-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LaXiAp6Uxe20I7osa6emoNiRhnoUQUc3egIziLKo10oDUN2L2Re77kmwcaviFeyH i2HrAz5WeTgnzzKNMhpoBw== 0001038838-01-000179.txt : 20010319 0001038838-01-000179.hdr.sgml : 20010319 ACCESSION NUMBER: 0001038838-01-000179 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010131 FILED AS OF DATE: 20010316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIDEOLOCITY INTERNATIONAL INC CENTRAL INDEX KEY: 0000786771 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 870429154 STATE OF INCORPORATION: NV FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 033-02310-D FILM NUMBER: 1570212 BUSINESS ADDRESS: STREET 1: 136 HEBER AVENUE, SUITE 209 CITY: PARK CITY STATE: UT ZIP: 84060 BUSINESS PHONE: 4356158338 MAIL ADDRESS: STREET 1: 1242 ROOSEVELT AVE CITY: SALT LAKE CITY STATE: UT ZIP: 84105 FORMER COMPANY: FORMER CONFORMED NAME: PINE VIEW TECHNOLOGIES INC DATE OF NAME CHANGE: 20000124 FORMER COMPANY: FORMER CONFORMED NAME: PINE VIEW TECHNOLOGIES CORP DATE OF NAME CHANGE: 19960608 10QSB 1 0001.txt FORM 10-QSB ENDED JANUARY 31, 2001 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ Commission file number 33-2310-D VIDEOLOCITY INTERNATIONAL, INC. ------------------------------- (Exact name of small business issuer as specified in charter) NEVADA 87-0429154 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1762-A Prospector Dr., Park City, Utah 84060 - --------------------------------------- ----- (Address of principal executive offices) (Zip Code) (801) 230-0839 -------------- (Issuer's telephone number) Not Applicable -------------- (Former name, former address, and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Applicable only to issuers involved in bankruptcy proceedings during the preceding five years Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] Applicable only to corporate issuers State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of March 12, 2001, there were 42,786,860 shares of the registrant's common stock, par value $0.001, issued and outstanding. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] VIDEOLOCITY INTERNATIONAL, INC. AND SUBSIDIARIES FORM 10-QSB TABLE OF CONTENTS Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of January 31, 2001 and October 31, 2000 4 Condensed Consolidated Statements of Operations for the three month periods ended January 31, 2001 and from inception through January 31, 2001 5 Condensed Consolidated Statements of Cash Flows for the three month periods ended January 31, 2001 and from inception through January 31, 2001 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis or Plan of Operation 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 16 2 Part I--Financial Information Item 1. Financial Statements The accompanying unaudited condensed consolidated balance sheets of Videolocity International, Inc. (the "Company" or the "Issuer") at January 31, 2001 and October 31, 2000, and the related unaudited consolidated condensed statements of operations for the three months ended January 31, 2001 and 2000, and the period May 26, 2000 to January 31, 2001 have been prepared by the Company's management and they do not include all information and notes to the financial statements necessary for a complete presentation of the financial position, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of the Company's management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. The financial statements included in this report on Form 10-QSB should be read in conjunction with the Company's audited financial statements and the notes thereto included in its annual report on Form 10-KSB for the year ended October 31, 2000. Operating results for the quarter ended January 31, 2001 are not necessarily indicative of the results that may be expected for the year ending October 31, 2001. 3
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES (Development Stage Company) CONSOLIDATED BALANCE SHEETS January 31, 2001 and October 31, 2000 (Unaudited) - ------------------------------------------------------------------------------------------------------------------- Jan 31, Oct 31, 2001 2000 ----------- ---------- ASSETS CURRENT ASSETS Cash $ 412,807 $ 402,934 ----------- ---------- Total Current Assets 412,807 402,934 ----------- ---------- EQUIPMENT - net of accumulated depreciation - Note 2 25,520 - ----------- ---------- OTHER ASSETS Advanced deposits 31,656 10,656 Marketable securities - available-for-sale - Note 3 50,000 50,000 Patents and license agreement - Note 4 & 7 243,951 200,000 Good will - Note 5 950,638 - ----------- ---------- 1,276,245 260,656 ----------- ---------- $ 1,714,572 $ 663,590 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Note payable - license agreement - Note 4 $ - $ 200,000 Accounts payable - Note 8 33,974 19,920 ----------- ---------- Total Current Liabilities 33,974 219,920 ----------- ---------- STOCKHOLDERS' EQUITY Preferred stock - Notes 1 and 9 10,000,000 shares authorized, at $0.001 par value; 950,000 series A issued and 40,000 series B issued 990 - Common stock 125,000,000 shares authorized, at $0.001 par value; 42,786,860 shares issued and outstanding on January 31, 2001; 6,405,610 on October 31, 2000 42,786 6,406 Capital in excess of par value 1,978,731 567,043 Deficit accumulated during the development stage (341,909) (129,779) ----------- ---------- Total Stockholders' Equity 1,680,598 443,670 ----------- ---------- $ 1,714,572 $ 663,590 =========== ==========
The accompanying notes are an integral part of these financial statements. 4
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES (Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS For The Three Months Ended January 31, 2001 and 2000 and the Period May 26, 2000 (date of inception) to January 31, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------------------------- Three Months Ended May 26, Jan 31, Jan 31, 2000 to 2001 2000 Jan 31, 2001 ---------- ----------- ------------ REVENUES $ 3,257 $ - $ 3,257 ---------- ----------- ---------- EXPENSES Research and development 86,285 - 86,285 Administrative 119,843 - 249,622 Depreciation and amortization 9,259 - 9,259 ---------- ----------- ---------- 215,387 - 345,166 ---------- ----------- ---------- NET LOSS $ (212,130) $ - $ (341,909) ========== =========== ========== NET LOSS PER COMMON SHARE Basic $ - $ - ---------- ----------- AVERAGE OUTSTANDING SHARES Basic 42,786,860 - ---------- -----------
The accompanying notes are an integral part of these financial statements 5
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES (Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS For The Three Months Ended January 31, 2001 and 2000 (Unaudited) - --------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Jan 31, Jan 31, 2001 2000 ---------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (212,130) - Adjustments to reconcile net loss to net cash provided by operating activities Change in accounts payable 12,392 - Depreciation and amortization 9,259 - Net Decrease in Cash From Operations (190,479) - ---------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (26,648) - Advance deposits (21,000) - Purchase of license agreement and patent (252,000) - Advances on note receivable (100,000) - ---------- ------- (399,648) - ---------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common and preferred capital stock 600,000 - ---------- ------- Net Increase in Cash 9,873 - Cash at Beginning of Period 402,934 - ---------- ------- Cash at End of Period $ 412,807 $ - ========== ======= NON CASH FLOWS FROM INVESTING ACTIVITIES Issuance of 30,281,250 common shares for all outstanding stock of Videolocity, Inc. $ - ---------- Issuance of 950,000 preferred shares for members' interests in 5th Digit Technologies LLC 950,000 ----------
The accompanying notes are an integral part of these financial statements. 6 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION The Company was incorporated under the laws of the State of Nevada on November 5, 1985 with authorized common stock of 50,000,000 shares at $0.001 par value with the name "Pine View Technologies Corporation. On November 27, 2000 the name was changed to "Videolocity International Inc." and on November 22, 2000 the Company increased the authorized common capital stock to 125,000,000 with the same par value and authorized preferred capital stock of 10,000,000 shares at $.001 par value. The terms of the preferred are outlined in note 9. During December 2000 the Company completed the acquisition of all of the outstanding stock of Videolocity, Inc. and 5th Digit Technologies LLC. See Notes 5 and 6 The Company and its subsidiaries are in the business of developing and marketing systems, products, and solutions for the delivery of video and other content to end users on demand. On December 4, 2000 the Company completed a reverse common stock split of .61 shares for each outstanding share. This report has been completed showing after stock split shares from inception. On December 4, 2000 the Company completed a private placement offering of 6,100,000 common shares for cash of $500,000 and an on January 22, 2001 an offering of 40,000 shares of series B preferred for cash of $100,000. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting Methods The Company recognizes income and expenses based on the accrual method of accounting. Dividend Policy The Company has not yet adopted a policy regarding payment of dividends. Income Taxes On January 31, 2001, the Company and its subsidiaries had an available net operating loss carry forward of $336,884 resulting in a tax benefit of $101,065 from the loss carry forward. The tax benefit has been fully offset by a valuation reserve because the use of the future tax benefit is doubtful since the Company has not started operations. The net operating loss will expire in 2022. Amortization of the Patents and the License Agreement The patents are being amortized over seventeen years. The license agreement is being amortized to expense over ten years. 7 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Equipment Office equipment is being depreciated over five years. Basic and Diluted Net Income (Loss) Per Share Basic net income (loss) per share amounts are computed based on the weighted average number of shares actually outstanding. Diluted net income (loss) per share amounts are computed using the weighted average number of common shares and common equivalent shares outstanding as if shares had been issued on the exercise of any preferred share rights unless the exercise becomes antidilutive and then only the basic per share amounts are shown in the report. Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentration of credit risk consists primarily of cash. Cash balances are maintained in accounts that are not federally insured for amounts over $100,000 but are other wise in financial institutions of high credit quality. Principals of Consolidation The consolidated financial statements shown in this report includes the assets and liabilities of Videolocity, Inc. (subsidiary) as if the acquisition of the subsidiary by the Company was completed on October 31, 2000 and excludes the historical operating information of the Company prior to December 4, 2000, and the operating information of the 5th Digit Technologies, LLC (subsidiary) prior to December 22, 2000. All intercompany transactions have been eliminated Financial Instruments The carrying amounts of financial instruments, including cash, marketable securities, advance deposits, and accounts payable, are considered by management to be their estimated fair values. Estimates and Assumptions Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of the assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing these financial statements. 8 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Comprehensive Income The Company adopted Statement of Financial Accounting Standards No. 130. The adoption of this standard had no impact on the total stockholder's equity. Other Recent Accounting Pronouncements The Company does not expect that the adoption of other recent accounting pronouncements will have a material impact on its financial statements. 3. MARKETABLE SECURITIES - AVAILABLE - FOR - SALE On October 27, 2000 the Company acquired 1,000,000 common shares of Merit Studios, Inc. for $50,000. See Note 4 4. ACQUISITION OF LICENSE AGREEMENT On October 27, 2000, the Company entered into a technology license agreement with Merit Studios, Inc. pertaining to Merit's proprietary compression technology as it applies to the compression and delivery of video and other content. The term of the agreement is for five years, which is extended for additional one-year periods unless terminated by either party. The Company is granted exclusive rights to the technology for the first two years of the agreement, and thereafter, the exclusive rights will be extended for additional one-year periods as long as the Company enters into at least three sublicense agreements for the technology during each additional year. The terms of the agreement was $250,000, with $50,000 being allocated to the purchase price of the 1,000,000 common shares of Merit Studios, Inc. outlined in note 3. The license agreement was subsequently amended as described in Item 5 of this report. 5. ACQUISITION OF ALL OUTSTANDING STOCK VIDEOLOCITY, INC. On December 4, 2000 the Company (parent) completed the acquisition of all of the outstanding stock of Videolocity International, Inc. ( subsidiary), by a stock for stock exchange in which the stockholders of of the subsidiary received 30,281,250 common shares of the parent, representing 82% of the outstanding stock of the parent. For reporting purposes, the acquisition was treated as an acquisition of the parent by the subsidiary (reverse acquisition) and a recapitalization of the subsidiary. For reporting purposes the assets and liabilities of the subsidiary are shown in the balance sheet as if the acquisition had been completed on October 31, 2000 The historical operating statements prior to December 4, 2000 are those of the subsidiary. No good will was recognized from the acquisition. 9 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 5. ACQUISITION OF ALL OUTSTANDING STOCK VIDEOLOCITY, INC. - Continued The subsidiary was organized on May 26, 2000 for the purpose of developing and marketing systems, products, and solutions for the delivery of video and other content to end users on demand. 6. ACQUISITION OF ALL MEMBERS' INTERESTS OF 5TH DIGIT TECHNOLOGIES, LLC On December 22, 2000 the Company (the parent) acquired all of all the outstanding members' interest in 5th Digit Technologies LLC (the subsidiary) in exchange for 950,000 series A preferred shares of the parent in which good will was recognized. The historical operating statements prior to December 22, 2000 are not included in the operating statements. The subsidiary was organized on October 10, 2000. 7. PATENTS PENDING The Company has three patent applications pending numbered 60/226,66575, 60/218,528, 60/233,447 and described as follows. The "Set Top Box" is a network appliance based on open hardware and software methodologies, allowing for rapid development and deployment for different markets. The "Webcaster" is a ruggedized computer capable of reliably transmitting multiple streams of internet video, whether in a studio application, or in demanding environments. The "Enhanced Video Compression Method" describes a method of filtering a digitized video, much like a dedicated Time Base Corrector used on a broadcast signal for analog video. 8. RELATED PARTY TRANSACTIONS Officers, directors, employees and their affiliates, have acquired 71 % of the common stock issued and 96% of the preferred stock issued. Included in the accounts payable on January 31, 2001 are amounts due to related parties of $8,204. 9. PREFERRED CAPITAL STOCK During December 2000 the Company issued 950,000 shares of series A preferred stock and 40,000 shares of series B preferred stock. 10 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 9. PREFERRED CAPITAL STOCK - continued The terms of the series A and B are outlined as follows. 1. Voting. Each share of preferred series A and B stock shall be entitled to one vote on all matters submitted to a vote of the shareholders. 2. Conversion.. Each share of preferred series A and B stock shall be convertible into one share of common stock by the holders at any time upon delivery to the Company by written notice of their election to convert. Each share of preferred series A stock shall automatically be converted to common shares on February 1, 2002, and each share of preferred series B shall automatically be converted on March 1, 2002, if not converted prior to that date. 3. Redemption. Upon written notice from the holders of the series A and B preferred stock as provided below, the Company will redeem the preferred stock during the 30 day period January 2, 2002 through January 31, 2002 for the preferred series A stock, and February 1, 2002 through February 28, 2002 for the preferred series B stock, at a price $5.00 per share. Any holder of the preferred stock desiring to redeem his shares shall provide written notice to the Company within the periods described above. 4. Call Provision. The preferred stock shall be callable by the Company until January 31, 2002 for the preferred series A stock, and February 28, 2002 for the preferred series B stock, at a price of $5.00 per share and the Company shall provide written notice of its intent to call not less than 30 days prior to the effective date of the call. Any holder of preferred stock may elect to convert to common stock prior to the call with notice of such conversion within five days prior to the effective date of the call. 5. Liquidation.. The preferred series A and B stock shall be entitled to a preference over the common stock of $5.00 per share in the event of dissolution of the Company. The liquidation preference of the preferred series B stock is subject and subordinate to the liquidation preference of the preferred series A stock. 10. STOCK INCENTIVE PLANS On October 1, 2000 the Company established a stock incentive plan to attract and retain qualified people to serve as key employees. Awards made under the plan shall be in plan units and each unit can be convertible, at the option of the participant, into one share of the Company's common stock after the vesting requirement has been satisfied. The Company has reserved 10,000,000 common shares that can be issued under the plan. On the date of this report, awards with respect to 9,093,750 shares had been made under the plan but none of such awards had vested. On November 15, 2000, the Company established an omnibus stock option and stock award plan and reserved 5,000,000 shares of the Company's common stock for issuance under the plan. As of the date of this report, no awards had been made under such plan. 11 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 11. CONTINUING AND CONTINGENT LIABILITIES On December 20, 2000 the Company entered into employment and consulting agreements starting January 5, 2001 and continuing for one year which provide for annual payments of $223,000 for three related parties. 12. LEGAL ACTIONS On July 25, 2000 the Company entered into an exclusive license agreement to manufacture and market all technologies, hardware and software, developed by the vendor, which includes a movie delivery technology using a device known as a "set-top box". The Company paid an advance deposit of $4,000, which is included in the advance deposits in the balance sheet. After the agreement was completed the vendor refused to comply with terms of the agreement. The company has started a legal action against the vendor to enforce the terms of the agreement. Management, with counsel, believes the court will enforce the terms of the contract. On January 2, 2001, the vendor filed a legal action in New York state against the Company, 5th Digit Technologies, LLC, and certain individuals, alleging tortious interference with the vendor's releationships, breaches of fiduciary duties, and misappropriation of information and properties. The Company believes the action to be without merit and intends to vigorously defend such action. 12 Item 2. Management's Discussion and Analysis or Plan of Operation Plan of Operation The following discussion should be read in conjunction with the Issuer's unaudited financial statements included elsewhere in this report. Videolocity's plan of operation is to use its existing capital together with the proceeds from future financings to complete development and commence deployment and sales of its video-on-demand system. As of January 31, 2001, Videolocity had net cash assets in the amount of approximately $413,000. Videolocity estimates that its minimum expenses during the next twelve months will be approximately $1,200,000, consisting of $900,000 in payroll, $49,000 for office rent, and $151,000 for general and administrative expenses, including legal and accounting. Videolocity will also incur substantial additional costs in connection with the manufacture of set-top-boxes for use with its video-on-demand systems. Videolocity estimates that such costs will be a minimum of $10,000,000 but plans to finance those costs based on contracts entered into for the deployment of its video-on-demand systems. Videolocity plans to generate revenues from the delivery of video content to the end users of its video-on-demand systems and believes that revenues will commence by mid-summer from contracts that are currently in negotiation. Videolocity will charge a fee for each movie or other item of content viewed through its system and anticipates that it will remit a portion of such fee to the studio or other content provider. Videolocity also plans to sell or lease the set-top boxes for use with its video-on-demand system to its viewers at a price calculated to return its out of pocket costs and a small profit over a period of three years. Videolocity plans to seek additional equity financing in two or more offerings during the next twelve months in a total amount of up to approximately $55,000,000, which will permit it to cover its minimum expenses described above and to accelerate the deployment of its video-on-demand systems. Videolocity has not entered into any agreement or arrangement for the provision of such financing and no assurances can be given that it will be able to obtain such financing on terms acceptable to it or at all. Based on its current costs of operation and contract commitments, Videolocity estimates that its current assets will be sufficient to fund its cost of operation for approximately six months and that it will be required to obtain additional financing before that time in order to continue its operations. Forward Looking Statements This report contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements reflect the views of Videolocity International, Inc. ("Videolocity" or the "Issuer") with respect to future events based upon information available to it at this time. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from these statements. Forward-looking statements are typically identified by the use of the words "believe," "may," "will," "should," "expect," "anticipate," "estimate," "project," "propose," "plan," "intend," and similar words and expressions. Examples of forward-looking statements are statements that describe the proposed operation and marketing of Videolocity's video-on-demand systems, statements that describe the functions and operations of technology it has licensed but not tested, statements with regard to the nature and extent of competition Videolocity may face in the future, and statements with respect to future strategic plans, goals or objectives. Forward-looking statements are contained in this information statement under the caption "Plan of Operation." 13 The forward-looking statements are based on present circumstances and on Videolocity's predictions respecting events that have not occurred, that may not occur, or that may occur with different consequences and timing than those now assumed or anticipated. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including the risk factors discussed in this report. These cautionary statements are intended to be applicable to all related forward-looking statements wherever they appear in this report. Any forward-looking statements are made only as of the date of this report and Videolocity assumes no obligation to update forward-looking statements to reflect subsequent events or circumstances. Part II--Other Information Item 1. Legal Proceedings See the Issuer's annual report on Form 10-K for the year ended October 31, 2000, and its current report on Form 8-K filed January 5, 2001, for a description of legal proceedings involving the Company. Item 2. Changes in Securities Designation of Series A and B Preferred Stock On December 22, 2000, Videolocity designated 950,000 shares of its authorized preferred stock as Series A Voting Preferred Stock. All 950,000 of such authorized shares of Series A Voting Preferred Stock were issued in connection with Videolocity's acquisition of 5th Digit Technologies, LLC. The Designation of Rights, Preferences, and Privileges for the Series A Voting Preferred Stock was filed as an exhibit to Videolocity's current report on Form 8-K filed January 5, 2001. On February 1, 2001, Videolocity designated 1,000,000 shares of its authorized preferred stock as Series B Voting Preferred Stock. As of the date of this report, 40,000 shares of Series B Preferred Stock have been issued. The Series B Voting Preferred Stock: is entitled to one vote per share with the Common Stock on all matters submitted to Videolocity's shareholders; participates with the Common Stock on all dividends; is callable by Videolocity at a price of $5.00 per share through February 28, 2002, subject to prior conversion by the holders; is redeemable by Videolocity at the request of the holders at a price of $5.00 per share during the period from February 1, 2002 through February 28, 2002; is convertible at any time at the option of the holders into Videolocity Common Stock on a share-for-share basis, and will automatically be converted to Common Stock on March 1, 2002; and is entitled to a liquidation preference of $5.00 per share. The foregoing summary is qualified in its entirety by reference to the Designation of Rights, Privileges, and Preferences of Series B Voting Preferred Stock, a copy of which is included as an exhibit to this report. Recent Sales of Unregistered Securities On December 22, 2000, Videolocity delivered 950,000 shares of its Series A Preferred Voting Stock to the four shareholders of 5th Digit Technologies, LLC Inc. to acquire 5th Digit Technologies, LLC. On or about February 1, 2001, the Issuer sold 40,000 shares of its Series B Voting Preferred Stock to one sophisticated investor for $100,000. No underwriter was involved in the transactions and the shares were issued or sold by the Issuer directly to the shareholders (members) and the investor. The shares were sold without registration under the Securities Act of 1933, as amended (the "Securities Act"), in reliance on the exemption from such registration requirements provided by Section 4(2) of the Securities Act for transactions not involving any public offering. The shares were sold without general advertising or solicitation. The 14 purchasers acknowledged that they were purchasing "restricted securities" which had not been registered under the Securities Act and which were subject to certain restrictions on resale, and the certificates representing the shares were imprinted with the usual and customary restricted stock legend. Item 4. Submission of Matters to a Vote of Security Holders The following actions were authorized and approved by shareholders holding a majority of Videolocity's issued and outstanding shares of common stock on November 15, 2000, the record date: (i) a .61-for-1 reverse stock split in the issued and outstanding shares of the Issuer's common stock; (2) the acquisition of Videolocity, Inc. in exchange for 30,281,250 post-split shares of the Issuer's common stock pursuant to the terms of an Agreement and Plan of Reorganization between the parties dated as of November 15, 2000; (3) the adoption and approval of the Amended and Restated Articles of Incorporation of Videolocity International, Inc. dated as of November 27, 2000; (4) an increase in the size of the Company's board of directors to six persons and the election of James P. Hill, Douglas B. Meadows, Larry R. McNeill, D. T. Norman, Jerry E. Romney, Jr., and Lawrence Turel as directors of the Company, subject to completion of the acquisition of Videolocity, Inc.; and (5) the adoption and approval of the Videolocity International, Inc. 2000 Stock Option and Stock Award Plan with respect to which 5,000,000 post-split shares of the Company's common stock were reserved for issuance. Shareholders holding 6,350,000 pre-split shares of the Issuer's common stock, or approximately 60.47% of the 10,501,000 pre-split shares that were issued and outstanding on the record date, approved the foregoing actions. Item 5. Other Information Videolocity, Inc., a wholly owned subsidiary of the Issuer, and Merit Studios, Inc. ("Merit") had previously entered into a License Agreement (the "License Agreement") with Merit dated as of October 27, 2000, which is described in Note 4 to the unaudited financial statements included with this report. Subsequent to January 31, 2001, Videolocity, Inc. assigned its interest in the License Agreement to Videolocity Direct, Inc., a wholly owned subsidiary of the Issuer ("Videolocity Direct"), and on March 6, 2001, Videolocity Direct and Merit entered into an Amended and Restated License Agreement (the "Amended Agreement") that superceded and replaced the License Agreement. The Amended Agreement made the following significant changes to the License Agreement: (i) the term of the agreement was increased to 20 years, with Videolocity Direct having an exclusive license to the WormHole Video-On-Demand System for 10 years and a non-exclusive license for an additional 10 years, subject to the performance of its obligations; (ii) Merit was issued 2,500,000 shares of the authorized 10,000,000 common shares of Videolocity Direct, with the Issuer owning 5,000,000 common shares of Videolocity Direct, and the remaining 2,500,000 authorized and unissued shares being reserved for issuance in an initial public offering once the Wormhole Video-On-Demand System becomes fully operational; (iv) the license fees payable by Videolocity Direct will consist of the cash fees previously paid, future royalty payments of 10% of Videolocity Direct's net revenue per transaction over the WormHole Video-On-Demand System, and one-half of all proceeds received by Videolocity Direct from the sale of sublicenses under the Amended Agreement; (v) Videolocity Direct will pay Merit a one time compression fee for each item of video content to be delivered through the Wormhole Video-On-Demand System; and (vi) Videolocity Direct will be responsible for obtaining all content for delivery through the Wormhole Video-On-Demand System. 15 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following documents are included as exhibits to this report: Exhibit SEC Ref. No. No. Title of Document Location - -------- ------ ----------------- -------- 3.1 3 Designation of Rights, Preferences and This Privileges for the Series B Voting Filing Preferred Stock of Videolocity International, Inc. (b) Reports on Form 8-K On January 5, 2001, the Issuer filed a current report on Form 8-K with respect to its acquisition of 5th Digit Technologies LLC, its designation of Series A Preferred Stock, and developments in legal proceedings involving the Issuer. On March 6, 2001, the Issuer filed an amendment to such report to file financial and pro forma financial information with respect to 5th Digit Technologies, LLC. Signatures In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Videolocity International, Inc. Dated: March 15, 2001 By /s/ Jerry E. Romney, Jr. ------------------------- Jerry E. Romney, Jr. President Dated: March 15, 2001 By /s/ Larry R. McNeill --------------------- Larry R. McNeill Larry R. McNeill, Vice President and CFO and Chief Financial Officer (Principal Financial and Accounting Officer) 16 EX-3.(I) 2 0002.txt DESIGNATION OF RIGHTS DESIGNATION OF RIGHTS, PREFERENCES AND PRIVILEGES FOR THE SERIES B VOTING PREFERRED STOCK OF VIDEOLOCITY INTERNATIONAL, INC. We, the undersigned, Larry R. McNeill, Vice President and CFO, and D. T. Norman, Secretary, of Videolocity International, Inc., a Nevada corporation, hereinafter referred to as the "Corporation," hereby certify: FIRST: The name of the Corporation is VIDEOLOCITY INTERNATIONAL, INC. SECOND: As of the date of this Designation, no shares of the Corporation's Series B Voting Preferred Stock have been issued or are outstanding. THIRD: The following resolution establishing a series of Preferred Stock designated as the "Series B Voting Preferred Stock" consisting of 1,000,000 shares, $0.001 par value, was duly adopted by the board of directors of the Corporation effective as of January 19, 2001, in accordance with the articles of incorporation of the Corporation and the corporation laws of the state of Nevada: RESOLVED, that there is hereby created a series of preferred stock of the Corporation to be designated as the "Series B Voting Preferred Stock" consisting of 1,000,000 shares, $0.001 par value, with the following powers, preferences, rights, qualifications, limitations, and restrictions: 1. Liquidation. 1.01. In the event of any voluntary or involuntary liquidation (whether complete or partial), dissolution, or winding up of the Corporation, after the requirements with respect to the liquidation preference of the Series A Voting Preferred Stock have been satisfied, the holders of the Series B Voting Preferred Stock shall be entitled to be paid out of the remaining assets of the Corporation available for distribution to its shareholders, whether from capital, surplus, or earnings, an amount in cash equal to $5.00 per share. No distribution shall be made on any common stock of the Corporation (the "Common Stock") or series of preferred stock of the Corporation other than the Series A Voting Preferred Stock by reason of any voluntary or involuntary liquidation (whether complete or partial), dissolution, or winding up of the Corporation unless each holder of any Series B Voting Preferred Stock shall have received all amounts to which such holder shall be entitled under this subsection. 1.02 If on any liquidation (whether complete or partial), dissolution, or winding up of the Corporation, the assets of the Corporation available for distribution to holders of Series B Voting Preferred Stock shall be insufficient to pay the holders of outstanding Series B Voting Preferred Stock the full amounts to which they otherwise would be entitled under section 1.01, the assets of the Corporation available for distribution to holders of the Series B Voting Preferred Stock shall be distributed to them pro rata on the basis of the number of shares of Series B Voting Preferred Stock held by each such holder. 1.03 Upon completion of the distribution required by Section 1.01 above, if assets remain in the Corporation, the holders of the Corporation's Common Stock shall receive all the remaining assets of the Corporation. 1 2. Voting Rights. The holders of the Series B Voting Preferred Stock shall be entitled to one vote for each share of the Series B Voting Preferred Stock held by them, and to vote with the Series A Voting Preferred Stock and the Common Stock of the Corporation on all matters submitted to a vote of the Corporation's stockholders. Except as otherwise provided herein or by the laws of the State of Nevada, the holders of the Series A Voting Preferred Stock, the Series B Voting Preferred Stock, and Common Stockholders shall vote together as one class on all matters submitted to a shareholder vote of the Corporation. 3. Dividends. The Series B Voting Preferred Stock shall participate with the Series A Voting Preferred Stock and the Common Stock on any dividends declared and paid thereon on a share-for-share basis. The Series B Voting Preferred Stock shall not have any preference as to dividends. 4. Redemption by Corporation. The Series B Voting Preferred Stock shall be redeemed by the Corporation at a price of $5.00 per share, upon the written request for redemption from any holder thereof received during the twenty-eight day period commencing February 1, 2002 and expiring at the close of business on February 28, 2002. Before any holder of Series B Voting Preferred Stock shall be entitled to have his or her shares redeemed by the Corporation, he or she shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series B Voting Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the request for redemption as provided above. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series B Voting Preferred Stock a check in the amount of the redemption price multiplied by the number of shares surrendered for redemption. Such redemption shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series B Voting Preferred Stock to be redeemed. The Corporation's obligations to pay the redemption price for the Series B Voting Preferred Stock shall be subordinate to the Corporation's obligation to pay the redemption price for the Series A Voting Preferred Stock. 5. Call by Corporation. The Series B Voting Preferred Stock shall be callable by the Corporation at a price of $5.00 per share by delivering a written notice of call to the holders of the Series B Voting Preferred Stock within the period commencing on the day following the issuance of the Series B Voting Preferred Stock and expiring at the close of business on February 28, 2002, which notice shall indicate the Corporation's intent to call the Series B Voting Preferred Stock and shall specify the effective date of the call. The effective date shall be not less than 30 days from the delivery date of the notice. Any holder of Series B Voting Preferred Stock may elect to convert his or her Series B Voting Preferred Stock to Common Stock prior to the effective date of the call; provided that notice of such conversion is received by the Corporation not less than five (5) days prior to the effective date of the call. On the effective date of the call, all issued and outstanding shares of Series B Voting Preferred Stock (not previously redeemed or converted to Common Stock) shall automatically be converted into the right to receive payment of the call price of $5.00 per share upon surrender of the certificate or certificates for the Series B Voting Preferred Stock, duly endorsed, at the office of the Corporation or of any transfer agent for the Series B Voting Preferred Stock. 2 6. Conversion. 6.01 Conversion Rate. Each share of the Series B Voting Preferred Stock is convertible into one share of Common Stock of the Corporation at the times, in the manner, and subject to the conditions provided in this section 6. 6.02 Voluntary Conversion. Each share of the Series B Voting Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for such stock. 6.03 Mechanics of Conversion. Before any holder of Series B Voting Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series B Voting Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series B Voting Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series B Voting Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. 6.04 Automatic Conversion. On March 1, 2002, each share of the Series B Voting Preferred Stock which has not been surrendered for redemption in accordance with the provisions of Section 4 hereof, called by the Corporation in accordance with the provisions of Section 5 hereof, or surrendered for conversion in accordance with the provisions of Sections 6.02 and 6.03 hereof, shall be automatically converted into one share of Common Stock of the Corporation on March 1, 2002, without any further notice or action by the Corporation or the holders of the Series B Voting Preferred Stock, and from and after March 1, 2002, each certificate representing such shares of Series B Voting Preferred Stock shall be deemed to represent the number of shares of the Corporation's Common Stock into which such Series B Voting Preferred Stock has been converted. 6.05 Anti-Dilution. In order to prevent dilution of the rights granted hereunder, the conversion and voting rights shall be subject to adjustment from time to time in accordance with this section. (a) In the event the Corporation shall declare a dividend or make any other distribution on any capital stock of the Corporation payable in Common Stock, options to purchase Common Stock, or securities convertible into Common Stock of the Corporation, shall at any time subdivide (other than by means of a dividend payable in Common Stock) its outstanding shares of Common Stock into a greater number of shares or combine such outstanding stock into a smaller number of shares, and if there is not a corresponding dividend or distribution on or to, or split or subdivision of, the Series B Voting Preferred Stock, then in each such event, the conversion rate shall be adjusted so that the holders of the Series B Voting Preferred Stock shall be entitled to receive the kind and number of shares of Common Stock or other securities of the Corporation which they would have owned or have been entitled to receive after the happening of any of the events described above, had such shares of the Series B 3 Voting Preferred Stock been converted immediately prior to the happening of such event or any record date with respect thereto; an adjustment made pursuant to this paragraph (a) shall become effective immediately after the effective date of such event retroactive to the record date for such event. (b) If any capital reorganization or reclassification of the capital stock of the Corporation, consolidation or merger of the Corporation with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger, or sale, lawful adequate provisions shall be made whereby the holders of the Series B Voting Preferred Stock shall thereafter, have the right to acquire and receive on conversion of the Series B Voting Preferred Stock such shares of stock, securities, or assets as would have been issuable or payable (as part of the reorganization, reclassification, consolidation, merger, or sale) with respect to or in exchange for such number of outstanding shares of the Corporation's Common Stock as would have been received on conversion of the Series B Voting Preferred Stock immediately before such reorganization, reclassification, consolidation, merger, or sale. In any such case, appropriate provisions shall be made with respect to the rights and interests of the holders of the Series B Voting Preferred Stock to the end that the provisions hereof (including without limitation provisions for adjustments of the conversion rate and for the number of shares issuable on conversion of the Series B Voting Preferred Stock) shall thereafter be applicable in relation to any shares of stock, securities, or assets thereafter deliverable on the conversion of the Series B Voting Preferred Stock. In the event of a merger or consolidation of the Corporation with or into another corporation or the sale of all or substantially all of its assets as a result of which a number of shares of Common Stock of the surviving or purchasing corporation greater or lesser than the number of shares of Common Stock of the Corporation outstanding immediately prior to such merger, consolidation, or purchase are issuable to holders of Common Stock of the Corporation, then the conversion rate shall be adjusted in the same manner as though there was a subdivision or combination of the outstanding shares of Common Stock of the Corporation. (c) No adjustment shall be made in the conversion rate of the number of shares of Common Stock issuable on conversion of Series B Voting Preferred Stock (i) in connection with the issuance of any shares of Common Stock, securities, or assets on account of the anti-dilution provisions set forth in this section 6.05; (ii) in connection with the purchase or other acquisition by the Corporation of any capital stock, evidence of its indebtedness, or other securities of the Corporation; or (iii) in connection with the sale or exchange by the Corporation of any Common Stock, evidence of its indebtedness, or other securities of the Corporation, including securities containing the right to subscribe for or purchase Common Stock of the Corporation. 6.06 The Corporation covenants and agrees that: (a) The shares of Common Stock issuable on any conversion of any shares of Series B Voting Preferred Stock shall have been deemed to have been issued to the person on the date such shares are surrendered to the Corporation for conversion as provided in Section 6.02 or the date such shares are automatically converted as provided 4 in Section 6.04, and on such date such person shall be deemed for all purposes to have become the record holder of such Common Stock. (b) All shares of Common Stock which may be issued on any conversion of the Series B Voting Preferred Stock will, on issuance, be fully paid and nonassessable and free from all taxes, liens, and charges with respect to the issue thereof. (c) The issuance of certificates for Common Stock on conversion of the Series B Voting Preferred Stock shall be made without charge to the registered holder thereof for any issuance tax in respect thereof or other costs incurred by the Corporation in connection with the conversion of the Series B Voting Preferred Stock and the related issuance of Common Stock or other securities. 7. Subordination. Any redemption hereunder shall be subordinated to payment in full of the redemption payments applicable to the Series A Voting Preferred Stock and to all Senior Debt as defined herein. "Senior Debt" shall mean the principal of and premium, if any, and interest on all indebtedness of the Corporation to any financial institution, including, but not limited to, (i) banks whether currently outstanding or hereinafter created and whether or not such loans are secured or unsecured; (ii) any other indebtedness, liability, obligation, contingent or otherwise of the Corporation whether created or assumed by the Corporation prior to or after the date of the creation of the Series B Voting Preferred Stock, which is, when created, specifically designated by the Corporation as Senior Debt; and (iii) any refunding, renewals, or extensions of any indebtedness or similar obligations described as Senior Debt in subparagraphs (i) and (ii) above. 8. Additional Provisions 8.01 No change in the provisions of the Series B Voting Preferred Stock set forth in this Designation affecting any interests of the holders of any shares of Series B Voting Preferred Stock shall be binding or effective unless such change shall have been approved by the holders of all of the outstanding Series B Voting Preferred Stock in the manner provided in the corporation laws of the state of Nevada, as the same may be amended from time to time. 8.02 The shares of Series B Voting Preferred Stock shall be transferable only on the books of the Corporation maintained at its principal office, on delivery thereof duly endorsed by the holder or by his duly authorized attorney or representative or accompanied by proper evidence of succession, assignment, or authority to transfer. In all cases of transfer by an attorney, the original letter of attorney, duly approved, or an official copy thereof, duly certified, shall be deposited and remain with the Corporation. In case of transfer by executors, administrators, guardians, or other legal representatives, duly authenticated evidence of their authority shall be produced and may be required to be deposited and remain with the new certificate representing the share of Series B Voting Preferred Stock so transferred to the person entitled thereto. 8.03 The Corporation shall not be required to issue any fractional shares of Common Stock on the conversion of any share of Series B Voting Preferred Stock. 8.04 Any notice required or permitted to be given to the holders of the Series B Voting Preferred Stock under this Designation shall be deemed to have been duly given if mailed by first class mail, postage prepaid to such holders at their respective addresses appearing on the 5 stock records maintained by or for the Corporation and shall be deemed to have been given two days following the date they are deposited in the United States mail. IN WITNESS WHEREOF, the foregoing Designation of Rights, Privileges, and Preferences of Series B Voting Preferred Stock of the Corporation has been executed as of this 19th day of January 2001. ATTEST: VIDEOLOCITY INTERNATIONAL, INC. By /s/ D. T. Norman By /s/ Larry R. McNeill ------------------------ ----------------------------- D. T. Norman, Secretary Larry R. McNeill, Vice President and CFO 6 -----END PRIVACY-ENHANCED MESSAGE-----