses for much of his career. From 1997 to
2001, as an executive for Qualcomm Inc., he was responsible for global wireless
network implementation, operations, business development and venture capital for
Qualcomm Inc. businesses throughout the Americas, Eastern Europe, the
Commonwealth of Independent States, Asia, and Africa. Robert was the founder and
Director of the Wireless Campus Group that focused on the development of
intellectual properties and the delivery of content over CDMA network
infrastructure. He assisted in the development of the business plan for the Leap
Wireless spin-off and the Cricket phone service. Robert also served as a member
of the Board of Directors for the Elementary Institute of Science and the San
Diego Technology Counsel. Prior to that, he was an executive and management
consultant of several wireless carriers, responsible for the engineering
development, implementation and operation of wireless networks including market
leaders Sprint PCS and PrimeCo PCS, which formed the heart of what is now known
as Verizon Wireless. He was named a PrimeCo Pioneer for his role in the initial
launch of the wireless carrier. Prior to this, Robert led a GTE integration team
that planned and executed the combination of secure communications technologies
that formed the Mobile Subscriber Equipment (MSE) network for the United States
Army. Before joining GTE, Robert spent several years in the United States Signal
Corp, where he played a key role in the military's adoption of MSE and the
global implementation of the secure wireless contingency communications package.
Robert served throughout the world as a member of the elite 101st Airborne
Division where he served throughout Europe and the Middle East and was awarded
numerous medals for Achievement, Commendation, Conduct and Meritorious Service.
Robert holds a B.S. Electrical Engineering and a M.S. Communication degree with
an emphasis on Crisis Communications. He has also earned professional
certification in the area of project management, Personal Communications
Services (PCS) technologies, call processing, systems engineering, change
management, finance, debt and equity investments
Larry R. McNeill. Mr. McNeill resigned as a Board of Director during the year
ended October 31, 2005. Mr. McNeill became a director in December 2000. From
October 1998 through January 2004, Mr. McNeill was the Chief Financial Officer
of Theatre Candy Distributing Company, Inc. of Salt Lake City, Utah and through
August 2002 served as the Chief Financial Officer of the Videolocity Companies.
-28-
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 has served
as a director of Theatre Candy Distributing Company, Inc. and as a director of
American Polymer Corp.; Water and Wellness Centers LLC; and Financial Services,
LLC. He is a past President of the West Valley Colonels Association and founder
of the Cystic Fibrosis Foundation of Utah. Mr. McNeill holds a B.A. degree in
Business Administration, Economics and Russian, and a MBA degree in Business
Management.
Cortney L. Taylor. Mr. Taylor became Chief Financial Officer September 2002. Mr.
Taylor is a CPA, a member of the Utah Association of Certified Public
Accountants (UACPA) and the American Institute of Certified Public Accountants
(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 most recently as an assurance senior manager. Mr. Taylor
holds B.S. and Masters of Accounting degrees from Utah State University.
Bennie L. Williams. Mr. Williams was appointed Chairman and a director in June
2001. During February 2005, due to health and time concerns, the Board of
Directors elected Mr. Driscoll as Chairman replacing Mr. Williams in that
capacity. Mr. Williams currently remains on the Board of Directors. He 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 2001and
never had a business relationship with Videolocity. Mr. Williams has served six
years 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.
The Board of Directors plans to re-evaluate the committees, the composition of,
and the replacement of the board members at their next meeting.
Section 16(a) Beneficial Ownership Reporting Compliance
We do not have securities registered under Section 12(g) of the Securities
Exchange Act of 1934 and our directors, officers and affiliates are not required
to file reports under Section 16(a) of the Exchange Act.
ITEM 10. Executive Compensation
Presently, we do not have any retirement, pension, profit sharing, or insurance
plans covering officers or directors. Additionally, we do not currently provide
cash compensation to directors for serving in their capacities as directors, but
do reimburse such persons for expenses reasonably incurred by them in connection
with company business.
-29-
Summary Compensation Table
Securities
Name and Principal Other Annual underlying Restricted All Other
Position Year Salary Bonus Compensation options/SARs Stock Award Compensation
- ------------------ ------ --------- -------- ------------- ------------ ------------ -------------
Robert E. Holt 2005 $260,000* $ -- $ -- 1,000,000 $ 90,000# $ --
CEO, President/ 2004 $246,667* $ -- $ -- 4,850,000 $ -- $ --
Director 2003 $240,000* $ -- $ -- -- $ -- $ --
Cortney L. Taylor 2005 $150,000+ $ -- $ -- 1,000,000 $ 90,000# $ --
CFO 2004 $134,166+ $ -- $ -- 1,000,000 $ -- $ --
2003 90,000+ $ -- $ -- -- $ -- $ --
Mike York 2004 $140,000 $ -- $ -- 1,000,000 $ -- $ --
Vice President
*Salary for FY 2005, $184,167 of which was paid during FY 2005 with $75,833
being accrued at October 31, 2005, Salary for FY 2004, $216,667 of which was
paid during FY 2004 with $30,000 being accrued at October 31, 2004 and remains
accrued at October 31, 2005, Salary for FY 2003, $120,000 of which was paid
during FY 2003 with $120,000 being accrued at October 31, 2003 and remains
accrued at October 31, 2005. As of February 14, 2006 these amounts remain
accrued.
# During February 2005, the Board of Directors approved the issuance of
approximately $90,000 of restricted stock to each officer which has been accrued
but to date has not been issued. The issuance of the shares will be completed
when administratively possible.
+ Salary for FY 2005, $106,250 of which was paid during FY 2005 with $43,750
being accrued at October 31, 2005, Salary for FY 2004, 122,916 of which was paid
during FY 2004 with $11,250 being accrued at October 31, 2004 and remains
accrued at October 31, 2005. Salary for FY 2003, $56,250 of which was paid
during FY 2003 with $33,750 being accrued at October 31, 2003 and remains
accrued at October 31, 2005. As of February 14, 2006 these amounts remain
accrued
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at options/SARs at
FY-End (#) FY-End ($)
Shares Acquired Value Exercisable/ Exerciseable/
Name and Principal Position on exercise (#) Realized($) Unexercisable Unexercisable
- --------------------------- --------------- ----------- --------------- --------------
Robert E. Holt 20,000 $3,900 5,500,000/ - $ - / $ -
CE0, President, Director
Cortney L. Taylor 7,500 $1,150 1,900,000/ - $ - / $ -
CFO, Secretary/Treasurer
-30-
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 998,384
shares have been made through October 31, 2005. Through October 31, 2005, all
awards granted to date have met the vesting requirement and of that total
979,884 have been converted to stock. As of October 31, 2005 plan awards with
respect to 1,616 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. As of February
14, 2006 1,616 plan awards remain available for issuance under the Plan.
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 October 31, 2005, 467,855 shares have been 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. On December 4, 2003, the Board of Directors approved a total
of 30,000 shares under the plan to consultants of the Company that to date have
not been issued. As of February 14, 2006 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 purchase common stock to employees and Directors that vest according
to various individual employee contracts. The options were granted at the market
price on December 4, 2003. During February 2005 the Board of Directors approved
2,000,000 options to purchase common stock to officers of the Company that had a
vesting schedule through the first quarter of FY 2006. Additionally, during
February 2005, the Board of Directors approved the issuance of 2,000,000 shares
of restricted stock to officers that to date have been accrued but have not been
issued.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table provides information, to the best of our knowledge as of
January 31, 2006, 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.
-31-
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 October 31, 2005, 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.
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 7.91%
Marvin Erickson (3) 4,843,333 17.11%
WAJ Enterprises LLC (4) 4,150,000 15.03%
Officers and Directors(5)
Dan Driscoll (6) 1,280,677 5.18%
Robert E. Holt(7) 7,595,555 24.46%
Cortney L. Taylor (8) 3,040,000 11.47%
Bennie L. Williams (9) 1,690,555 6.72%
All Officers and Directors as a Group
(4 persons) as of January 31, 2005 13,606,787 36.71%
- ----------------------
(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 October 31, 2005, 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) Includes 2,125,000 shares which could be acquired within 60 days upon
conversion of convertible notes payable, 60,000 shares which could be
acquired within 60 days upon exercise of options at an exercise price of
$0.12 per share that expire upon payoff or conversion of notes payable and
400,000 shares which could be acquired within 60 days upon exercise of
options at an exercise price of $0.04 per share that expire upon payoff or
conversion of notes payable. Also includes 155,000 shares of stock that are
due to Mr. Erickson on extensions of notes payable.
(4) Includes 200,000 options that could be acquired within 60 days upon
exercise of options at an exercise price of $0.14 per share that expire
upon payoff of notes payable and 250,000 shares that are due on extensions
of notes payable. (5) The mailing address for each of Videolocity's
officers and directors is PO Box 1929, Sandy, Utah 84091.
(6) Includes 500,000 shares which could be acquired within 60 days upon
exercise of outstanding options at an exercise price of $0.13 per share and
555,555 shares of restricted stock that have been granted and to date not
issued.
-32-
(7) Includes 4,500,000 shares which could be acquired within 60 days upon
exercise of outstanding options at an exercise price of $0.13 per share and
also includes 1,000,000 shares which could be acquired within 60 days upon
exercise of outstanding options at an exercise price of $0.09 per share and
1,555,555 shares of restricted stock that have been granted and to date not
issued.
(8) Includes 900,000 shares which could be acquired within 60 days upon
exercise of outstanding options at an exercise price of $0.13 per share and
1,000,000 shares which could be acquired within 60 days upon exercise of
outstanding options at an exercise price of $0.09 per share and 1,000,000
shares of restricted stock that have been granted and to date are not
issued.
(9) Includes 700,000 shares which could be acquired within 60 days upon
exercise of outstanding options at an exercise price of $0.13 per share,
555,555 shares of restricted stock that have been granted and to date not
issued, 100,000 shares that are due to Mr. Williams on extensions of notes
payable.
Item 12. 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.
We currently have outstanding $125,000 in notes payable to officers and
directors that were originated prior to the most recent two fiscal years.
Item 13. Exhibits
(a) List of documents filed as part of this report:
1. Financial Statements - Included in Part II, Item 7 of this report
Report of Independent Certified Public Accountant
Consolidated Balance Sheet as of October 31, 2005
Consolidated Statements of Operations for the year ended
October 31, 2005 and the year ended October 31, 2004 and the
period May 26, 2000 (inception) to October 31, 2005
Statement of Changes in Stockholders' Deficit for the period
May 26, 2000 (inception) to October 31, 2005
Consolidated Statements of Cash Flows for the year ended
October 31, 2005 and the year ended October 31, 2004 and the
period May 26, 2000 (inception) to October 31, 2005
Notes to Financial Statements
2. List of Exhibits
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
-33-
2. List of Exhibits, cont'd
Exhibit No. Description of Exhibit
- ----------- ----------------------
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.
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
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 Operating Agreement with E. Oliver Capital Group LLC.
-34-
2. List of Exhibits, cont'd
Exhibit No. Description of Exhibit
- ----------- ----------------------
16.1(7) Letter regarding change in certifying accountant
21.1(6) Subsidiaries
31.1 Certification of C.E.O. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of C.F.O. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of C.E.O. pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification of C.F.O. pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
- -------------------------
(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.
(b) Reports on Form 8-K
None
Item 14. Principal Accountants Fees and Services
We do not 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. As a result, we do not rely on
pre-approval policies and procedures.
Audit Fees
The aggregate fees billed by our independent auditors, Madsen & Associates,
CPA's, for professional services rendered for the audit of our annual financial
statements included in our Annual Report on Form 10-KSB for the fiscal year
ended October 31, 2004, and for the review of quarterly financial statements
included in our Quarterly Reports on Form 10-QSB for the quarters ending July
31, 2005, April 30, 2005 and January 31, 2005 were approximately $8,500. To
-35-
date, we have not been billed by Madsen & Associates, CPA's for professional
services rendered for the audit of our annual financial statements included in
our Annual Report on Form 10-KSB for the fiscal year ended October 31, 2005.
Audit Related Fees
For the fiscal years ended October 31, 2005 and 2004, there were no fees billed
for assurance and related services by Madsen & Associates, CPA's relating to the
performance of the audit of our financial statements which are not reported
under the caption "Audit Fees" above.
Tax Fees
For the fiscal years ended October 31, 2005 and 2004, there were no fees
billed by Madsen & Associates, CPA's for tax compliance, tax advice and tax
planning.
We do not use Madsen & Associates, CPA's for financial information system
design and implementation. These services, which include designing or
implementing a system that aggregates source data underlying the financial
statements or generates information that is significant to our financial
statements, are provided internally or by other service providers. We do not
engage Madsen & Associates, CPA's to provide compliance outsourcing services.
There were no fees billed by Madsen & Associates, CPA's for activities
unrelated to the audit. The board of directors has considered the nature and
amount of fees billed by Madsen & Associates, CPA's and believes that the
provision of services for activities unrelated to the audit is compatible with
maintaining their' independence.
-36-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Videolocity International, Inc.
By: /S/ DAN DRISCOLL
---------------------------
Dan Driscoll
Chairman
Dated: February 14, 2006
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/ DAN DRISCOLL February 14, 2006
----------------------------------
Dan Driscoll Chairman and Director
By: /S/ BENNIE WILLIAMS Director February 14, 2006
--------------------------------
Bennie Williams
By: /S/ ROBERT E. HOLT President and Director February 14, 2006
---------------------------------- (Principal Executive Officer)
Robert E. Holt
By: /S/ CORTNEY L. TAYLOR C.F.O. February 14, 2006
------------------------------ (Principal Financial
Cortney L. Taylor and Accounting Officer)
-37-
VIDEOLOCITY INTERNATIONAL, INC.
(A Development Stage Company)
FINANCIAL STATEMENTS
October 31, 2005
C O N T E N T S
Independent Auditors' Report ............................................. F-1
Balance Sheet............................................................. F-16
Statements of Operations ................................................. F-17
Statements of Stockholders' Equity ...................................... F-18
Statements of Cash Flows ................................................. F-20
Notes to the Financial Statements ........................................ F-21
F-1
INDEPENDENT AUDITORS' REPORT
MADSEN & ASSOCIATES, CPA's Inc. 684 East Vine St, Suite 3
Certified Public Accountants Murray, Utah 84107
and Business Consultants Telephone 801 268-2632
Fax 801-262-3978
Board of Directors
Videolocity International, Inc. and Subsidiaries
Park City, Utah
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of Videolocity
International, Inc. and Subsidiaries (A Development Stage Company) at October
31, 2005, and the related statements of operations, stockholders' equity, and
cash flows for the years ended October 31, 2005 and 2004 and the period May 26,
2000 (date of inception) to October 31, 2005. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Videolocity International,
Inc. and Subsidiaries at October 31, 2005, and the related statements of
operations, stockholders' equity and cash flows for the years ended October 31,
2005 and 2004 and the period May 26, 2000 (date of inception) to October 31,
2005 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company will need additional
working capital to service its debt and for any planned activity, which raises
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are described in 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,
February 13, 2006
F-2
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
October 31, 2005
ASSETS
CURRENT ASSETS
Cash $ 2,271
Accounts receivable 1,091
Other assets 34,538
-----------
Total current assets 37,900
Property and equipment, at cost, net 597,078
Other assets 24,909
-----------
$ 659,887
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 280,404
Accrued liabilities 3,449,862
Accrued interest payable 488,570
Notes payable - related parties 125,000
Notes payable 2,424,800
Current portion of long term obligations - capital lease 255,395
------------
Total current liabilities 7,024,031
Long term obligations less current portion - capital lease 385,083
Compensation debenture 360,000
MINORITY INTERESTS 4,866
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 100,000,000 shares
authorized, 23,438,199 issued and outstanding 23,439
Preferred stock, $0.001 par value; 5,000,000 shares
authorized none outstanding --
Additional paid-in capital 6,855,824
Deficit accumulated during the development stage (13,993,356)
-----------
Total stockholders' deficit (7,114,093)
-----------
$ 659,887
===========
The accompanying notes are an integral part of this statement.
F-3
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended From
October 31 May 26, 2000
-------------------------- through
2004 2003 October 31, 2005
----------- ----------- -----------
Revenues $ 114,420 $ 10,225 $ 126,645
Cost of Goods Sold 86,219 8,729 94,948
----------- ----------- -----------
Gross Profit 28,201 1,496 29,697
Operating expenses
Salaries, payroll taxes, and employee benefits 3,110,531 821,269 6,631,985
Professional fees and consultants 82,862 191,054 1,338,036
Technology development consulting 237,113 237,683 850,270
Directors compensation through stock plan 200,000 -- 295,000
Rent 48,000 48,000 304,305
Provision for bad debts -- 10,000 600,000
Travel, conventions, meals and entertainment 30,647 41,277 237,933
Depreciation and amortization 33,163 26,937 178,804
Utilities 18,234 22,338 109,849
Gain on transfer of license agreements -- -- (114,509)
Write off of goodwill -- -- 958,628
Other 48,786 75,394 611,983
----------- ----------- -----------
3,809,336 1,473,952 12,002,284
----------- ----------- -----------
Operating loss (3,781,135) (1,472,456) (11,972,587)
Interest income -- -- 5,578
Legal Settlement (103,033) (97,400) (200,433)
Gain on sale of stock, net -- -- 338,049
Interest and beneficial conversion expense (345,942) (518,643) (2,070,451)
Expense for stock options on guarantee (19,526) (69,120) (88,646)
Minority interests -- -- (4,866)
----------- ----------- -----------
Loss before income taxes (4,250,636) (2,157,619) (13,993,356)
Income taxes -- -- --
----------- ----------- -----------
NET LOSS (4,250,636) (2,157,619) (13,993,356)
=========== =========== ===========
Loss per common share
Basic and Diluted (0.22) (0.19)
Weighted-average common and dilutive common
equivalent shares outstanding
Basic and Diluted 19,479,625 11,617,692
The accompanying notes are an integral part of these statements.
F-3
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, October 31, 2003,
October 31, 2004 and October 31, 2005
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 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)
continued
F-4
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, October 31, 2003,
October 31, 2004 and October 31, 2005
Continued
Deficit
Accumulated
Additional during the
Preferred stock Common stock paid-in Development
Shares Amount Shares Amount capital Stage
----------- ----------- ----------- ----------- ----------- -----------
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 -- -- -- -- 303,900 --
notes payable
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)
Interest expense recognized on
beneficial conversion feature on -- -- -- -- 120,000 --
notes payable
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)
Balance at October 31, 2003 -- $ -- 6,346,996 $ 6,347 $ 4,083,060 $(7,585,101)
continued
F-5
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, October 31, 2003,
October 31, 2004 and October 31, 2005
Continued
Deficit
Accumulated
Additional during the
Preferred stock Common stock paid-in Development
Shares Amount Shares Amount capital Stage
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2003 -- $ -- 6,346,996 $ 6,347 $ 4,083,060 $(7,585,101)
Fees related to Equity Distribution
Agreement -- -- -- -- (390,000) --
Issuance of stock options for:
Guarantee -- -- -- -- 69,120 --
Services -- -- -- -- 46,316 --
Loan -- -- -- -- 140,432 --
Issuance of common stock for:
Bonus interest and extensions on debt -- -- 736,500 736 215,464 --
Services -- -- 500,000 500 87,500 --
Cash -- -- 500,000 500 224,500 --
Cash under Equity Line -- -- 140,746 141 37,859 --
Conversion of debt -- -- 745,432 745 181,353 --
Conversion of compensation debenture -- -- 743,902 744 29,256 --
Stock incentive plans -- -- 770,000 770 144,081 --
Legal settlement -- -- 80,000 80 22,320 --
Net loss for the year -- -- -- -- -- (2,157,619)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2004 -- $ -- 15,503,298 $ 15,503 $ 6,261,503 $(9,742,720)
Issuance of stock options for:
Loan -- -- -- -- 19,526 --
Issuance of common stock for:
Bonus interest and extensions on debt -- -- 36,667 37 2,796 --
Cash under Equity Line -- -- 6,330,100 6,331 323,669 --
Conversion of debt -- -- 1,489,334 1,489 210,609 --
Stock incentive plans -- -- 48,800 49 36,551 --
Legal settlement -- -- 30,000 30 1,170 --
Net loss for the year -- -- -- -- -- (4,250,636)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2005 -- $ -- 23,438,199 $ 23,439 $ 6,855,824 $(13,993,356)
============ =========== ========== =========== =========== ============
The accompanying notes are an integral part of this statement.
F-6
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
From
For the year ended May 26, 2000
October 31, (inception)
-------------------------------- Through
2005 2004 October 31, 2005
--------------- --------------- -------------------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (4,250,636) $ (2,157,619) $ (13,993,356)
Adjustments to reconcile net loss to
net cash used in operating activities
Minority interests - - 4,866
Provision for bad debts - 10,000 600,000
Write off of goodwill - - 958,628
Gain on sale of investment stock - - (338,049)
Gain on transfer of license - - (114,509)
Loss on write-off of loan fees 100,000 - 100,000
Depreciation and amortization 143,376 26,937 289,022
Interest expense recognized on beneficial conversion - - 423,900
Issuance of common stock under stock plans 36,600 144,850 810,558
Issuance of common stock for services - 88,000 553,832
Issuance of common stock for interest 2,833 216,201 509,925
Options issued on guarantee, services, and loans 19,526 255,868 275,394
Issuance of common stock for legal settlement - 22,400 22,400
Changes in assets and liabilities
Other assets 37,546 (92,774) (159,447)
Accounts receivable 7,947 (9,038) (1,091)
Accounts payable and accrued liabilities 2,947,780 87,172 3,538,884
Accrued interest 221,707 109,746 707,948
--------------- --------------- -------------------
Total adjustments 3,517,315 859,362 8,182,261
--------------- --------------- -------------------
Net cash used in operating activities (733,321) (1,298,257) (5,811,095)
--------------- --------------- -------------------
Net cash flows from investing activities -
Investment stock and licenses, net - - 555,791
Increase in notes receivable - - (600,000)
Purchase of property and equipment - (44,982) (164,977)
--------------- --------------- -------------------
Net cash flows used in investing activities - (44,982) (209,186)
--------------- --------------- -------------------
Cash flows from financing activities
Increase in notes payable, net 590,000 1,040,000 4,784,800
Proceeds from long term obligations - 357,000 357,000
Payments on long term obligations (40,104) (141,450) (181,554)
Proceeds from issuance under equity line - 38,000 38,000
Proceeds from issuance of common stock - 225,000 1,024,306
--------------- --------------- -------------------
Net cash provided by financing activities 549,896 1,518,550 6,022,552
--------------- --------------- -------------------
Net increase (decrease) in cash (183,425) 175,311 2,271
Cash at beginning of period 185,696 10,385 -
--------------- --------------- -------------------
Cash at end of period $ 2,271 $ 185,696 $ 2,271
=============== =============== ===================
The accompanying notes are an integral part of this statement.
F-7
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information
-------------------------------------------------
Cash paid during the period for
Interest $ -- $ -- $ --
Income taxes -- -- --
Noncash investing and financing activities
During the year ended October 31, 2005 the Company retired $330,000 of notes
payable using proceeds from it's equity distribution agreement and converted
$30,000 of its compensation debenture into common stock. The Company converted
$180,000 of notes payable and $2,098 of accrued interest payable into common
stock. Additionally, the Company issued common stock for a legal settlement that
was accrued in the prior year totaling $1,200.
During the year ended October 31, 2004 the Company entered into a capital lease
that resulted in an increase of property and equipment totaling $657,614.
Additionally, the Company converted $1,370,000 of notes payable and $217,280 of
accrued interest payable into common stock. During the year ended October 31,
2004, the company issued a convertible compensation debenture totaling $390,000
in exchange for fees related to a Standby Equity Distribution Agreement.
F-8
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
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 on demand,
high speed internet access, and other content to end users such as hotels,
hospitals, and condominiums.
At October 31, 2005 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.
On December 1, 2000, the Company completed a reverse stock split of 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. As of September 16, 2004, the Company received written consent from
shareholders representing approximately 55 percent of the outstanding shares, at
that time, to increase the number of authorized shares of common stock from
50,000,000 to 100,000,000 and the number of authorized shares of preferred stock
from 1,000,000 to 5,000,000. There are currently no preferred shares
outstanding. Preferred shares may be issued from time to time in one or more
distinctly designated series. The Board of Directors has the authority to
designate the powers, preferences, qualifications, powers, limitations, and the
rate and timing of dividends prior to the issuance of any series of preferred
stock.
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
inter-company 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.
F-9
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
4. Revenue recognition The Company has started to and 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 recognizes 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.
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 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, which includes, but is not limited to salaries, technology
consulting, and various computer equipment components, 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. The Company is a development-stage company and currently has
one customer from which all accounts receivables were derived.
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 F, G, J 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.
13. Advertising costs Advertising and marketing costs are expensed as incurred.
F-10
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
14. Reclassifications Certain reclassifications have been made to the 2004
financial statements to conform with the 2005 presentation.
NOTE B - REALIZATION OF ASSETS
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 $13,993,356 from May 26, 2000 (inception) through
October 31, 2005 including a loss of $4,250,636 for the year ended October 31,
2005. Current liabilities exceed current assets by $6,986,131 at October 31,
2005. The Company has recognized minimal revenue during it's developmental stage
from May 26, 2000 (inception) through October 31, 2005, 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 has installed its first Digital
Entertainment System commercially, 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. Additionally, the Company is working on the
formation of a joint venture that when completed should bring operational
capital into the Company. The proposed joint venture will fund certain agreed
upon operational expenses of Videolocity in the form of prepaid licensing fees
(deferred revenue) during the time that the joint venture begins to install and
use Videolocity's technologies into various uses. (Note N)
NOTE C - OTHER ASSETS
At October 31, 2005, other assets consisted of the following:
Short term Long term
Non trade receivables $ 1,317 $ --
Deposits --
10,267
Prepaid expenses --
22,954
Deposits -- 24,909
------------- ------------
$ 34,538 $ 24,909
============= ============
F-11
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
NOTE D - PROPERTY AND EQUIPMENT
At October 31, 2005 property and equipment and estimated useful lives consist of
the following:
Amount Years
---------- ---------
Computer equipment $ 164,978 3-5
Equipment under capital lease 657,614 3-5
----------
822,592
Less accumulated depreciation and amortization 225,514
----------
$ 597,078
==========
NOTE E - ACCRUED LIABILITIES
At October 31, 2005, accrued liabilities consisted of the following:
Payroll, payroll taxes, and related amounts $ 2,984,302
Director and consultant compensation 217,000
Capital lease paid on Company's behalf (Note G) 246,913
Other 1,647
---------------
$ 3,449,862
===============
NOTE F - NOTES PAYABLE
At October 31, 2005 the Company has notes payable totaling $2,549,800 due to
various individuals and companies including $125,000 to current related parties
including Board of Directors and Management. Of the total, $370,000 is written
at 12% simple interest, $1,334,800 is written at 8 percent simple interest and
$845,000 has no stated interest rate. Interest has been imputed from the date of
issuance on all non-interest bearing notes payable at 8 percent. Of the total
notes payable $662,800 is convertible at the option of the debt holder in the
following amounts: $167,800 is convertible at $1.00 per share, $60,000 is
convertible at $0.72 per share, $10,000 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, $15,000 is convertible at $0.12 per share and $80,000 is
convertible at $0.04 per share. The notes payable have maturities as follows:
$20,000 matured during October 2002, $335,000 matured during November 2002,
$10,000 matured during January 2003, $719,800 matured during August 2003,
$25,000 matured during November 2003, $75,000 matured during June 2005, $250,000
matured during July 2005, $80,000 matured during September 2005, $615,000 is
callable on demand when the Company has secured between $1 million and $5
million in new debt or equity funding,, $100,000 has no set maturity and is
payable until paid in full and $320,000 is due on a set schedule of $10,000 per
week beginning in November 2004 until paid in full using advances under the
Company's Standby Equity Line. (Note L). Approximately $1,239,800 is past due as
of October 31, 2005. Subsequent to October 31, 2005 a significant portion of the
Company's debt was extended by the debt holder (Note N).
F-12
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
NOTE F - NOTES PAYABLE - CONTINUED
The Company has issued options to purchase Company stock under certain of the
notes payable originated in the following amounts: 400,000 shares at $0.77 per
share, 120,000 shares at $0.72 per share, 20,000 shares at $0.50 per share,
200,000 shares at $0.14 per share, 60,000 at $0.12 per share and 400,000 at
$0.04 per share. All options granted in conjunction with new notes payable were
granted at or above the fair market value on the date the notes payable were
originated. Where necessary, the value of the options granted is based on the
fair value at the date of grant calculated using the Black-Scholes
option-pricing model. Expense is recognized at the time the options become
exercisable.
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 $100,000 to current related parties. During the
year ended October 31, 2004, the Company converted a total of $535,000 of notes
payable under the UCC-1 into common stock of the Company including $135,000 to
related parties. During the year ended October 31, 2005 the Company converted
$100,000 of notes payable under the UCC-1 into Common Stock of the Company and
repaid $20,000 under a settlement agreement. As of October 31, 2005 there
remains a total of $845,000 of notes payable under the UCC-1. The notes payable
under the UCC-1 have maturities under the UCC-1 as follows: $20,000 matured
during October 2002, $335,000 matured during November 2002, $10,000 matured
during January 2003 and $480,000 matured during August 2003 (Note N).
On February 6th, 2003 the Company received a formal notice of default regarding
a $215,000 note payable under the UCC-1. During the year ended October 31, 2005,
the Company received demand notices on three notes payable totaling $485,000
including the $215,000 note payable under the UCC-1. The Company agreed to a
payback schedule on $20,000 of that total consisting of 5,000 per month until
paid in full. The Company has completed the agreed upon payments for the $20,000
note payable. Subsequent to October 31, 2005 the Company received an extension
on $250,000 of the total and worked out a payback schedule on the $215,000 note
payable to (Note N).
NOTE G - LONG TERM OBLIGATIONS - CAPITAL LEASE
During the year ended October 31, 2004, the Company signed a capital lease
agreement that included approximately $658,000 in equipment and approximately
$357,000 in operating capital. The lease terms require approximately $25,000 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 bringing their total held
pursuant to the agreement equal to 2.5 percent of the then outstanding shares of
the Company. As of October 31, 2005, the Company has surpassed 20,000,000
shares. However, the guarantor currently holds more than 2.5% of the total
outstanding shares in options and is not entitled to additional options. Expense
recognized for the period ended October 31, 2004 related to these options
totaled $69,120. The equipment was recorded as equipment under capital leases.
During the year ended October 31, 2005, the Company was unable to make the
required payments on the lease and the guarantor made approximately $247,000 in
lease payments on behalf of the Company. The amounts paid on behalf of the
Company have reduced the outstanding balance on the lease and have been recorded
as accrued liabilities of the Company. (Note E)
F-13
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
NOTE G - LONG TERM OBLIGATIONS - CAPITAL LEASE - CONTINUED
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 October
31, 2005:
Cash
proceeds from
Equipment Lease Total
---------- ---------- ----------
2005 $ 197,098 $ 106,033 $ 303,131
2006 197,098 106,033 303,131
2007 72,819 35,344 108,163
2009 -- -- --
---------- ---------- ----------
Total minimum payments 467,015 247,410 714,425
Less amount representing interest 49,677 24,270 73,947
---------- ---------- ----------
Present value of net minimum payments 417,338 223,140 640,478
Less current portion 165,270 90,125 255,395
---------- ---------- ----------
Long-term portion $ 252,068 $ 133,015 $ 385,083
========== ========== ==========
NOTE H - INCOME TAXES
The Company has sustained losses in all periods presented. Consequently, there
is no income tax provision or benefit for the 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
$1,572,486 for the year ended October 31, 2005 ($710,063 for the year ended
October 31, 2004, and $4,970,885 for the period May 28, 2000 (inception) through
October 31, 2005).
F-14
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
As of October 31, 2005, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $9,900,000 expiring through 2025.
Reconciliation of income taxes computed at the federal statutory rate and income
tax expense are as follows:
Cumulative
from
May 28,
Year ended Year ended 2000 (inception)
October 31, Through
--------------------------- October 31,
2005 2004 2005
------------ ------------ ------------
Current
Federal income taxes at
statutory rate $(1,455,216) $ (733,590) $(4,757,740)
State income taxes net of
federal benefit (140,181) (66,455) (456,944)
Change in valuation allowance 1,572,486 710,063 4,970,885
Other 12,911 89,982 243,799
Deferred -- -- --
------------ ------------ ------------
Total $ -- $ -- $ --
============ ============ ============
Deferred taxes consist of the following:
Year ended Year ended
October 31, October 31,
2005 2004
------------ ------------
Current deferred taxes
Allowance for doubtful accounts $ 223,800 $ 220,700
Deferred Compensation 1,068,344 --
------------ -----------
Total 1,292,144 324,799
Less valuation allowance (4,970,885) (3,398,399)
------------ ------------
Total (3,678,741) (3,073,600)
Long term deferred taxes
Accumulated depreciation (4,119) (5,315)
Net operating losses 3,682,859 3,078,915
------------ ------------
Total $ 3,678,741 $ 3,073,600
------------ ------------
-- --
=========== ===========
F-15
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
NOTE I - 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.
Year ended October 31,
2005 2004
--------------- --------------
Net earnings (loss) $ (4,250,636) $ (2,157,619)
Imputed dividends on preferred stock -- --
--------------- --------------
Net earnings (loss) applicable to common stock $ (4,250,636) $ (2,157,619)
=============== ==============
The following data was used in computing loss per share:
Year ended Year ended
October 31, October 31,
2005 2004
-------------- --------------
Shares outstanding entire period 15,503,298 6,346,996
Net weighted-average shares issued during
period 3,976,327 5,270,696
-------------- --------------
Weighted average number of common shares and
dilutive potential common shares used in 19,479,625 11,617,692
diluted EPS ============== ==============
F-16
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
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 F, G, J 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.
Earnings (loss) per share - basic and diluted
Year ended Year ended
October 31, October 31,
2005 2004
--------------- --------------
Earnings (loss) before imputed
dividend $ (0.22) $ (0.19)
Imputed dividend - (accretion) - -
--------------- --------------
Earnings (loss) per share attributable
to common shareholders - basic
and diluted $ (0.22) $ (0.19)
=============== ==============
NOTE J - 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 the year ended October 31,
2005, the Company recognized approximately $37,000 of compensation expense with
the issuance of 48,800 shares of stock under vesting schedules. Through October
31, 2005, the Company has granted 998,384 plan units of which 979,884 units have
been exercised under the plan and 18,500 plan units remain subject to vesting
requirements.
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. Through October 31, 2005, the Company
has issued a total of 467,855 shares under the Plan.
F-17
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
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. Pursuant to the Articles
of Incorporation, 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 vested at
various times through FY 2004. Additionally, during the quarter ended April 30,
2005, as an incentive, and to retain current key individuals, the Board of
Directors approved a total of 2,000,000 options to purchase stock outside of the
plans to employees that vest at various times through FY 2006. Additionally, the
Board of directors approved 2,000,000 shares to be issued in restricted stock to
officers of the Company to be issued when administratively possible. As of
October 31, 2005 the 2,000,000 shares of restricted stock has not been issued,
however the Company has recorded an accrued liability for the expense incurred.
The expense for the granted shares has been accrued and is currently recorded
within accrued liabilities. The above noted options were issued pursuant to the
Restated Articles of Incorporation approved by a majority of the stockholders on
November 15, 2000.
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,
2005 2004 2005
------------- ------------ ------------
Net earnings (loss):
As reported $(4,250,636) $(2,157,619) $(13,993,356)
Proforma $(4,334,599) $(2,752,055) $(14,771,715)
Basic earnings (loss) per share:
As reported $(0.21) $(0.19) $(1.57)
Pro forma $(0.22) $(0.24) $(1.66)
Diluted earnings (loss) per share:
As reported $(0.21) $(0.19) $(1.57)
Pro forma $(0.22) $(0.24) $(1.66)
Weighted average fair value per plan unit
granted during the year $ 0.09 $ 0.13
F-18
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
The following table summarizes stock option activity for the period May 26, 2000
(inception) through October 31, 2005:
Shares subject Weighted-average
to options exercise price
- ----------------------------------- ---------------- ----------------
Outstanding at May 26, 2000
(inception) -- $ -
Granted -- $ -
Exercised -- $ -
Forfeited -- $ -
- ----------------------------------- ---------------- ----------------
Outstanding at October 31, 2000 -- $ -
Granted 490,833 $ 1.13
Exercised (5,000) $ 1.00
Forfeited -- $ -
- ----------------------------------- ---------------- ----------------
Outstanding at October 31, 2001 485,833 $ 1.14
Granted 185,400 $ 1.08
Exercised (36,684) $ 1.35
Forfeited (416,249) $ 1.01
- ----------------------------------- ---------------- ----------------
Outstanding at October 31, 2002 218,300 $ 1.30
Granted -- $ -
Exercised (119,400) $ 1.45
Forfeited (4,200) $ 1.40
- ----------------------------------- ---------------- ----------------
Outstanding at October 31, 2003 94,700 $ 1.04
Granted 9,955,000 $ 0.13
Exercised (770,000) $ 0.19
Forfeited (2,400) $ 1.50
- ----------------------------------- ---------------- ----------------
Outstanding at October 31, 2004 9,277,300 $ 0.14
Granted 2,020,000 0.09
Exercised (48,800) 0.75
Forfeited -- -
- ----------------------------------- ---------------- ----------------
Outstanding at October 31, 2005 11,248,500 $ 0.12
Exercisable at October 31, 2005 11,248,500 $ 0.12
F-19
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
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 year ended October 31, 2005. 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 year ended
-------------------------------
October 31, October 31,
2005 2004
-------------------------------
Risk-free interest rate 3.5 % 2.5 %
Dividend yield 0 % 0 %
Volatility factor .59 .59
Expected option term life in years 3.0 2.5
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, 2005 is as follows:
Weighted Average Weighted Average
Range of Exercise Number Remaining Contractual Exercise Price
Prices Outstanding / Exercisable Life (Years) Outstanding / Exercisable
------------------------- ------------ -------------------------
$0.00 to 0.50 11,230,000 / 11,230,000 8.30 $0.12 / $0.12
0.51 to 1.00 18,500 / 18,500 0.01 0.70 / 0.70
----------- ---------- ---- ----- ------
11,248,500 / 11,248,500 8.29 $0.12 / $0.12
NOTE K - RELATED PARTY TRANSACTIONS
As of October 31, 2005 the Company has 8% notes payable to current directors,
and officers totaling $125,000. Additionally, the Company has 8% notes payable
totaling $215,000 to a private entity of which a former director is the manager.
The Company has accounts payable totaling approximately $41,000 due to a former
director at October 31, 2005. As of October 31, 2005 executive officers and
directors of the Company own approximately 5% of the outstanding stock.
F-20
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
NOTE L - STANDBY EQUITY DISTRIBUTION AGREEMENT AND COMPENSATION DEBENTURE
During May 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP, a New Jersey-based domestic
investment fund. 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
$350,000 per drawdown and 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 effective date of the agreement is the date that the Securities
and Exchange Commission first declared a registration statement effective
registering the resale of the securities. The drawdowns are subject to an
effective registration statement with the United States Securities and Exchange
Commission covering the resale of the shares. The Company filed an SB-2 on July
9, 2004 to register 19,314,099 shares of common stock and the SB-2 was declared
effective by the Securities and Exchange Commission on July 22, 2004. As of
October 31, 2005, the Company had issued 140,746 shares to Cornell and received
$38,000 under the agreement.
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. Through October 31, 2005, the holder has converted
$30,000 of the debenture balance into 743,902 shares of the Company's common
stock. The balance of the compensation debenture as of October 31, 2005 totals
$360,000.
The Company placed 10,000,000 of the registered shares into escrow to facilitate
drawdowns and the repayment of a $400,000 loan due to Cornell Capital Partners
LP and through October 31, 2005 has issued 6,330,100 shares under the Standby
Equity Distribution Agreement using the proceeds to repay $330,000 of the loan.
The balance of the loan at October 31, 2005 totals $70,000. The Company placed
another 5,000,000 of the registered shares into escrow to facilitate repayment
of a second lone totaling $250,000. The repayment of this loan begins subsequent
to the completion of payments under the first loan. The Company has not issued
any shares in repayment of the second loan. Those shares not issued under
drawdowns or as repayment on the loan will be returned to the Company. As of
October 31, 2005, the Company has 8,669,900 shares that remain in escrow. The
shares held in escrow are not included in the Company's outstanding shares
(15,000,000 held in escrow less 6,330,100 shares issued). (Note F)
NOTE M - COMMITMENTS AND CONTINGINCIES
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.
F-21
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
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, the Company 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. During the year ended
October 31, 2005 the Company fulfilled its obligations under the agreement.
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 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 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. 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. However, based on
the anticipated costs to recover the $100,000, the Company has written off the
fee during the year ended October 31, 2005.
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 $9,000 at October 31, 2005.
As of October 31, 2005, the Company has recorded an allowance for bad debt
totaling $600,000 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.
F-22
Videolocity International, Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004 and October 31, 2005
NOTE N - SUBSEQUENT EVENTS
Notes Payable
As of February 15, 2006 approximately $25,000 of notes payable are past due
although the Company has a verbal commitment of the holder's intent to extend
the note. Subsequent to year end, management has negotiated the extension of
approximately $1,405,000 of notes payable, worked out a payment agreement on
$215,000 as noted below, and is currently working on extensions on the remainder
of the Company's notes payable.
On November 30, 2005, with an addendum signed on December 5, 2005, the Company
and the note holder of approximately $215,000 in notes payable reached an
agreement to settle the note payable, in total, with twenty four monthly
payments of $5,000 per month beginning January 5, 2006 and ending on December 5,
2007 for the aggregate amount of $120,000. The note holder has agreed to stay
any actions to enforce or collect upon the judgment during the repayment term.
At any time the Company fails to meet its required payment, the note holder will
have the right to proceed with all legal remedies to collect upon and satisfy
the judgment and note payable. The Company has the right to prepay all or a
portion of the total at its discretion. The settlement agreement also provided
that the Company release the note holder, ISOZ, LC, and its employees, agents,
representatives and affiliates and assigns, from any and all actions, judgments,
claims or causes of action and from any claim or allegation previously made by
the Company against the note holder.
Joint venture
On December 1, 2005, the Company entered into an operating agreement with E.
Oliver Capital Group LLC toward the formation of a joint venture between
Videolocity International, Inc. and E. Oliver Capital Group LLC.
The finalization of the agreement is contingent on shareholder approval and
Videolocity obtaining extensions of all outstanding notes payable. Toward that
goal, we have forwarded a proposal to certain shareholders and have been in
discussions with the holders of all notes payable. We did not solicit proxies
and submitted the proposal to shareholders holding at least a majority of the
outstanding shares of the company. To date, we have received verbal commitments
representing a majority of the voting shares approving the proposal but are
currently waiting for the signed documents from the individual shareholders.
Additionally, to date, the Company has received extensions of notes payable
totaling approximately $1,405,000, reached a payback agreement on $215,000,
received verbal commitments on an additional $920,000 of notes payable which the
company is currently waiting for the documents, and management is currently in
discussions with the holders of the remaining $10,000 of notes payable.
F-23
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
of
EOCG MEDIA LLC
A Delaware Limited Liability Company
OPERATING AGREEMENT, dated December 1, 2005, between Videolocity
International, Inc. and E Oliver Capital Group LLC ("Members" or "Parties").
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which is
hereby acknowledged, the Parties covenant, contract and agree as follows:
ARTICLE I
FORMATION OF LIMITED LIABILITY COMPANY
1.1 Formation of LLC. The Parties have formed a Delaware limited
liability company named EOCG Media LLC (the "LLC"). The operation of the LLC
shall be governed by the terms of this Agreement and the applicable laws of the
State of Delaware relating to the formation, operation and taxation of a LLC,
specifically the provisions of the Delaware Limited Liability Company Act,
Delaware Statutes, Title 6, Subtitle II, Chapter 18 (the "Act"). To the extent
permitted by the Act, the terms and provisions of this Agreement shall control
if there is a conflict between such Law and this Agreement. The Parties intend
that the LLC shall be taxed as a partnership. Any provisions of this Agreement,
if any, that may cause the LLC not to be taxed as a partnership shall be
inoperative.
1.2 Certificate of Organization. The members acting through an
Authorized Person are filing a Certificate of Formation for record in the office
of the Delaware Department of State thereby creating the LLC.
1.3 Business. The business of the LLC shall be any and all lawful
business.
1.4 Registered Office and Registered Agent. The registered office of
the LLC and the registered agent at such office shall be Corporation Service
Company, 2711 Centerville Road, suite 400, Wilmington, Delaware 19808. The
manager may change the registered office and/or registered agent from time to
time.
1.5 Duration. The LLC will commence business as of the date any of the
Members contribute a capital investment in the LLC and will continue in
perpetuity.
1.6 Fiscal Year. The LLC's fiscal and tax year shall end December 31.
ARTICLE II
MEMBERS
2.1 Initial Members. The initial Members of the LLC are:
-1-
Videolocity International, Inc.
E Oliver Capital Group, LLC
2.2 Additional members. New Members may be admitted only upon
compliance with the provisions of this Agreement. New Members may be admitted
prior to December 31, 2008 only upon the consent of both Members. Thereafter,
New Members may be admitted upon the consent of E Oliver Capital Group LLC.
ARTICLE III
MANAGEMENT
3.1 Management. The Members have elected to manage the LLC by hereby
delegating the management of the LLC to a Manager, subject to the limitations
set out in this Agreement. The Members shall elect and may remove the Manager by
majority vote, and the Manager shall serve until a successor is elected by the
Members. The Manager shall have the authority to take all necessary and proper
actions in order to conduct the business of the LLC. The Manager may take any
appropriate action on behalf of the LLC, including, but not limited to signing
checks, executing leases, signing loan documents and determining the timing and
total amount of distributions to the Members. The compensation to the Manager
shall be in the discretion of the majority of the Members of the LLC.
The initial Manager is Gilbert R. Armenta.
3.2 Officers. Robert Holt shall be the Chief Executive Officer of the
LLC. The Manager may, if he deems it appropriate, appoint other officers for the
LLC. Any officers of the LLC shall consist of such officers or agents as may be
determined from time to time by the Manager. The officers shall act in the name
of the LLC and shall supervise its operation under the direction and management
of the Manager and shall hold office at the pleasure of the Manager.
ARTICLE IV
CONTRIBUTIONS, PROFITS, LOSSES, AND DISTRIBUTIONS
4.1 Contributions. The Members shall make the following contributions
to the capital of the LLC.
4.1.1 Videolocity International, Inc. Videolocity International, Inc.
shall contribute, transfer and irrevocably assign to the LLC all of its
intellectual property technology ("Intellectual Property Technology") which
shall include (i) its Videoloicity Digital Entertainment System (DES tm) and
related services, trade secrets, patents, copyrights and any other intellectual
property rights, including High Speed Internet Access together with digital
streaming video technology, and (ii) its existing license agreements and
agreements for Video-On-Demand programming for the DES, including digital movie
titles, other content and entertainment including music and gaming content). The
LLC shall continue developing and licensing the Intellectual Property
Technology, including the current license to E Oliver Capital Group LLC.
-2-
4.1.2 E Oliver Capital Group LLC. E Oliver Capital Group LLC shall
contribute from time to time such funds as are necessary to operate and deploy
the intellectual property technology, including necessary salaries and other
operating expenses and capital expenditures of the LLC. Upon the execution of
this Agreement, E Oliver Capital Group LLC will advance Videolocity
International, Inc. the aggregate sum of US$______ as set forth in the 90 day
budget of Videolocity International, Inc. attached hereto as Schedule 1. In
addition, if distributions by the LLC to Videolocity International, Inc. are not
sufficient to fund the costs of maintaining a CFO of Videolocity International,
Inc. through December 31, 2007, E Oliver Capital Group LLC from time to time
will advance Videolocity International, Inc. such amounts as are necessary to
fund the costs of maintaining such CFO. All amounts advanced by E Oliver Capital
Group LLC to Videolocity International, inc. will be recouped from distributions
by the LLC to Videolocity International, Inc. as provided in Section 4.2.1
below. Attached hereto as Schedule 2 is the 180 day budget of the LLC.
4.2 Profits and Losses. The profits and losses and all other tax
attributes of the LLC shall be allocated among the Members as follows:
4.2.1 Videolocity International, Inc. Videolocity International, Inc.
shall receive (i) the technical transfer fees (the mark up over cost and
installation of equipment deployed) and the first 5% of the net licensing fees
derived by the LLC in licensing the Intellectual Property Technology from the
current version 1 of the Intellectual Property Technology and (ii) twenty-five
percent (25%) of the technical transfer fees and the first 5% of the net
licensing fees derived by the LLC in licensing version 2 of the intellectual
property technology currently in development. E Oliver Capital Group LLC is
advancing Videolocity International, Inc. the aggregate sum of US$_______ and
may advance additional amounts to Videolocity International, Inc., all of which
will be first recouped from distributions by the LLC to Videolocity
International, Inc. prior to Videolocity International, Inc. receiving payment
and distributions. Attached hereto as Schedule 3 is a descriptions of version 1
and version 2 of the Intellectual Property Technology.
4.2.2 E Oliver Capital Group LLC. E Oliver Capital Group LLC shall
receive any remaining revenues of the LLC from the development and licensing of
the Intellectual Property Technology.
4.3 Distributions. Distributions of cash or other assets of the LLC
(other than in dissolution of the LLC) shall be made no less than quarterly in
the total amounts and at the times as determined by the Manager.
ARTICLE V
VOTING; CONSENT TO ACTION
5.1 Voting by Members. Members shall be entitled to vote on all matters
which provide for a vote by the Members. Videolocity International, Inc. shall
have one vote and E Oliver Capital Group LLC shall have one [sic] votes. In the
event of a tie vote, the Manager shall cast the deciding vote.
5.2 Majority Required. Except as otherwise required, a majority vote of
the Members if required for any action.
-3-
5.3 Meetings - Written Consent. Action of the Members may be
accomplished with or without a meeting. If a meeting is held, evidence of the
action shall be by Minutes or Resolution reflecting the action of the Meeting,
signed by a voting majority of the Members. Action without a meeting may be
evidenced by a written consent signed by a voting majority of the Members.
5.4 Meetings. Meetings of the Members may be called by anyMember and by
any Manager of the LLC.
ARTICLE VI
DUTIES AND LIMITATION OF LIABILITY MEMBERS, OFFICERS
AND PERSONS SERVING ON ADVISORY COMMITTEES; INDEMNIFICATION
6.1 Duties of Members; Limitation of Liability. The Members, Managers
and officers shall perform their duties in good faith, in a manner they
reasonably believe to be in the best interest of the LLC, and with such care as
an ordinarily prudent person in a like position would use under similar
circumstances. No Member or officer shall have any liability to the LLC or any
other Member by reason of being or having been a Member or officer. No Member or
officer shall not be liable to the LLC or to any other Member or officer unless
the loss or damage shall have been the result of fraud, deceit, gross
negligence, willful misconduct, or a wrongful taking by that Member or officer.
6.2 Members Have No Exclusive Duty to LLC. The Members shall not be
required to participate in the LLC as their sole and exclusive business. Members
may have other business interests and may participate in other investments or
activities in addition to those relating to the LLC. Neither the LLC nor any
other Member shall have any right, by virtue of this Agreement, to share or
participate in another Member's business interests, investments or activities or
the income or proceeds derived therefrom. No Member shall incur liability to the
LLC or to any other Member by reason of participating in any such other
business, investment or activity.
6.3 Protection of Members and Officers. As used herein, the term
"Protected Party" refers to the Members and officers of the Company.
(a) To the extent that, at law or in equity, a Protected Party has
duties (including fiduciary duties) and liabilities relating thereto to the LLC
or to any other Protected Party, a Protected Party acting under this Agreement
shall not be liable to the LLC or to any other Protected Party for good faith
reliance on the provisions of this Agreement; the records of the LLC; and/or
such information, opinions, reports or statements presented to the LLC by any
person as to matters the Protected Party reasonably believes are within such
other person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the LLC, including information, opinions,
reports or statements as to the value and amount of the assets, liabilities,
profits or losses of the LLC or any other fact pertinent to the existence and
amount of assets from which distributions to Members might properly be paid.
-4-
(b) The provisions of this Agreement, to the extent that they restrict
the duties and liabilities of a Protected Party to the LLC or to any other
Protected Party otherwise existing at law or in equity, are agreed by the
Parties hereto to replace such other duties and liabilities of such Protected
Party.
(c) Whenever this Agreement permits or requires a Protected Party to
make a decision in its "discretion" or under a grant of similar authority or
latitude, the Protected Party shall be entitled to consider only such interests
and factors as it desires, including its own interests and shall have no duty or
obligation to give any consideration to any interest of or factors affecting the
LLC or any other Person.
(d) Whenever this Agreement permits or requires a Protected Party to
make a decision using a "good faith" or under another express standard, the
Protected Party shall act under such express standard and shall not be subject
to any other or different standard imposed by this Agreement or other applicable
law.
6.4. Indemnification and Insurance
6.4.1 Right to Indemnification. Any person who is or was a Member or
officer of the LLC and who is or may be a party to any civil action because of
his/her participation in or with the LLC, and who acted in good faith and in a
manner which he/she reasonably believed to be in, or not opposed to, the best
interests of the LLC, shall be indemnified and held harmless by the LLC. Any
person who is or was a Member or officer of the LLC and who is or may be a parto
to any criminal action because of his/her participation in or with the LLC, and
who acted in good faith and had reasonable cause to believe that the act or
omission was lawful, shall be indemnified and held harmless by the LLC.
6.4.2 Advancement of Expenses. Expenses (including attorney's fees)
incurred by an indemnified person in defending any proceeding shall be paid in
dvance of the proceeding's final disposition. Should the indemnified Member or
officer ultimately be determined to not be entitled to indeminification, that
Member or officer agrees to immediately repay to LLC all funds expended by the
LLC on behalf of the Member or officer.
6.4.3 Non-Exclusivity of Rights. The right to indemnification and the
advancement of expenses conferred in this section shall not be exclusive of any
right which any person may have or hereafter acquire under any statute,
provision of this Agreement, contract, agreement, vote of Members or otherwise.
The Members and officers are expressly authorized to adopt and enter into
indemnification agreements for Members, officers and advisory committee Members.
6.4.4 Insurance. The Members may cause the LLC to purchase and maintain
insurance for the LLC, for its Members and officers, and/or on behalf of any
third party or parties whom the Members might determine should be entitled to
such insurance coverage.
-5-
6.4.5 Effect of Amendment. No amendment, repeal or modification of this
Article shall adversely affect any right hereunder with respect to any action or
omission occurring prior to the date when such amendment, repeal or modification
became effective. 6.5 Duties of persons Serving on Advisory Committees;
Limitation of Liability; Indemnification. The Members shall have the right to
form advisory committees. Persons serving on an advisory committee, whether or
not a Member or officer, shall perform their duties in good faith, in a manner
they reasonably believe to be in the best interests of the LLC, and with such
care as an ordinarily prudent person in a like position would use under similar
circumstances. A person serving on an advisory committee shall not have any
liability to the LLC or to any Member or officer for any loss or damage
sustained by the LLC or any Member or officer unless the loss or damage was the
result of fraud, deceit, gross negligence, willful misconduct, or a wrongful
taking by such person.
ARTICLE VII
MEMBERS INTEREST TERMINATED
7.1 Termination of Membership. A Member's interest in the LLC shall
cease upon the occurrence of one or more of the following events:
(a) A member provided notice of withdrawal to the LLC thirty (30) days
in advance of the withdrawal date. Withdrawal by a Member is not a breach of
this Agreement.
(b) A member assigns all of its interest to a qualified third party
(c) A Member, without the consent of a majority of the Members (1)
makes an assignment for the benefit of creditors; (2) files a voluntary petition
in bankruptcy; (3) is adjudicated a bankrupt or insolvent; (4) files a petition
or answer seeking for himself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution, or similar relief under any statute, law
or regulation; (5) files an answer or other pleading admitting or failing to
contest the material allegations of a petition filed against him in any
proceeding of the nature described in this paragraph; (6) seeks consents to, or
acquiesces in the appointment of a trustee, receiver, or liquidator of the
Member or of all or any substantial part of his properties; or (7) if any
creditor permitted by law to do so should commence foreclosure or take any other
action to seize or sell any Member's interest in the LLC.
(d) If within one hundred twenty (120) days after the commencement of
any action against a Member seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution, or similar relief under any statute,
law, or regulation, the action has not been dismissed and/or has not been
sonsented to by a majority of the Members.
(e) If within ninety (90) days after the appointment, without a
Member's consent or acquiescense, of a trustee, receiver, or liquidator of the
Member or of all or any substantial part of the Member's properties, said
appointment is not vacated or within ninety (90) days after the expiration of
any stay, the appointment is not vacated and/or has not been consented to by a
majority of the Members.
-6-
(f) Any of the events provided in applicable code provisions that arfe
not inconsistent with the dissociation events identified above.
7.3 Effect of Dissociation. Any dissociated Member shall not be
entitled to receive the fair value of his LLC interest solely by virtue of his
dissociation. A dissociated Member that still owns an interest in the LLC shall
be entitled to continue to receive such profits and losses, to receive such
distribution or distributions, and to receive such allocations of income, gain,
loss deduction, credit or similar items to which he would have been entitled if
still a Member. For all other purposes, a dissociated Member shall no longer be
considered a Member and shall have no rights of a Member.
7.3 Withdrawal by E Oliver Capital Group LLC. If E Oliver Capital Group
LLC at any time prior to December 31, 2012 withdraws from the LLC, all rights to
the Intellectual Property Technology shall be reassigned to Videolocity
International, Inc., provided that E Oliver Capital Group LLC shall continue to
have a non exclusive license to utilize the Intellectual Property Technology and
any new versions or improvements thereof throughout the World.
ARTICLE VIII
RESTRICTIONS ON TRANSFERABILITY OF LLC INTEREST
8.1 LLC Interest. The LLC interest is personal property. A Member has
no interest in property owned by the LLC.
8.2 Encumbrance. A member can encumber its LLC interest by a security
interest or other form of collateral only with the consent of a majority of the
other Members. Such consent shall only be given if the proceeds of the
encumbrance are contributed to the LLC to respond to a cash call of the LLC.
ARTICLE IX
DISSOLUTION
9.1 Termination of LLC. The LLC will be dissolved and its affairs must
be wound up only upon the written consent of a majority of the Members.
9.2 Final Distributions. Upon the winding up of the LLC, the assets
must be distributed as follows (a) to the LLC creditors; (b) to Members in
satisfaction of liabilities for distributions; and (c) to Members first for the
return of their contributions and secondly respecting their LLC interest, in the
proportions in which the Members share in profits and losses.
ARTICLE X
TAX MATTERS
10.1 Capital Accounts. Capital accounts shall be maintained consistent
with Internal Revenue Code ` 704 and the regulations thereunder.
-7-
10.2 Tax Matters Partner. The Members hereby designate J. Reid Bingham
as the "tax matters partner" for purposes of representing the LLC before the
Internal Revenue Service if necessary.
10.3 Partnership Election. The Members elect that the LLC be taxed as a
partnership and not as an association taxable as a corporation.
ARTICLE XI
RECORDS AND INFORMAION
11.1 Records and Inspection. The LLC shall maintain at its place of
business the Certification of Formation, any amendments thereto, this Agreement,
and all other LLC records required to be kept by the Act, and the same shall be
subject to inspection and copying at the reasonable request and the expense of,
any Member.
11.2 Obtaining Additional Information. Subject to reasonable standards,
each Member may obtain from the LLC from time to time upon reasonable demand for
any purpose reasonably related to the Member's interest as a Member in the LLC
(1) information regarding the state of the business and financial condition of
the LLC; (2) promptly after becoming available, a copy of the LLC's federal,
state, and local income tax returns for each year, and (3) other information
regarding the affairs of the LLC as is just and reasonable.
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1 Amendment. Except as otherwise provided in this Agreement, any
amendment to this Agreement may be proposed by a Member. Unless waived by the
Members, the proposing Member shall submit to the Members any such proposed
amendment together with an opinion of counsel as to the legality of such
amendment and the recommendation of the Member as to its adoption. A proposed
amendment shall become effective at such time as it has been approved in writing
by a majority of the Members. This Agreement may not be amended nor may any
rights hereunder be waived except by an instrument in writing signed by the
party sought to be charged with such amendment or waiver, except as otherwise
provided in this Agreement.
12.2 Applicable Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of Delaware.
12.3 Pronouns, etc. Reference to a Member or Manager, including by use
of a pronoun shall be deemed to include masculine, feminine, singular, plural,
individuals, partnerships or corporations where applicable.
12.4 Counterparts. This instrument may be executed in any number of
counterparts, each of which shall be considered an original.
-8-
12.5 Specific Performance. Each Member agrees with the other Members
that the other Members would be irreparably damaged if any of the provisions of
this Agreement are not performed in accordance with their specific terms and
that monetary damages would not provide an adequate remedy in such event.
Accordingly, it is agreed that, in addition to any other remedy to which the
non-breaching Members may be entitled, at law or in equity, the non-breaching
Members shall be entitled to injunctive relief to prevent breaches of this
Agreement, and specifically, to enforce the terms and provisions of this
Agreement in any action instituted in any court of the United States or any
state thereof having subject matter jurisdiction thereof.
12.6 Further Action. Each Member, upon the request of the LLC, agrees
to perform all further acts and to execute, acknowledge and deliver any
documents which may be necessary, appropriate, or desirable to carry out the
provisions of this Agreement.
12.7 Method of Notices. All written notices required or permitted by
this Agreement shall be hand delivered or sent by registered or certified mail,
postage prepaid, addressed to the LLC at its place of business or to a Member as
set forth on the Members' signature page of this Agreement (except that any
Member may from time to time give notice changing his address for that purpose),
and shall be effective when personally delivered, or if mailed, on the date set
forth on the receipt of registered or certified mail.
12.8 Facsimiles. For purposes of this Agreement, any copy, facsimile,
telecommunication or other reliable reproduction of a writing, transmission or
signature may be substituted or used in lieu of the original writing.
Transmission or signature for any and all purposes for which the original
writing, transmission or signature could be used, provided that such copy,
facsimile, telecommunication or reproduction shall have been confirmed received
by the sending party.
12.9 Computation of Time. In computing any period of time under this
Agreement, the day of the act, event or default from which the designated period
of time begins to run shall not be included. The last day of the period so
computed shall be included, unless it is a Saturday, Sunday, or legal holiday,
in which event the period shall run until the end of the next day which is not a
Saturday, Sunday, or legal holiday.
IN WITNESS WHEREOF the Parties have executed this Agreement as of the date first
above written.
Videolocity International, Inc.
By: /s/ Robert Holt
---------------------
Name: Robert Holt
Title: President
E Oliver Capital Group LLC
By: /s/ Gilbert Armenta
---------------------
Name: Gilbert Armenta
Title: President/CEO
-9-
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert E. Holt, Chief Executive Officer of Videolocity International, Inc.
(the "registrant"), certify that:
1. I have reviewed this annual report on Form 10-KSB of Videolocity
International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies and material weaknesses in the design
or operation of our financial reporting internal controls which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Date: February 14, 2006
/s/ ROBERT E. HOLT
- --------------------------------
Robert E. Holt
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Cortney L. Taylor, Chief Financial Officer of Videolocity International, Inc.
(the "registrant"), certify that:
1. I have reviewed this annual report on Form 10-KSB of Videolocity
International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies and material weaknesses in the design
or operation of our financial reporting internal controls which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Date: February 14, 2006
/s/ CORTNEY L. TAYLOR
- ------------------------------
Cortney L. Taylor
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Videolocity International, Inc.,
(the "Company") on Form 10-KSB for the period ending October 31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Robert E. Holt, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act
of 2002, that, to the best of my knowledge and belief:
1. The Report fully complies with the requirements of section 13 (a) or 15
(d) of the Securities and Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ ROBERT E. HOLT
- -----------------------------
Robert E. Holt
Chief Executive Officer
February 14, 2006
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certifications are accompanying the Company's Form 10-QSB solely
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code) and is not
being filed as part of the Form 10-QSB or as a separate disclosure document.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Videolocity International, Inc., (the
"Company") on Form 10-KSB for the period ending October 31, 2005 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Cortney L. Taylor, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act
of 2002, that, to the best of my knowledge and belief:
1. The Report fully complies with the requirements of section 13 (a) or 15
(d) of the Securities and Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ CORTNEY L. TAYLOR
- ----------------------------
Cortney L. Taylor
Chief Financial Officer
February 14, 2006
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certifications are accompanying the Company's Form 10-QSB solely
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code) and is not
being filed as part of the Form 10-QSB or as a separate disclosure document.
NITED STATES 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, 2005
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
Commission File Number 33-2310-D
VIDEOLOCITY INTERNATIONAL, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 87-0429154
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5532 Lillehammer Lane, Suite 300, Park City, Utah 84098
(Address of principal executive officers)
Issuer's telephone number: (435) 615-8338
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practicable date:
Class Outstanding as of March 17, 2006
- -------------------------- ------------------------------------
Common Stock, 24,456,699
Par Value $0.001 par value
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
VIDEOLOCITY INTERNATIONAL, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Financial Statements.............................................. 2
Item 2. Management's Discussion and Analysis or Plan of Operation......... 16
Item 3. Controls and Procedures........................................... 19
PART II
Item 1. Legal Proceedings................................................. 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....... 20
Item 3. Defaults Upon Senior Securities................................... 20
Item 4. Submissions of Matters to a Vote of Security Holders.............. 21
Item 5. Other Information................................................. 21
Item 6. Exhibits and Reports on Form 8-K.................................. 21
Signatures........................................................ 22
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
January 31, 2006
ASSETS
CURRENT ASSETS
Cash $ 62,100
Accounts receivable 1,091
Other assets 25,642
-----------
Total current assets 88,833
Property and equipment, at cost, net 561,717
Other assets 24,909
-----------
$ 675,459
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 276,748
Deferred revenue 176,663
Accrued liabilities 3,617,770
Accrued interest payable 526,567
Notes payable 840,000
Current portion of long term obligations - capital lease 261,185
-----------
Total current liabilities 5,698,933
Long term obligations less current portion - capital lease 317,574
Notes payable - related parties 125,000
Notes payable 1,574,800
Compensation debenture 360,000
MINORITY INTERESTS 4,866
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 100,000,000 shares
authorized, 23,456,699 issued and outstanding 23,458
Preferred stock, $0.001 par value; 5,000,000 shares
authorized none outstanding --
Additional paid-in capital 6,868,755
Deficit accumulated during the development stage (14,297,927)
-----------
Total stockholders' deficit (7,405,714)
-----------
$ 675,459
===========
The accompanying notes are an integral part of these statements.
2
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three months ended From
January 31 May 26, 2000
---------------------------- through
2006 2005 January 31, 2006
------------ ------------ ------------
Revenue $ -- $ 28,275 $ 124,645
Cost of Goods Sold -- 17-232 94,948
------------ ------------ ------------
Gross Profit -- 11,513 29,697
Operating expenses
Salaries, payroll taxes, and employee benefits 86,193 225,023 6,718,178
Professional fees and consultants 26,189 16,890 1,364,225
Technology development consulting 16,560 38,715 866,830
Directors compensation through stock plan -- -- 295,000
Rent 12,000 12,000 316,305
Provision for bad debts -- -- 600,000
Travel, conventions, meals and entertainment 800 9,967 238,733
Depreciation and amortization 35,360 36,267 214,164
Utilities 4,564 3,328 114,413
Gain on transfer of license agreements -- -- (114,509)
Write off of goodwill -- -- 958,628
Other 6,280 21,607 618,263
------------ ------------ ------------
187,946 363,891 12,190,230
------------ ------------ ------------
Operating loss (187,946) (352,378) (12,160,533)
Interest income -- -- 5,578
Legal settlement -- -- (200,433)
Gain on sale of stock, net -- -- 338,049
Interest and beneficial conversion expense (116,625) (93,563) (2,187,076)
Expense for stock options on guarantee
services, debt -- (13,971) (88,646)
Minority interests -- -- (4,866)
------------ ------------ ------------
Loss before income taxes (304,571) (459,912) (14,297,927)
------------ ------------ ------------
Income taxes
-- -- --
NET LOSS $ (304,571) $ (459,912) $(14,297,927
============ ============ ============
Loss per common share
Basic and Diluted $ (0.01) $ (0.03)
Weighted-average common and dilutive common
equivalent shares outstanding
Basic and Diluted 20,441,014 16,347,598
The accompanying notes are an integral part of these statements.
-3-
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,October 31, 2003,
October 31, 2004, October 31, 2005 and the quarter ended January 31, 2006
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 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 -- -- -- -- 303,900 --
notes payable
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)
Interest expense recognized on
beneficial conversion feature on -- -- -- -- 120,000 --
notes payable
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)
continued
-4-
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,October 31, 2003,
October 31, 2004, October 31, 2005 and the quarter ended January 31, 2006
Deficit
Accumulated
Additional during the
Preferred stock Common stock paid-in Development
Shares Amount Shares Amount capital Stage
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2003 -- $ -- 6,346,996 $ 6,347 $ 4,083,060 $(7,585,101)
Fees related to eFees related to Equity
Distribution Agreement -- -- -- -- (390,000) --
Issuance of stock options for:
Guarantee -- -- -- -- 69,120 --
Services -- -- -- -- 46,316 --
Loan -- -- -- -- 140,432 --
Issuance of common stock for:
Bonus interest and extensions on debt -- -- 736,500 736 215,464 --
Services -- -- 500,000 500 87,500 --
Cash -- -- 500,000 500 224,500 --
Cash under Equity Line -- -- 140,746 141 37,859 --
Conversion of debt -- -- 6,429,056 6,429 1,580,851 --
Stock incentive plans -- -- 770,000 770 144,081 --
Legal settlement -- -- 80,000 80 22,320 --
Net loss for the year -- -- -- -- -- (2,157,619)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2004 -- $ -- 15,503,298 $ 15,503 $ 6,261,503 $(9,742,720)
Issuance of stock options for:
Loan -- -- -- -- 19,526 --
Issuance of common stock for:
Bonus interest and extensions on debt -- -- 36,667 37 2,796 --
Cash under Equity Line -- -- 6,330,100 6,331 323,669 --
Conversion of debt -- -- 1,489,334 1,489 210,609 --
Stock incentive plans -- -- 48,800 49 36,551 --
Legal settlement -- -- 30,000 30 1,170 --
Net loss for the year -- -- -- -- -- (4,250,636)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2005 -- $ -- 23,438,199 $ 23,439 $ 6,855,824 $(13,993,356)
Issuance of common stock for:
Stock incentive plans -- -- 18,500 19 12,931 --
Net loss for the quarter -- -- -- -- -- (304,571)
----------- ----------- ----------- ----------- ----------- -----------
Balance at January 31, 2006 -- $ -- 23,456,699 $ 23,458 $ 6,868,755 $(14,297,927)
============ =========== ========== =========== =========== ============
The accompanying notes are an integral part of this statement.
-5-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
From
May 26, 2000
For the quarter ended (inception)
January 31, Through
-------------------------------- January 31,
2006 2005 2006
--------------- --------------- -------------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (304,571) $ (459,912) $(14,297,927)
Adjustments to reconcile net loss to
net cash used in operating activities
Minority interests -- -- 4,866
Provision for bad debts -- -- 600,000
Write off of goodwill -- -- 958,628
Gain on sale of investment stock -- -- (338,049)
Gain on transfer of license -- -- (114,509)
Depreciation and amortization 35,361 36,267 324,383
Interest expense recognized on beneficial conversion -- -- 423,900
Issuance of common stock under stock plans 12,950 17,200 823,508
Issuance of common stock for services -- -- 553,832
Issuance of common stock for interest -- -- 509,925
Options issued on guarantee, services, and loans -- 13,971 275,394
Issuance of common stock for legal settlement -- -- 22,400
Changes in assets and liabilities
Accounts receivable -- (4,152) (1,091)
Other assets 8,896 15,252 (50,551)
Accounts payable and accrued liabilities 102,533 5,591 3,641,417
Deferred revenue 176,663 -- 176,663
Accrued interest 37,997 67,989 745,945
------------ ------------ ------------
Total adjustments 374,400 152,118 8,556,661
------------ ------------ ------------
Net cash (used in) provided by operating activities 69,829 (307,794) (5,741,266)
Net cash flows from investing activities -
Investment stock and licenses, net -- -- 555,791
Increase in notes receivable -- -- (600,000)
Purchase of property and equipment -- -- (164,977)
------------ ------------ ------------
Net cash flows used in investing activities -- -- (209,186)
------------ ------------ ------------
Cash flows from financing activities
Increase in notes payable -- 285,000 4,809,800
Proceeds from lease -- -- 357,000
Cash received on equity distribution agreement -- -- 38,000
Payments on lease -- (19,528) (181,554)
Payments on notes payable (10,000) -- (35,000)
Proceeds from issuance of common stock -- -- 1,024,306
------------ ------------ ------------
Net cash (used in) provided by financing activities (10,000) 265,472 6,012,552
------------ ------------ ------------
Net increase (decrease) in cash 59,829 (42,322) 62,100
Cash at beginning of period 2,271 185,696 --
------------ ------------ ------------
Cash at end of period $ 62,100 $ 143,374 $ 62,100
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ -- $ -- $ --
Income taxes -- -- --
Noncash investing and financing activities
During the quarter ended January 31, 2006 the Company transferred $61,719 from
long term obligations- capital lease to accrued liabilities to reflect payments
made to the lease on behalf of the Company by the third party guarantor.
The accompanying notes are an integral part of these statements.
-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 January
31, 2006 and for the three months ended January 31, 2006 and 2005 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 ended January 31, 2006 should be
read in conjunction with the Company's annual report on Form 10-KSB for the
fiscal year ended October 31, 2005. The results of operations for the three
months ended January 31, 2006 may not be indicative of the results that may be
expected for the year ending October 31, 2006.
NOTE C - ORGANIZATION AND BUSINESS ACTIVITY
The Company is a Nevada corporation organized on November 5, 1985 under the name
Pine View Technologies. On November 27, 2000 the Company's name was changed to
Videolocity International, Inc. On December 4, 2000, the Company acquired
Videolocity Inc. in a transaction recorded as a recapitalization 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 January 31, 2006, 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
recorded minimal revenue from its planned principal operations.
On December 1, 2000, the Company completed a reverse stock split of its 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. As of September 16, 2004, the Company received written consent from
shareholders representing approximately 55 percent of the outstanding shares, at
that time, to increase the number of authorized shares of common stock from
50,000,000 to 100,000,000 and the number of authorized shares of preferred stock
from 1,000,000 to 5,000,000.
There are currently no preferred shares outstanding. Preferred shares may be
issued from time to time in one or more distinctly designated series. The Board
of Directors has the authority to designate the powers, preferences,
qualifications, powers, limitations, and the rate and timing of dividends prior
to the issuance of any series of preferred stock.
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.
-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 K, L, M,
and P 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 - 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 approximately $9,000 on
January 31, 2006. 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 attorney's fees to collect (Note O). As of
January 31, 2006, the Company has recorded an allowance for bad debt totaling
$600,000 against the note receivable.
NOTE G - OTHER ASSETS
At January 31, 2006, other assets consisted of the following:
Short term Long term
Non trade receivables $ 1,585 $ --
Deposits -- 24,909
Prepaid expenses 24,057 --
------------ -------------
$ 25,642 $ 24,909
============ =============
NOTE H - PROPERTY AND EQUIPMENT
At January 31, 2006, property and equipment and estimated useful lives
consist of the following:
Amount Years
---------- ---------
Equipment $ 164,978 3-5
Equipment under capital lease 657,613 3-5
----------
822,591
Less accumulated depreciation and amortization 260,874
----------
$ 561,717
==========
NOTE I - JOINT VENTURE AND DEFERRED REVENUES
On December 1, 2005, the Company entered into an operating agreement with E.
Oliver Capital Group LLC toward the formation of a joint venture between
Videolocity International, Inc. and E. Oliver Capital Group LLC.
The finalization of the agreement is contingent on shareholder approval and
Videolocity obtaining extensions of all outstanding notes payable. Toward that
goal, the Company forwarded a proposal to certain shareholders and has been in
discussions with the holders of all notes payable. The Company did not solicit
proxies and submitted the proposal to shareholders holding at least a majority
of the outstanding shares of the Company. Through January 31, 2006, the Company
has received written consent from shareholders representing a majority of the
outstanding stock of the Company approving the agreement. Additionally, through
January 31, 2006 we have received extensions on notes payable totaling
approximately $1,406,000 and have worked out a payment schedule on an additional
$215,000 of notes payable. The Company is currently working to obtain extensions
on the remaining notes payable.
-8-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the agreement E. Oliver Capital Group LLC is required to advance to
Videolocity the funds required to maintain corporate functions of Videolocity
including SEC reporting, legal, audit, public relations, investor relations, and
general business based on the budgets provided by Videolocity. Through January
31, 2006 E. Oliver Capital Group has forwarded to Videolocity approximately
$177,000 under the agreement that has been recorded as deferred revenue in the
financial statements. Under the agreement, the amounts forwarded to Videolocity
will be recouped through distributions from the joint venture and prior to
Videolocity receiving cash distributions from the joint venture. Videolocity
will be entitled to distributions from the joint venture including technical
transfer fees and licensing fees as follows: Videolocity International, Inc.
shall receive (i) all technical transfer fees (the mark up over cost and
installation of equipment deployed) and the first 5% of the net licensing fees
derived by the LLC in licensing the Intellectual Property Technology from the
current version 1 of the Intellectual Property Technology and (ii) twenty-five
percent (25%) of the technical transfer fees and the first 5% of the net
licensing fees derived by the LLC in licensing version 2 of the intellectual
property technology currently in development.
NOTE J - ACCRUED LIABILITIES
At January 31, 2006, accrued liabilities consisted of the following:
Payroll, payroll taxes, and related amounts $ 3,026,578
Director and consultant compensation 217,000
Capital lease paid on Company's behalf (Note L) 322,696
Other 51,496
--------------
$ 3,617,770
==============
NOTE K - NOTES PAYABLE
During the quarter ended January 31, 2006, the Company contacted note holders
regarding extensions on the Company's notes payable. The note holders were
offered one share of the Company's restricted common stock for each dollar of
notes payable that was extended. As of January 31, 2006 the Company has recorded
an accrued expense totaling approximately $50,000 to account for the expense of
the restricted shares to be issued. The restricted common stock will be issued
as soon as administratively possible. As of January 31, 2006 the Company
received extensions on $1,404,800 of the notes payable and has reached a payment
schedule on an additional $215,000. The Company remains in discussions with
certain note holders regarding extensions on the Company's remaining notes
payable.
At January 31, 2006 the Company has notes payable totaling $2,539,800 due to
various individuals and companies including $125,000 to current related parties
including Board of Directors and Management. Of the total, $370,000 is written
at 12% simple interest, $1,324,800 is written at 8 percent simple interest and
$845,000 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
$662,800 is convertible at the option of the debt holder in the following
amounts: $167,800 is convertible at $1.00 per share, $60,000 is convertible at
$0.72 per share, $10,000 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, $15,000 is convertible at $0.12 per share and $80,000 is convertible at
$0.04 per share. The notes payable have maturities as follows: $50,000 matured
during August 2003, $25,000 matured during November 2003, $250,000 matures
during December 2006, $1,034,800 matures during December 2007, $120,000 matures
during January 2008, $535,000 is callable on demand when the Company has secured
between $1 million and $5 million in new debt or equity funding, $320,000 is due
on a schedule of $10,000 per week until paid in full using advances under the
Company's Standby Equity Line (Note P) and $205,000 (originally $215,000) is due
on a set schedule of $5,000 per month until paid in full (noted below).
Approximately $75,000 is past due as of January 31, 2006.
In prior periods, the Company has issued options to purchase Company stock under
certain of the notes payable originated in the following amounts: 400,000 shares
at $0.77 per share, 120,000 shares at $0.72 per share, 20,000 shares at $0.50
per share, 200,000 shares at $0.14 per share, 60,000 at $0.12 per share and
400,000 at $0.04 per share. All options granted in conjunction with new notes
payable were granted at or above the fair market value on the date the notes
payable were originated. Where necessary, the value of the options granted is
based on the fair value at the date of grant calculated using the Black-Scholes
option-pricing model. Expense was recognized at the time the options become
exercisable.
-9-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $100,000 to current related parties. During the
year ended October 31, 2004, the Company converted a total of $535,000 of notes
payable under the UCC-1 into common stock of the Company including $135,000 to
related parties. During the year ended October 31, 2005, the Company converted
$100,000 and paid back $20,000 of notes payable under the UCC-1. As of January
31, 2006 there remains a total of $835,000 of notes payable under the UCC-1.
While obtaining extensions on $630,000 of the UCC-1 notes, the Company received
a release from "any and all security interest in debtors intellectual properties
and assets to include proceeds and products of collateral". The Company signed
an agreement for the remaining $205,000 (originally $215,000) as noted below.
The notes payable under the UCC-1 have maturities under the UCC-1 as follows:
$580,000 matures during December 2007 and $50,000 matures during January 2008,
and $205,000 (originally $215,000) is due on a set schedule of $5,000 per month
until paid in full as noted below.
On February 6th, 2003 the Company received a formal notice of default regarding
a $215,000 note payable under the UCC-1. During the year ended October 31, 2005,
the Company received a demand notice on the $215,000 note payable. On November
30, 2005, with an addendum signed on December 5, 2005, the Company and the
$215,000 note holder reached an agreement to settle the note payable, in total,
with twenty four monthly payments of $5,000 per month beginning January 5, 2006
and ending on December 5, 2007 for the aggregate amount of $120,000. The note
holder has agreed to stay any actions to enforce or collect during the repayment
term. At any time the Company fails to meet its required payment, the note
holder will have the right to proceed with all legal remedies to collect upon
and satisfy the note payable. The Company has the right to prepay all or a
portion of the total at its discretion. The settlement agreement also provided
that the Company release the note holder, ISOZ, LC, and its employees, agents,
representatives and affiliates and assigns, from any and all actions, judgments,
claims or causes of action and from any claim or allegation previously made by
the Company against the note holder During the quarter ended January 31, 2006
the company made two payments on the note totaling $10,000.
NOTE L - LONG TERM OBLIGATIONS - CAPITAL LEASE
The Company has a capital lease agreement that included approximately $658,000
in equipment and approximately $357,000 in operating capital. The lease terms
require approximately $26,000 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 expired February 4, 2006. Additionally, there was a clause that if
the Company's outstanding shares surpassed 20,000,000 prior to February 4, 2006,
the privately held Company would 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. This clause also expired on February 4, 2006.
Expense recognized for the period ended October 31, 2004 related to these
options totaled $69,120. The equipment was recorded as equipment under capital
leases. The Company has been unable to make the required payments on the lease
and the guarantor has made approximately $323,000 in lease payments on behalf of
the Company. The amounts paid on behalf of the Company have reduced the
outstanding balance on the lease and have been recorded as accrued liabilities
of the Company (Note J).
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 January
31, 2006:
Cash
proceeds from
Equipment Lease Total
---------- ---------- ----------
Through January 31, 2007 $ 197,098 $ 106,033 $ 303,131
Through January 31, 2008 197,098 106,033 303,131
Through January 31, 2009 23,544 8,836 32,380
Thereafter -- -- --
---------- ---------- ----------
Total minimum payments 417,740 220,902 638,642
Less amount representing interest 40,319 19,564 59,883
---------- ---------- ----------
Present value of net minimum payments 377,421 201,338 578,759
Less current portion 169,081 92,104 261,185
---------- ---------- ----------
Long-term portion $ 208,340 $ 109,234 $ 317,574
========== ========== ==========
-10-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - 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 the quarter ended January
31, 2006, the Company recognized approximately $13,000 of compensation expense
with the issuance of 18,500 shares of stock under vesting schedules. Through
January 31, 2006, the Company has granted 998,384 plan units of which 998,384
units have been exercised under the plan.
On March 26, 2002 the Company filed an additional stock option and stock award
plan, which had been approved by the shareholders of Pine View Technologies in
November 2001. 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. Through January 31, 2006, the Company
has issued a total of 467,855 shares under the Plan.
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. Pursuant to the Articles
of Incorporation, 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 vested at
various times through FY 2004. During the quarter ended April 30, 2005, as an
incentive, and to retain current key individuals, the Board of Directors
approved a total of 2,000,000 options to purchase stock outside of the plans to
employees that vest at various times through FY 2006. Additionally, the Board of
directors approved 2,000,000 shares to be issued in restricted stock to officers
of the Company to be issued when administratively possible. As of January 31,
2006 the 2,000,000 shares of restricted stock has not been issued, however the
Company has recorded an accrued liability for the expense incurred in the period
they were granted. The above noted options and restricted stock were issued
pursuant to the Restated Articles of Incorporation approved by a majority of the
stockholders on November 15, 2000.
-11-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As currently 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 (NOTE S). 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)
Quarter ended Quarter ended Through
January 31, January 31, January 31,
2006 2005 2006
------------- ------------ ------------
Net earnings (loss):
As reported $ (304,571) $ (459,912) $(14,898,882)
Proforma $ (304,571) $ (459,912) $(15,677,241)
Basic earnings (loss) per share:
As reported $(0.01) $(0.03) $(1.57)
Pro forma $(0.01) $(0.03) $(1.66)
Diluted earnings (loss) per share:
As reported $(0.01) $(0.03) $(1.57)
Pro forma $(0.01) $(0.03) $(1.66)
Weighted average fair value per plan unit
granted during the quarter $ 0.00 $ 0.27
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 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 quarter ended
----------------------------------
January 31, January 31,
2006 2005
--------------- ----------------
Risk-free interest rate -- 3.5 %
Dividend yield -- 0 %
Volatility factor -- .59
Expected option term life in years -- 3.5
There were no options granted in the three months ended January 31, 2006. No
assumptions were necessary during the period to estimate the fair value of
options.
-12-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock option activity for the period May 26, 2000
(inception) through January 31, 2006:
Shares subject Weighted-average
to options exercise price
- --------------------------------------- ---------------- ----------------
Outstanding at May 26, 2000
(inception) -- $ --
Granted -- $ --
Exercised -- $ --
Forfeited -- $ --
- --------------------------------------- ---------------- ----------------
Outstanding at October 31, 2000 -- $ --
Granted 490,833 $ 1.13
Exercised (5,000) $ 1.00
Forfeited -- $ ---
- --------------------------------------- ---------------- ----------------
Outstanding at October 31, 2001 485,833 $ 1.14
Granted 185,400 $ 1.08
Exercised (36,684) $ 1.35
Forfeited (416,249) $ 1.01
- --------------------------------------- ---------------- ----------------
Outstanding at October 31, 2002 218,300 $ 1.30
Granted -- $ --
Exercised (119,400) $ 1.45
Forfeited (4,200) $ 1.40
- --------------------------------------- ---------------- ----------------
Outstanding at October 31, 2003 94,700 $ 1.04
Granted 9,955,000 $ 0.13
Exercised (770,000) $ 0.19
Forfeited (2,400) $ 1.50
- --------------------------------------- ---------------- ----------------
Outstanding at October 31, 2004 9,277,300 $ 0.14
Granted 2,020,000 $ 0.09
Exercised (48,800) $ 0.75
Forfeited -- --
- --------------------------------------- ---------------- ----------------
Outstanding at October 31, 2005 11,248,500 $ 0.12
Granted -- $ ---
Exercised (18,500) $ 0.70
Forfeited -- $ --
--------------------------------------- ---------------- ----------------
Outstanding at January 31, 2006 11,230,000 $ 0.12
Exercisable at January 31, 2006 11,230,000 $ 0.12
The plan units vested at various dates ranging from May 2003 through November
2005.A further summary of information related to options outstanding at January
31, 2006 is as follows:
Weighted Average Weighted Average
Range of Exercise Number Remaining Contractual Exercise Price
Prices Outstanding / Exercisable Life (Years) Outstanding / Exercisable
------------------------- ------------ -------------------------
$0.00 to 0.10 2,000,000 / 2,000,000 9.07 $0.09 / $0.09
$0.11 to 0.20 9,200,000 / 9,200,000 7.85 $0.13 / $0.13
$0.21 to 0.30 30,000 / 30,000 0.01 $0.30 / $0.30
----------- ---------- ---- -------- --------
11,230,000 /11,230,000 8.05 $0.12 / $0.12
-13-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - 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 $110,000 for the three months ended January 31,
2006.
As of January 31, 2006, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $9,800,000 expiring through 2026.
NOTE O - COMMITMENTS AND CONTINGENCIES
The Company is 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.
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 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 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. 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. However, based on
the anticipated costs to recover the $100,000, the Company has written off the
fee during the year ended October 31, 2005.
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 $9,000 at January 31, 2006.
As of the year ended October 31, 2005, the Company recorded an allowance for bad
debt totaling $600,000 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. The Company's attorney, working with the courts, is attempting to
identify assets of Merit Studios in order to enforce the judgment.
NOTE P - STANDBY EQUITY DISTRIBUTION AGREEMENT AND COMPENSATION DEBENTURE
During May 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP, a New Jersey-based domestic
investment fund. 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
$350,000 per drawdown and 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 effective date of the agreement is the date that the Securities
and Exchange Commission first declared a registration statement effective
registering the resale of the securities. The drawdowns are subject to an
effective registration statement with the United States Securities and Exchange
Commission covering the resale of the shares. The Company filed an SB-2 on July
9, 2004 to register 19,314,099 shares of common stock and the SB-2 was declared
effective by the Securities and Exchange Commission on July 22, 2004. As of
January 31, 2006, the Company had issued 140,746 shares to Cornell and received
$38,000 under the agreement.
-14-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Through January 31, 2006, the holder has converted
$30,000 of the debenture balance into 743,902 shares of the Company's common
stock. The balance of the compensation debenture as of January 31, 2006 totals
$360,000.
The Company placed 10,000,000 of the registered shares into escrow to facilitate
drawdowns and the repayment of a $400,000 loan due to Cornell Capital Partners
LP (Note K) and through January 31, 2006 has issued 6,330,100 shares under the
Standby Equity Distribution Agreement using the proceeds to repay $330,000 of
the loan. The balance of the loan at January 31, 2006 totals $70,000. The
Company placed another 5,000,000 of the registered shares into escrow to
facilitate repayment of a second loan totaling $250,000. The repayment of this
loan begins subsequent to the completion of payments under the first loan. The
Company has not issued any shares in repayment of the second loan. Those shares
not issued under drawdowns or as repayment on the loan will be returned to the
Company. As of January 31, 2006, the Company has 8,669,900 shares that remain in
escrow. The shares held in escrow are not included in the Company's outstanding
shares (15,000,000 held in escrow less 6,330,100 shares issued).
NOTE Q - SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
As of January 31, 2006 the Company has 8% notes payable to current directors,
and officers totaling $125,000. The Company has accounts payable totaling
approximately $41,000 due to a former director at January 31, 2006. As of
January 31, 2006 executive officers and directors of the Company own
approximately 5% of the outstanding stock.
NOTE R - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. However, the Company
has incurred losses since its inception and has not yet been successful in
establishing profitable operations. These factors raise substantial doubt about
the ability of the Company to continue as a going concern. 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. Our plan of operation will depend
on our ability to raise substantial additional capital, of which there can be no
assurance. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
NOTE S - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004 the FASB issued revised SFAS No. 123R, "Share-Based Payment."
SFAS No. 123R sets accounting requirements for "share-based" compensation to
employees and requires companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation. SFAS
No. 123R is effective in interim or annual periods beginning after June 15, 2005
for companies that do not file as small business issuers and December 15, 2005
for companies that file as small business issuers. We will be required to adopt
SFAS No. 123R in our second quarter of fiscal 2006 and currently disclose the
effect on net (loss) income and (loss) earnings per share of the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
The Company currently does not have any unvested share based payments.
Subsequent issuances of share based compensation, if any, could have a material
impact and will be addressed under the new accounting pronouncement as issued.
The Company does not expect that the adoption of other recent accounting
pronouncements will have a material impact on its financial statements
-15-
Item 2. Management's Discussion and Analysis or Plan of Operation
The following information should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Form 10-QSB.
Forward-Looking Information
This report on Form 10-QSB includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements may relate to
such matters as anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products and services, anticipated
market performance and similar matters. When used in this report, the words
"may," "will," expect, ," "should, " anticipate," "continue," "estimate,"
"project," "intend," and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding
events, conditions, and financial trends that may affect our future plans of
operations, business strategy, operating results, and financial position. We
caution readers that a variety of factors could cause our actual results to
differ materially from the anticipated results or other matters expressed in
forward-looking statements. These risks and uncertainties, many of which are
beyond our control, include (i) the sufficiency of existing capital resources
and our ability to raise additional capital to fund cash requirements for future
operations; (ii) uncertainties involved in the rate of growth of our business
and acceptance of our products and services; (iii) volatility of the stock
market, particularly within the technology sector; and (iv) general economic
conditions. Although we believe the expectations reflected in these
forward-looking statements are reasonable, such expectations may prove to be
incorrect.
Plan of Operation
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.
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. We operate our business
through five subsidiaries that perform various functions strategic to their
market place or core competency.
We are actively marketing our DES(TM), 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 a 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.
-16-
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 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 is paid for based
upon a set fee for each use by the end customer. 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 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 to carry out our
business plan 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, $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 the 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).
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 $ 12.95 for each 1- to 24-hour period
Video on demand $ 3.95 to $ 12.95 per viewing
Games $ 2.95 to $ 6.95 each 1- to 4-hour period
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 noted below and an operating agreement toward the
formation of a joint venture, also noted below, which would provide Videolocity
with operating capital. We can not give any assurance that we will be able to
secure such additional funding on favorable terms to us, or otherwise.
On December 1, 2005, we entered into an operating agreement with E. Oliver
Capital Group LLC toward the formation of a joint venture between Videolocity
International, Inc. and E. Oliver Capital Group LLC. The finalization of the
agreement is contingent on shareholder approval and Videolocity obtaining
extensions of all outstanding notes payable. Toward that goal, we forwarded a
proposal to certain shareholders and have been in discussions with the holders
of all notes payable. We did not solicit proxies and submitted the proposal to
shareholders holding at least a majority of the outstanding shares of the
Company. Through January 31, 2006, we have received written consent from
shareholders representing a majority of the outstanding stock of the Company
approving the agreement and will report the final count when all of the
remaining consents are returned. Additionally, through January 31, 2006 we have
received extensions on notes payable totaling approximately $1,406,000 and have
worked out a payment schedule on an additional $215,000 of notes payable. The
Company is currently working to obtain extensions on the remaining notes
payable.
-17-
Under the agreement E. Oliver Capital Group is required to advance to
Videolocity the funds required to maintain corporate functions of Videolocity
including SEC reporting, legal, audit, public relations, investor relations, and
general business based on the budgets provided by Videolocity. Through January
31, 2006 E. Oliver Capital Group has forwarded to Videolocity approximately
$177,000 to help maintain Videolocity's corporate functions. Under the
agreement, the amounts forwarded to Videolocity will be recouped through
distributions from the joint venture and prior to Videolocity receiving cash
distributions from the joint venture. Videolocity will be entitled to
distributions from the joint venture including technical transfer fees and
licensing fees as follows: Videolocity shall receive (i) all technical transfer
fees (the mark up over cost and installation of equipment deployed) and the
first 5% of the net licensing fees derived by the LLC in licensing the
Intellectual Property Technology from the current version 1 of the Intellectual
Property Technology and (ii) twenty-five percent (25%) of the technical transfer
fees and the first 5% of the net licensing fees derived by the LLC in licensing
version 2 of the intellectual property technology currently in development.
During May 2004 we entered into a 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 four 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-down up to four times 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 registration statement was declared
effective by the Securities and Exchange Commission on July 22, 2004. 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. As of January 31, 2006, the
Company had issued 140,746 shares to Cornell and received $38,000 under the
agreement.
Without drawing against the standby equity distribution agreement and/or
finalization of the joint venture 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 operations for
approximately the next quarter and that we must obtain additional financing
during that time in order to continue operations. Our plan of operation will
depend on our ability to raise substantial additional capital, of which there
can be no assurance.
Liquidity and Capital Resources
During the three months ended January 31, 2006, our total current assets
increased approximately $51,000 and total assets increased approximately $15,000
from approximately $660,000 to approximately $675,000. The increase in current
assets during the quarter is primarily due to the receipt of advances on future
revenues "deferred revenues". Approximately $177,000 was advanced to us during
the quarter to help us maintain our corporate functions while finalizing a joint
venture. Under the terms of the joint venture, Videolocity will receive
distributions of revenue from the use of our technologies within the joint
venture. The decrease in the remaining assets is due to depreciation taken on
property and equipment.
During the three months ended January 31, 2006, total current liabilities
decreased from approximately $7,024,000 to approximately $5,699,000. There are
several factors that contributed to this net decrease in current liabilities.
The most significant is a decrease in current notes payable during the quarter.
During the quarter, we contacted the holders of our notes payable and numerous
discussions were held regarding the extension of our notes payable. From these
discussions, we were able to reclassify approximately $1,406,000 of current
notes payable to long term notes payable from receipt of signed extensions. This
amount was offset by an increase in accrued liabilities of approximately
$168,000 from recording additional liability for payments made on our lease by
our third party guarantor, and from recording approximately $50,000 of accrued
expense to reflect the restricted stock that will be issued to those note
holders that have extended their notes to date. Note holders were offered one
share of Videolocity common stock for each dollar of note payable extended. The
restricted stock will be issued when administratively possible. The decrease in
notes payable was further offset by the receipt of approximately $177,000 of
advances on future revenues "deferred revenues" that will be generated through a
joint venture.
Results of Operations
To date, we have been a development stage company and have only realized
revenues from an installation of our technologies in one hotel. We are in the
process of forming a joint venture that will be actively marketing the
Videolocity DES and is currently signing contracts for the installation of our
DES into various hotels. During the three months ended January 31, 2006 we did
not realize revenues from our installed system as the hotel was undergoing a
major renovation. The system was shut down in the final phase of the renovation.
We are currently working with hotel management to determine a date for our
installation team to be on site and re-hook up the servers and bring the system
up to capacity. We believe that once we have the system operational within the
newly remodeled hotel that revenue will be increased over comparable periods in
the prior year.
-18-
For the three months ended January 31, 2006, operational expenses decreased
approximately $176,000 overall, or approximately forty-eight percent, as
compared to the three months ended January 31, 2005. This is attributed
primarily to a decrease in payroll expense of approximately $139,000. Payroll
expenses were decreased substantially during the quarter as compared to the
prior year as a direct result of the loss of several of our employees during the
quarter. As we continue to work on the formation of a joint venture we have been
advanced funds that will enable us to maintain our current employee base and we
believe that as the joint venture begins to deploy the Videolocity DES and we
begin to realize the resulting revenues we will be able to bring the level of
staffing to previous levels. We had decreases in most operational expenses
during the quarter as compared to the prior year including, technology
development, travel and conventions, due to not having the funds to conduct
certain of those activities during the quarter. Professional fees and
consultants increased over the prior year by approximately $9,300. Although
legal fees and similar costs were lower than the prior year, we needed some
additional consultants to help with some of the activities performed by
employees that had left during the quarter. During the quarter ended January 31,
2006, non operating expenses increased approximately $9,100 as compared to the
three months ended January 31, 2005 resulting from the increase of interest
expense recorded on notes payable.
Our plan of operation will depend on our ability to raise substantial additional
capital, of which there can be no assurance.
Net Operating Loss
As of January 31, 2006, we have, together with our subsidiaries, accumulated a
net operating loss carryforward of approximately $9,800,000, with an operating
loss tax benefit of approximately $3,655,000. 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 2026.
Inflation
In the opinion of management, inflation has not and will not have a material
effect on our operations in the immediate future.
Item 3. Controls and Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934. Based upon that evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures are effective to cause the material information required to be
disclosed by us in the reports that we file or submit under the Exchange Act to
be recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. There have been no significant changes
in our internal controls or in other factors which could significantly affect
internal controls subsequent to the date we carried out our evaluation.
PART II
Item 1. Legal Proceedings
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 sought $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. 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. The Company's attorney, working with the
courts, is attempting to identify assets of Merit Studios in order to enforce
the judgment.
On June 2, 2003, we 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.
-19-
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 we
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 the Company. This motion to dismiss was denied by the Court on March
12, 2004. 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. However, based on the anticipated costs to recover the $100,000, the
Company has written off the fee during the year ended October 31, 2005.
On October 19, 2005, the Company's attorney received notification that a default
judgment was filed with the third district court on June 21, 2005 totaling
approximately $318,000 including principal, accrued interest, and legal fees,
together with interest from that date until paid in full regarding a note
payable in the amount of $215,000. Prior to October 19, 2005 the Company was
unaware of the judgment and did not have knowledge that a complaint had been
filed because the Company had not been served. Accordingly, being unaware of the
complaint the Company did not respond. On November 30, 2005, with an addendum
signed on December 5, 2005, the Company and the note holder reached an agreement
to settle the note payable, in total, with twenty four monthly payments of
$5,000 per month beginning January 5, 2006 and ending on December 5, 2007 for
the aggregate amount of $120,000. The note holder has agreed to stay any actions
to enforce or collect upon the judgment during the repayment term. At any time
the Company fails to meet its required payment, the note holder will have the
right to proceed with all legal remedies to collect upon and satisfy the
judgment and note payable. The Company has the right to prepay all or a portion
of the total at its discretion. The settlement agreement also provided that the
Company release the note holder, ISOZ, LC, and its employees, agents,
representatives and affiliates and assigns, from any and all actions, judgments,
claims or causes of action and from any claim or allegation previously made by
the Company against the note holder.
We are 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 our financial position or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the three months ended January 31, 2006, we issued an aggregate of 18,500
shares of common stock all of which were registered shares under the Company's
employee stock incentive plans. Subsequent to January 31, 2006 and to date, we
have issued 1,000,000 shares that were registered under an SB-2 toward an
agreement for the conversion of a compensation debenture.
We did not issue unregistered shares during the quarter ended January 31, 2006,
or subsequently through the date hereof.
Item 3. Defaults Upon Senior Securities
On February 6, 2003 we received a formal notice of default from ISOZ, LC
regarding our $215,000 in notes payable to ISOZ, LC. On March 29, 2005 the
Company received a demand letter regarding the $215,000 in notes payable to
ISOZ, LC. On October 19, 2005, the Company's attorney received notification that
a default judgment was filed with the third district court on June 21, 2005
totaling approximately $318,000 including principal, accrued interest, and legal
fees, together with interest from that date until paid in full regarding the
note payable. Prior to October 19, 2005 the Company was unaware of the judgment
and did not have knowledge that a complaint had been filed because the Company
had not been served. Accordingly, being unaware of the complaint the Company did
not respond. On November 30, 2005, with an addendum signed on December 5, 2005,
the Company and the note holder reached an agreement to settle the note payable,
in total, with twenty four monthly payments of $5,000 per month beginning
January 5, 2006 and ending on December 5, 2007 for the aggregate amount of
$120,000. The note holder has agreed to stay any actions to enforce or collect
upon the judgment during the repayment term. At any time the Company fails to
meet its required payment, the note holder will have the right to proceed with
all legal remedies to collect upon and satisfy the judgment and note payable.
The Company has the right to prepay all or a portion of the total at its
discretion. The settlement agreement also provided that the Company release the
note holder, ISOZ, LC, and its employees, agents, representatives and affiliates
and assigns, from any and all actions, judgments, claims or causes of action and
from any claim or allegation previously made by the Company against the note
holder.
-20
Also, during the quarter ended July 31, 2005, the Company received a default
notice on our lease payable. Currently, the guarantor of the lease has taken
over the payments on the lease.
Our notes payable have maturities or have been extended as follows: $50,000
matured during August 2003, $25,000 matured during November 2003, $250,000
matures during December 2006, $1,034,800 matures during December 2007, $120,000
matures during January 2008, $535,000 is callable on demand when the Company has
secured between $1 million and $5 million in new debt or equity funding,,
$320,000 is due on a schedule of $10,000 per week until paid in full using
advances under the Company's Standby Equity Line and $205,000 (originally
$215,000) is due on a set schedule of $5,000 per month until paid in full.
Approximately $75,000 is currently past due. We are actively pursuing extensions
and/or conversions on the notes payable.
Item 4. Submissions of Matters to a Vote of Security Holders
On December 1, 2005, the Company entered into an operating agreement with E.
Oliver Capital Group LLC toward the formation of a joint venture between
Videolocity International, Inc. and E. Oliver Capital Group LLC. The Board of
Directors approved for submission to the Company's shareholders a "Shareholder's
Consent to Proposed Action by Videolocity International, Inc." seeking approval
to finalize the agreement with E. Oliver Capital Group LLC. The Company did not
solicit proxies and made the proposal as of December 1, 2005 to shareholders
holding at least a majority of the outstanding shares.
To date, we have received written consent from shareholders representing a
majority of the outstanding stock of the Company approving the agreement and
will report the final totals when all of the remaining consents are returned.
Item 5. Other Information
On September 16, 2005 the Company's Chief Financial Officer resigned with cause
due to the Company's inability to make payroll in a timely manner. At the time
of his resignation, the Company's Chief Financial Officer had not received his
contracted salary for approximately the prior two months and was also owed for
approximately six months salary from the calendar year 2002. The resignation was
accepted by the Board of Directors on September 25, 2005. The resignation was
not due to any disagreements with any other member of the Company's management
or it's Board of Directors. During February 2006 the Board of Directors rehired
the Chief Financial Officer in his previous roles, with finalization of his new
contract scheduled for the next Board of Directors meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following documents are included attached as exhibits to this
report.
Exhibit 31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Exhibit 32.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
This Item is not applicable.
-21-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VIDEOLOCITY INTERNATIONAL, INC.
BY: /S/ ROBERT E. HOLT
------------------------------------
ROBERT E. HOLT
Chief Executive Officer and Director
Date: March 20, 2006
BY: /S/ CORTNEY TAYLOR
------------------------------------
CORTNEY TAYLOR
Chief Financial Officer
(Principal accounting Officer)
Date: March 20, 2006
-22-
Exhibit 31.1
Certifications
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert E. Holt, Chief Executive Officer of Videolocity International, Inc.
(the "registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Videolocity
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls.
Date: March 20, 2006
/s/ Robert E. Holt
- ------------------------
Robert E. Holt
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Cortney L. Taylor, Chief Financial Officer of Videolocity International, Inc.
(the "registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Videolocity
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4.The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
Date: March 20, 2006
/s/ Cortney L. Taylor
- ----------------------------
Cortney L. Taylor
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Videolocity International, Inc. (the
"Company") on Form 10-QSB for the period ending January 31, 2006 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Robert E. Holt, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Robert E. Holt
- -----------------------
Robert E. Holt
Chief Executive Officer
Date: March 20, 2006
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certifications are accompanying the Company's Form 10-QSB solely
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code) and is not
being filed as part of the Form 10-QSB or as a separate disclosure document.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Videolocity International, Inc. (the
"Company") on Form 10-QSB for the period ending January 31, 2006 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Cortney L. Taylor, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Cortney L. Taylor
- -----------------------
Cortney L. Taylor
Chief Financial Officer
Date: March 20, 2006
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certifications are accompanying the Company's Form 10-QSB solely
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code) and is not
being filed as part of the Form 10-QSB or as a separate disclosure document.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): December 14, 2004
VIDEOLOCITY INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Nevada 33-2310-D 87-0429154
- ---------------------------- ----------- -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1762-A Prospector Avenue, Park City, Utah 84060
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (435) 615-8338
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 9. Regulation FD Disclosure.
On December 14, 2004, Videolocity International, Inc. caused to be mailed
to its shareholders a letter containing the following information:
* * * * * * * * *
VIDEOLOCITY INTERNATIONAL, INC.
Dear Shareholder,
I'd like to offer a special holiday greeting to all of the Shareholders,
employees, friends and families of Videolocity International, Inc. As this year
comes to a close, I would like to take this opportunity to outline our strategy
in pursuit of becoming the new leader in the global arena of interactive digital
technologies. Along with you, we look forward to tremendous growth and a very
bright future as we implement our refined business plan in the upcoming year.
As a brief history, the operating entity of Videolocity International, Inc. was
formed in May of 2000 to develop and market systems, products and solutions for
the interactive delivery of video and other digital content to end users on
demand. Even though pay-per-view in the hospitality market is well defined and
has been available for almost 15 years, pay-per-view technology has remained
largely unchanged. However, through innovative development of technologies,
applications of advanced encoding/compression processes and seemingly unrelated
principles of using Internet Protocol (IP), Videolocity has broadened the range
of content and the ability of a variety of markets to effectively implement a
revolutionary new method of providing interactive services. These new
technologies and applications were integrated into an end-to-end delivery
platform for interactive services and digital content, called the Digital
Entertainment System (DES(TM)). The DES(TM) has been validated in several rounds
of testing and a recent commercial deployment into a prominent 700 room Las
Vegas hotel. The DES(TM) enables the property to provide in-room entertainment,
guest education, increased staff productivity and competitive offerings while
reducing the risk of obsolescence. This leads to increased revenue and cost
savings for each property.
We recently introduced the DES(TM) at the Telco TV 2004 show in Orlando, Florida
and have subsequently been recognized for the significance of our technologies.
Our approach was to attend the show with the intent to interest a few Internet
Service Providers (ISP's), cable companies, telephone companies and independent
content service providers in testing our DES(TM) for residential applications.
During the few weeks following the show, our Company has entered into agreements
for testing the DES(TM) and applicable technologies with numerous customers
including major wireless infrastructure manufacturers, ISP's and telephone
companies. As the terms of the agreements progress and others are finalized we
will provide access via the Videolocity website and press releases including the
terms and conditions to the public.
In this letter, I will briefly describe Videolocity's technologies,
applications, share an overview of our marketing and licensing strategy, and
report on the current opportunities and potential customers. Readers are invited
to review our most recent 10-QSB filed with the SEC, which is available at
www.sec.gov. To access the Company's filings click on "search for company
filings", then under "general-purpose searches click on "companies and other
filers" and finally, type in Videolocity International and click enter. A
significant highlight of our financial reports was the successful conversion of
debt over the last 12 months. The latest annual report 10-KSB will be due in
late January 2005. The only remaining requirement for us to execute our business
2
plan is the finalization of funding which we hope to accomplish with the
completion of the installation of the commercial DES(TM), subsequent revenues,
and the testing of the Videolocity technologies with several key partners. The
standby equity line of credit between Videolocity and Cornell Capital Partners
L.L.C., remains in effect although we have mutually agreed to suspend any
attempts to draw from the equity line until the stock price is at an adequate
valuation and there is significant trading volume to support any such draws
without hurting the long term objectives of the Company. This equity line
remains available to serve as collateral for other forms of funding and the
remaining stock we registered for use under the standby equity line of credit
remains un-issued until such time it is needed.
DES(TM) Technology - and its Applications
The DES(TM) is an end-to-end packaged solution that was developed primarily for
use in the hospitality market, yet the far reaching capabilities offers a
platform for the future of IP networks while providing a solid innovative
solution that exceeds current demands in the hospitality market. The target
applications for the DES(TM) are video-on-demand, television and computer based
Internet, server and Internet gaming, music-on-demand, marketing, branding,
advertising, administrative and remote maintenance capabilities. In the very
near future our technology evolution will provide video conferencing, Voice over
Internet Protocol (VoIP), X-10 home automation, ad insertion and mobile security
which includes real-time and mobile access to cameras and secure databases.
Target markets include:
Hospitality Industries
o Hotels
o Timeshares
o Casinos
o Motels
o Extended Stay
o Cruise Ships
o Aircraft
Healthcare Industries
o Hospitals
o Extended Care
o Assisted Living
o Imaging Centers
o Remote education and training
Residential Applications
o Multiple dwelling units
o Intelligent Communities
o Fiber to the home
o Campus housing
o Colleges
o Rural and urban broadband customers
The DES(TM) is flexible, scalable and customizable! A major advantage of the
DES(TM) is the ability to operate over most wired and wireless networks
including CATV, DSL, fiber, cable modem and wireless.
The DES(TM) can provide this array of features at a fraction of the cost of
comparable systems because of the intellectual properties and trade secrets that
address the technical limitations that directly effect costs and revenues. To
learn more about the key technologies please visit our Company's website.
3
Licensing and Strategy
Videolocity has tremendous short and long term opportunities to earn significant
revenues from the licensing of its technologies and applications without the
burden of capital-intensive direct deployments. To this end, we have developed a
strategy for licensing our technologies and the DES(TM) on multiple levels to
capture both long term market share and to accelerate the adoption of our
technologies into several key opportunities. Both long and short term strategies
are essential, to earn the Company and it's Shareholders the maximum return and
to move this Company rapidly to profitability.
Our short term strategy included the manufacturing of the DES(TM) and subsequent
deployment into the Las Vegas property. We have generated our initial revenues
from the commercial deployment of the DES(TM) and will experience growth in the
revenue of the system as we continue to add content and new features, provided
that funding is available for these enhancements.
We are well along the path to making our long term strategy a reality as we are
in the process of negotiating key Original Equipment Manufacturer (OEM)
Agreements. These OEM Agreements will provide revenues via a technology transfer
fee and a minimum 5-year residual income stream from the usage of the DES(TM).
In the coming weeks we will announce the various Letters of Intent (LOI)
outlining the OEM Agreements, customers and applications. The technology
transfer fees will provide anticipated working capital and are structured to
recover the expenses related to developing the DES(TM) and applications over the
last several years. The residual payments will provide strong revenues for the
future and will allow the Company to continue to develop new technologies,
enhancements and applications.
Additionally, the Company will review the possibility of making several key
acquisitions that will not only enhance our current talented team, but provide
new revenue streams and reduce the developmental costs of continued research and
development efforts. The need to grow via acquisition led to the recent request
and majority Shareholder approval to increase the amount of authorized shares of
the Company's common voting stock.
Marketing and Customers
During the last 6 months, we have been pleased with broad and diverse initial
market interest in the DES(TM) and other applicable uses for the technologies.
To help identify and prioritize industries and markets, along with key customers
and partners, the Company has engaged Dan Driscoll and Nick Gilliland. Dan
Driscoll has been a member of our Board of Directors for over two years and is
well known in the wireless and telephony industries for his ability to close
deals, which has been limited due to the Company's inability to close funding
and begin generating revenue. Nick is a respected member of the Salt Lake City
community and brings many years of successful sales in the wireless, telephony
and IP industries. In an effort I call "Unleashing the Titans", Dan and Nick are
putting on a full court press to identify synergistic partners for the Company
while keeping a close eye on the competition. Consistent with our strategy,
during the last year, Mike York our VP has worked with Shareholders, primarily
in Las Vegas, that have provided much needed working capital and a guarantee on
an equipment lease in order for the Company to deploy the initial commercial
DES(TM). Customers, both domestically and internationally have traveled to Las
Vegas, to discuss the advancement of the DES(TM) and the incorporation of the
technologies for their specific applications. These discussions have resulted in
our ability to aggressively use channel marketing and branding to pursue the
many business opportunities without staffing a large sales force. We have
specific end goals in mind and by using our channel partners we will take an
integral step on the path leading towards the establishment of our technologies
within the vast international markets via licensing agreements and continued
engineering and design.
4
Projects, Partners and TEAM!
Because the majority of our future business is based on the licensing of our
intellectual property, the key to our marketing strategy is the demonstration of
our DES(TM) and its benefit to the customer. We are in the process of
establishing a demonstration program, which will allow us to answer the requests
for licenses based on market potential, immediacy of revenues and long-term
market objectives. In addition to the demonstration program, we are introducing
new marketing collateral that our potential partners may use to gain traction
with their respective clients. We have been asked for the last several years "if
the DES(TM) and technologies are so revolutionary, why haven't you been able to
close funding or deploy the system?" There are many contributing factors and we
must all understand the steps required to evaluate, adapt, test and apply a
technology solution to any market. The main factor is that we have been a public
Company since May of 2000 and the reverse merger that made us public has only
served as a stumbling block based on the down-turn in the market and the various
injustices committed by public Company executives in recent years. We were
blessed by the fact that Cortney Taylor believed in the future of Videolocity
enough to leave a very rewarding career as a Senior Manager at one of the
largest and most respected accounting firms in the world. Cortney has led the
efforts to successfully audit the Company since its inception, maintain the SEC
reporting, and budget what little funding we have had so that we might
accomplish our goals. Through all of the difficulties of running a public
company and his ultimate responsibility based on the Public Company Accounting
Reform provided under the Sarbanes-Oxley Act of 2002, Cortney remains an
integral part of the team.
We are in a highly competitive industry and even with proprietary technologies
we need good partners in order to succeed. The Company has entered into various
non-disclosure agreements that prevent us from making announcements at this time
however, with the completion of LOI's and OEM Agreements. We are looking forward
to making these announcements. Please keep your eye on our website for updates.
To meet the demands of a growing company, Videolocity has expanded the roles of
its key employees. Because the nature of our business is based on intellectual
properties we have adopted a staffing plan that only provides for high caliber
management. Daniel Osorio is our Chief Systems Architect and as the inventor of
many of the patents and trade secrets he maintains the daily responsibility of
allocating the engineering projects. Daniel has broad knowledge and experience
in developing encoding/compression technologies and for the digital rights
management of content. His counterpart is Bill Lee, the Chief Network Architect.
Bill has proven many times over that his vast knowledge of wireless and wired
networks, interconnectivity and propagation are unrivaled and he will remain the
leader of adapting our technologies for use over almost all network standards
both here and abroad. Videolocity is pleased to announce the addition of two key
members of the engineering team. Randy Moller and Louis Zirkel serve in roles
that the Company has desperately needed for the last two years. The programming
capability and the ability to integrate our DES(TM) into a variety of
interfaces, billing, reporting and management capability is the key to adapting
the technologies for the vast markets I previously outlined. These gentlemen
manage all efforts pertaining to their area of expertise and are responsible for
the outsourcing of all applicable engineering development. Shane McNeill has
been with the Company since its inception and has a wide range of
responsibilities as he performs almost all of the encoding of content at our
Park City office and at our facility in Los Angeles, California. Shane performs
most logistical functions and handles inventory control, which will be an
increasingly demanding task, as the OEM Agreements will dictate larger volume
shipments. We must attribute much of our recent success to the fact that our
technologies have been approved by the major movie studios and independent
5
content providers based on our digital rights management and quality. Allow me
to highlight the sacrifices made by Erik St. Anthony as he has spent much of the
last two years using his vast contacts within the media industry to place
Videolocity on the doorstep of the decision makers, which is just short of a
miracle for a developmental stage company. Let me not forget to mention our
Board of Directors that include Larry McNeill, Bennie Williams and Dan Driscoll
that have braved the responsibility of supporting the Company during these
difficult and sometimes unrewarding times. Note that based on the financial
hardships of the Company and the pre-revenue status we have not initiated a
search for additional members that will compliment our current Board. However,
we will focus on a search for new members in the coming months.
Keeping our Shareholders and Public Informed
We are grateful for the ongoing patience, support and loyalty of all our
employees, Board Members, Shareholders and families during the difficult early
years of our developmental phase, and eagerly look forward to future successes
together. During the last three years we have achieved the impossible task of
taking a small public technology company forward from developmental stages to
commercial viability at a time when so many companies, large and small, have
ceased to exist for business or financial reasons. I will not revisit the many
challenges we face but will only point out that we have, in fact, survived a
remarkable downturn in the technology industry and the economy in general only
to come out with great potential, dedicated staff and marketable products and
solutions. We appreciate your support and interest in Videolocity. We have had
tremendous response since we announced our deployment of the DES(TM) and the
recent attendance at the Telco TV 2004 convention. We look forward to wonderful
and exciting opportunities as the Company moves into a new year and we continue
to work with current and future partners for licensing the DES(TM). We are in
the process of revitalizing our website, so keep a close watch as we announce
several exciting events over the next several months. It has been very difficult
to finance press releases and to make announcements in recent years but we will
strive to make it possible for you to monitor our growth. Keep in mind that we
have been predominantly a developmental stage company and have only recently
emerged into the commercial market space. We must maintain the integrity of the
technologies and applications until we are well established and sometimes this
means bringing a little less attention to ourselves.
Together, with you, we look forward to a prosperous future. We also look forward
to the reduced dependency on short-term capital by closing our funding
requirements. We believe Videolocity will play a big role in making the dream of
ON-DEMAND, a near term reality. After all, we have the technologies that the
future's been waiting for.
Thank you for your faith in us, and your faith in a better future. Together we
can make it come true but it will take our combined efforts and patience.
Sincerely,
/s/ Robert E. Holt
- ---------------------------------------
Robert E Holt
CEO, Videolocity International, Inc.
This release contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act and Section 27A
of the Securities Act. Readers are cautioned not to put undue reliance on such
forward-looking statements. Such forward-looking statements are not guarantees
of future performance and involve risks and uncertainties.
6
Certain factors may cause actual results to differ materially from those
contained in the forward-looking statements, including but not limited to: the
development and/or acceptance of new products, the impact of competition on the
Company's products and/or pricing, and the success of the Company's systems
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 15, 2004 VIDEOLOCITY INTERNATIONAL, INC.
By: /S/ ROBERT E. HOLT
--------------------------------------
Robert E. Holt, President
7
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): September 16, 2004
VIDEOLOCITY INTERNATIONAL, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Nevada 33-2310-D 87-0429154
- ---------------------------- ----------- ------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1762-A Prospector Avenue, Park City, Utah 84060
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (435) 615-8338
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Section 5 - Corporate Governance and Management
Item 5.03. Amendments to Articles of Incorporation or Bylaws; Change in Fiscal
Year.
On July 2, 2004 the Board of Directors of Videolocity International, Inc.
authorized for submission to shareholders that represent a majority of the
Company's common stock outstanding, an amendment to the Company's Articles of
Incorporation, to increase the number of authorized shares of common stock from
50,000,000 to 100,000,000, and the number of authorized shares of preferred
stock from 1,000,000 to 5,000,000. The Company did not solicit proxies and made
the proposal as of July 31, 2004 to shareholders holding at least a majority of
the outstanding shares.
As of September 16, 2004, the Company has received written consent representing
approximately 55 percent, or 8,309,974 shares of common stock, out of 15,123,863
shares issued and outstanding at July 31, 2004. Action will be taken based on
the written consent of shareholders as soon as administratively possible. A copy
of the amendment to the Articles of Incorporation will be filed as an exhibit to
Form 8-K following the filing of the amendment.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 21, 2004 VIDEOLOCITY INTERNATIONAL, INC.
By: /S/ ROBERT E. HOLT
---------------------------------
Robert E. Holt, President
2