-----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, OGP5wPmfg6X32Qsy20yonpSgoGEA6vlN6kY7qqcy3uus3vJj5zkgvQMSb8pZbiHT yyamHQG35crQUjHzAWaYjA== 0001038838-01-500159.txt : 20010619 0001038838-01-500159.hdr.sgml : 20010619 ACCESSION NUMBER: 0001038838-01-500159 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010430 FILED AS OF DATE: 20010618 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: 1662147 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 form10q043001.txt 10-QSB ENDED APRIL 30, 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 APRIL 30, 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 June 11, 2001, there were 42,986,860 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 April 30, 2001 and October 31, 2000 4 Condensed Consolidated Statements of Operations for the three and six month periods ended April 30, 2001 and 2000 and from inception on May 26, 2000 through April 30, 2001 5 Condensed Consolidated Statements of Cash Flows for the six month periods ended April 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis or Plan of Operation 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 15 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 April 30, 2001 and October 31, 2000, and the related unaudited consolidated condensed statements of operations for the three and six month periods ended April 30, 2001 and 2000, and the period from inception on May 26, 2000 to April 30, 2001, and the unaudited consolidated condensed statements of cash flows for the six month periods ended April 30, 2001 and 2000, 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 April 30, 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 April 30, 2001 and October 31, 2000 (Unaudited) - ----------------------------------------------------------------------------------------------------------------- Apr 30, Oct 31, 2001 2000 ---- ---- ASSETS CURRENT ASSETS Cash $ 101,198 $ 402,934 Accounts receivable 54,500 - ----------- --------- Total Current Assets 155,698 402,934 ----------- --------- EQUIPMENT - net of accumulated depreciation - Note 2 28,113 - ----------- --------- OTHER ASSETS Advanced deposits 22,231 10,656 Marketable securities - available-for-sale - Note 3 50,000 50,000 License agreement - Note 2 & 4 238,911 200,000 Good will - Note 6 926,672 - ----------- --------- 1,237,814 260,656 ----------- --------- $ 1,421,625 $ 663,590 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Note payable - license agreement - Note 4 $ - $ 200,000 Accounts payable 39,175 19,920 ----------- --------- Total Current Liabilities 39,175 219,920 ----------- --------- REDEEMABLE PREFERRED CAPITAL STOCK 10,000,000 shares authorized at $0.001 par value; 950,000 series A issued - Notes 1 & 8 950 - Capital in excess of par value 2,215,727 - ----------- --------- 2,216,677 - ----------- --------- MINORITY INTERESTS 2,700 - ----------- --------- STOCKHOLDERS' EQUITY Common stock 125,000,000 shares authorized, at $0.001 par value; 42,986,860 shares issued and outstanding on April 30, 2001; 6,405,610 on October 31, 2000 42,986 6,406 Capital in excess of par value (314,342) 567,043 Deficit accumulated during the development stage (565,571) (129,779) ----------- --------- Total Stockholders' Equity (deficiency) (836,927) 443,670 ----------- --------- $ 1,421,625 $ 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 and Six Months Ended April 30, 2001 and 2000 and the Period May 26, 2000 (date of inception) to April 30, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------------------------------- Three Months Six Months ------------------------- ----------------------- May 26, 2000 Apr 30, Apr 30, Apr 30, Apr 30, to 2001 2000 2001 2000 Apr 30, 2001 ---------- ---------- --------- --------- ------------ REVENUES $ 2,961 $ - $ 6,218 $ - $ 9,475 ---------- ------- --------- ------- ---------- EXPENSES Research and development 27,818 - 27,818 - 27,818 Administrative 361,676 - 567,804 - 700,840 Depreciation and amortization 36,929 - 46,188 - 46,188 ---------- ------- --------- ------- ---------- 426,423 - 641,810 - 774,846 ---------- ------- --------- ------- ---------- NET LOSS - before other income (423,462) - (635,592) - (765,371) NET GAIN FROM SALE OF INVESTMENT STOCK 199,800 - 199,800 - 199,800 NET LOSS $ (223,662) $ - $(435,792) $ - $ (565,571) ========== ======= ========= ======= ========== ======= ======= ======= ======= ======= LOSS PER COMMON SHARE Basic $ - $ - $ - $ - ---------- ------- --------- ------- ---------- AVERAGE OUTSTANDING COMMON SHARES Basic (stated in 1000's) 42,987 42,787 42,987 42,787 ---------- ------- --------- ------- ----------
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 Six Months Ended April 30, 2001 and 2000 (Unaudited) - ----------------------------------------------------------------------------------------------------------------------- Apr 30, Apr 30, 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(435,792) - Adjustments to reconcile net loss to net cash provided by operating activities Change in accounts receivable (54,500) - Change in accounts payable 19,255 - Depreciation and amortization 46,188 - Issuance of common stock for services 20,000 - Net Decrease in Cash From Operations (404,849) - --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (30,782) - Advance deposits (14,605) - Purchase of license agreement (251,500) - Advances on note receivable (100,000) - --------- --------- (396,887) - --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common capital stock 500,000 - --------- --------- Net decrease in Cash (301,736) - Cash at Beginning of Period 402,934 - --------- --------- Cash at End of Period $ 101,198 $ - ========= ========= NON CASH FLOWS FROM OPERATING AND INVESTING ACTIVITIES Issuance of 30,281,250 common shares for all outstanding stock of of Videolocity Inc. $ - --------- Issuance of 950,000 preferred shares for members' interests in 5th Digit Technologies LLC 950,000 --------- Issuance of 200,000 common shares for services 20,000 ---------
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 8. 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. 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 April 30, 2001, the Company and its subsidiaries had an accumulated net operating loss of $565,571 with a tax benefit of $169,670 from the 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 License Agreement The license agreement is being amortized to expense over ten years. Equipment Office equipment is being depreciated over five years. 7 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued 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 of cash and accounts receivable. 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. The accounts receivable are considered by management to be fully collectable. Principals of Consolidation The consolidated financial statements shown in this report include 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, 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. 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. 8 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued 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 terms of the original license agreement of two years were amended by an agreement entitled "Amended and Restated License Agreement", as revised and restated, on March 6, 2001 which provides for an exclusive license for ten years, which will continue after May 6, 2011 on a non-exclusive basis for an additional ten years, however the Company must commence marketing of the technology within one year, otherwise the exclusive rights may convert to non-exclusive rights. The terms of the agreement were $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. Royalties are provided at 10% of the net revenue per transaction and 50% of all of the initial amounts received from the sales of sub-licenses. Merit Studios, Inc. received one third of the outstanding stock of Videolocity Direct, Inc. (a subsidiary of the Company) to which the license agreements with Merit Studios Inc. have been assigned. 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. 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. 9 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 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. RELATED PARTY TRANSACTIONS Officers, directors, employees and their affiliates, have acquired 71 % of the common stock issued and 100% of the preferred stock issued. Included in the accounts payable on April 30, 2001 are amounts due to related parties of $1,030. 8. 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. During March 2001 the sale of the series B preferred stock was rescinded and all monies paid were returned. The terms of the series A stock are outlined as follows. 1. Voting. Each share of preferred series A 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 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. 3. Redemption. Upon written notice from the holders of the series A preferred stock as provided below, the Company will redeem the preferred stock during the 30 day period January 2, 2002 through January 31, 2002 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 30-day period described above. The total redemption value is $4,750,000 resulting in an accretion of $3,800,000, over the issue value, which is being amortized over one year, at $316,667 per month as an addition to the capital in excess of par value under the redeemable preferred capital stock. 10 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 8. PREFERRED CAPITAL STOCK - continued 4. Call Provision. The preferred stock shall be callable by the Company until January 31, 2002 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 stock shall be entitled to a preference over the common stock at $5.00 per share in the event of dissolution of the Company. 9. STOCK INCENTIVE PLAN 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 400,000 common shares that can be issued under the plan. On the date of this report no awards had been made under the plan. 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. 10. CONTINUING AND CONTINGENT LIABILITIES On December 20, 2000 the Company entered into employment agreements starting January 5, 2001 and continuing for one year which provide for annual salaries of $175,000 for two related parties. On May 3, 2001 the Company engaged Sinclair-Davis Trading Corp to provide public relations services. The terms of the agreement provided for the issuance of 200,000 common shares of the Company, which was completed, and 200,000 shares to be issued on August 3, 2001. 11 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 Digital Entertainment System, which was formerly referred to by the Company as its "video-on-demand system." As of April 30, 2001, Videolocity had net cash assets in the amount of approximately $101,198. 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 and deployment of its Digital Entertainment System. 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 Digital Entertainment System. Videolocity has entered into a strategic relationship with Tech Flex Funding, Inc. (underwritten by American Express Equipment Finance), wherein funding is available for all its future installations on a lease back program without recourse to Videolocity. The 950,000 issued and outstanding shares of Videolocity's Series A Preferred Stock are redeemable at the option of the holders during the period from January 2 through January 31, 2002 at a price of $5.00 per share. If such shares are not converted to common stock and the holders demand redemption of such shares, the Company will be required to pay a maximum of $4,750,000 to the holders if all shares are redeemed. Videolocity plans to generate revenues from the delivery of video content to the end users of its Digital Entertainment System and believes revenues from contracts will commence by mid-summer from one completed contract and by early fall from other 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 Digital Entertainment 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 $25,000,000, which will permit it to cover its minimum expenses described above and to accelerate the deployment of its Digital Entertainment System. 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, contract commitments, and availability of credit, Videolocity estimates that its current assets will be sufficient to fund its cost of operation for approximately three months and that it will be required to obtain additional financing before that time in order to continue its operations. Negotiations for additional debt and equity funding are ongoing at the present time. The Company has received an additional $300,000 in debt financing from affiliated parties since April 30, 2001. 12 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 Digital Entertainment System, 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." 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 During the quarter ended April 30, 2001, Videolocity and iStreamTV, Inc. entered into a settlement agreement with respect to the pending actions between such parties, their affiliates and others in the Supreme Court of the State of New York, County of New York, and the Third District Court for the District of Utah. Pursuant to the terms of the settlement agreement, both actions were dismissed with prejudice, 5th Digit Technologies, a subsidiary of Videolocity, assigned its interest in three patent applications to iStreamTV without warranty, and iStream reimbursed Videolocity, Inc. for a portion of a $4,000 deposit previously paid by Videolocity, Inc. to iStreamTV. The patent applications assigned by 5th Digit did not pertain to products currently being used by the Company or proposed to be used by it in the future. Item 2. Changes in Securities and Use of Proceeds Recent Sales of Unregistered Securities On or about April 30, 2001, Videolocity and one accredited investor mutually agreed to rescind the sale of 40,000 shares of Videolocity's Series B Preferred Stock, and the purchase price for the shares was refunded to the investor and the shares were cancelled. As a result, there are no shares of Series B Preferred Stock issued and outstanding, and Videolocity has no current plans to sell any additional shares of Series B Preferred Stock. On or about April 30, 2001, Videolocity sold 200,000 shares of Videolocity Direct, Inc., a 66.67% owned subsidiary of Videolocity, to one accredited investor for $200,000. In addition, on May 3, 2001, 13 Videolocity issued 200,000 shares of its restricted common stock to Sinclair-Davis Trading Corp., and agreed to issue it an additional 200,000 restricted shares of common stock in three months, pursuant to the terms of the Services Agreement described in Item 5 below. The Company granted Sinclair-Davis a one-time demand registration right and piggy-back registration rights with respect to such shares. No underwriter was involved in the foregoing transactions and the shares were issued or sold by the Issuer directly to the investor and Sinclair-Davis. 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 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 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information Videolocity entered into a Services Agreement with Sinclair-Davis Trading Corp. dated as of April 26, 2001, pursuant to which Sinclair-Davis agreed to provide public relations services to Videolocity during the eighteen-month term of the Agreement. Videolocity issued Sinclair-Davis 200,000 restricted shares of its common stock and agreed to issue an additional 200,000 restricted shares of its common stock three months from the signing date of the agreement. Videolocity also granted Sinclair-Davis a one-time right to demand registration of such shares and "piggy-back" registration rights with respect to such shares. The foregoing summary of the Services Agreement is qualified in its entirety by reference to the Services Agreement, a copy of which is included as an exhibit to this report. On or about May 30, 2001, Videolocity Direct, Inc., a partially owned subsidiary of Videolocity, and Merit Studios, Inc. ("Merit") entered into a License Agreement (the "License Agreement") for Merit's Wormhole Data (Compression) Packing Technology. The agreement grants Videolocity Direct an additional exclusive license to the WormHole Data (Compression) Packing Technology for 20 years, 10 years exclusive and 10 years non-exclusive; provided, that if the Company has not obtained content rights and commenced marketing efforts within one year of Merit's completion of the WormHole Video System, Merit may convert the exclusive rights to non-exclusive rights. Videolocity Direct will pay cash payments of $29 million over 10 years, and royalties, to Merit Studios. The royalties are 20 percent on all net revenue received by Videolocity Direct from its use of the WormHole Technology, together with 40 percent of any initial sublicense fees. The agreement separate from and in addition to the Amended and Restated License Agreement under which Videolocity Direct previously acquired an exclusive license for Merit's WormHole Video-On-Demand System. The foregoing summary of the License Agreement is qualified in its entirety by reference to the License Agreement, a copy of which will be filed as an exhibit to Videolocity's Form 10-QSB for the quarter ending July 31, 2001. Merit owns 33.33% of Videolocity Direct. 14 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 - ------- -------- ----------------- -------- 10.1 10 Amended and Restated License Agreement This [Video] between Videolcity Direct, Inc. and Filing Merit Studios, Inc. dated effective as of October 27, 2000 10.2 10 Services Agreement between Videolocity This International, Inc. and Sinclair-Davis Filing Trading Corp. dated as of April 26, 2001 (b) Reports on Form 8-K. The Issuer did not file any current reports on Form 8-K during the fiscal quarter ended April 30, 2001. 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: June 15, 2001 By /s/ Jerry E. Romney, Jr. ------------------------- Jerry E. Romney, Jr. President Dated: June 15, 2001 By /s/ Larry R. McNeill --------------------- Larry R. McNeill, Vice President and CFO and Chief Financial Officer (Principal Financial and Accounting Officer) 15 EX-10.1 2 ex101.txt AMENDED AND RESTATED AGREEMENT Exhibit 10.1 AMENDED AND RESTATED LICENSE AGREEMENT This Amended and Restated License Agreement is made and entered into effective as of the 27th day of October, 2000, by and between Videolocity Direct, Inc., a Nevada corporation ("Video Direct"), and Merit Studios, Inc., a Delaware corporation ("Merit"), upon the following: Premises WHEREAS, Merit and Videolocity, Inc., then named Moviesonline, Inc. ("Videolocity"), entered into that certain License Agreement (the "Original Agreement") dated as of October 27, 2000, pertaining to the WormHole Video System; and WHEREAS, Videolocity assigned all its right, title and interest in and to the Original Agreement to Video Direct with the prior written consent of Merit; and WHEREAS, Merit and Video Direct desire to amend and restate the Original Agreement in the manner provided herein; NOW, THEREFORE, in consideration of the mutual covenants to be performed and benefits to be received hereunder, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, Merit and Video Direct agree that the Original Agreement is hereby amended and restated as follows and that this Amended and Restated License Agreement shall supercede and replace the Original Agreement. Agreement 1. Grant of License. Merit hereby grants Video Direct an exclusive license for the period commencing as of October 27, 2000 and expiring on March 5, 2011 to use, sell sublicenses to others, the WormHole Video System (as defined herein) in any and all countries in the world. Such license shall continue on a non-exclusive basis from March 6, 2011 until the expiration or termination of this Agreement. Notwithstanding the foregoing, if Video Direct has not obtained the rights required to deliver content to end users through the WormHole Video System, and commenced marketing of the WormHole Video System, within one (1) year from the date the WormHole Video System is delivered to Video Direct in a fully operational condition, then Merit may convert the exclusive rights granted to Video Direct hereunder to non-exclusive rights by providing thirty (30) days prior written notice of such conversion to Video Direct. The term "WormHole Video System" shall mean the proprietary system being developed by Merit which uses Merit's proprietary WormHole data compression technology to compress and deliver video content, on demand and in a secure format, by downloading the content from a central server or other source through regular telephone lines, broad-band lines, the Internet, wireless communication, or other communication channels to the end user's set-top box or computer, where the content is uncompressed by the Wormhole decompression software which is installed in the set-top-box or computer, and displayed on a standard television/monitor, which WormHole Video System is more particularly described in Exhibit "A" attached hereto and incorporated herein by reference. The term WormHole Video System shall refer to the WormHole Video System as the same exists on the date of this Agreement and as the same may be modified, improved or enhanced during the term of this Agreement and shall include the system as a whole thereof as it applies to the decompression (unpeg) and/or delivery of video content to end-users. 2. Term. The term of this Agreement shall commence effective as of October 27, 2000 and expire at midnight on March 5, 2021. 3. License Fees. Video Direct shall make the following payments to Merit in the amounts and at the times indicated as payment for the license granted to Video Direct hereunder: (a) Two Hundred Fifty Thousand Dollars ($250,000) in cash on or before January 1, 2001, the receipt of which is hereby acknowledged by Merit. (b) Ten percent (10%) of the Net Revenue Per Transaction (as defined herein) received by Video Direct from each item of content (video or otherwise) delivered by it through the WormHole Video System to end users (the "Per Transaction Royalty"). The Per Transaction Royalty shall be paid by Video Direct to Merit on a monthly basis within 15 days following the end of the month in which the Per Transaction Royalty was earned. Each payment of the Per Transaction Royalty shall be accompanied by a statement setting forth the data and information used to calculate the Per Transaction Royalty and showing the manner of calculation. For purposes of this Agreement, "Net Revenue Per Transaction" shall mean the amount received by Video Direct from an end user for a content delivery transaction less the cost of the content delivered in such transaction. (c) 50% of all amounts received by Video Direct from the sale of sublicenses of the WormHole Video System to sublicensees. Such license fees shall be paid by Video Direct to Merit on a monthly basis within 15 days following the end of the month in which such license fees are received by Video Direct. 4. Obligations of Merit. Merit shall provide the following: (a) Merit shall design, build, install and load, as appropriate, the initial server and the other components and items of equipment (other than the set-top boxes) necessary for Video 2 Direct to operate the Wormhole Video System. This equipment is described as a server with one gigabyte of RAM, dual 800 megahertz processor, Intel Pentium Processor, 480 gigabytes of hard drive space, and 16 built-in dial-up modems. Video Direct acknowledges that the initial server has been installed at the location designated by it. The remaining actions shall be completed by Merit and the Wormhole Video System shall be fully operational on or before April 30, 2001. Such items shall be provided at no additional charge to Video Direct. Merit shall devote all its resources to completion of the WormHole Video System and shall not undertake any other activities or projects (specifically including further development of the WormHole data compression program) until the WormHole Video System has become fully operational. (b) Merit shall utilize its WormHole Technology to compress the video content to be provided by Video Direct through the WormHole Video System. Merit shall compress the first one hundred (100) feature length films provided to it by Video Direct in DVD format for a charge of $100,000, $49,000 of which has been paid by Video Direct to date and the balance of which is due on the date the films have been compressed and the WormHole Video System has become operational. Thereafter Merit shall compress the feature-length videos provided to it by Video Direct, in MPEG format on HD, CD, or Tape only, for a charge of $250 per video, with one-half of this per film charge to be paid when the film products are delivered to Merit for compression and the balance to be paid upon completion. Compression services shall be performed by Merit as requested by Video Direct with new releases being completed within the time periods dictated by the competitive window prevailing in the video industry. The compression charges for video content other than full length video shall be mutually agreed to by Merit and Video Direct based on the size of the content file (relative to a full length video) and the time it takes Merit to compress the file (relative to the time it takes Merit to compress a full length video). Notwithstanding the foregoing, in the event any person other than Videolocity International, Inc. or Merit should acquire fifty percent (50%) or more of the outstanding capital stock of Video Direct, the compression charges referred to in this subparagraph shall be increased to $1,500 per film, effective immediately upon the acquisition of such interest. In addition, as long as Videolocity International, Inc. owns over 50% of Video Direct, if any person acquires fifty (50%) or more of the outstanding capital stock of Videolocity International, Inc., the compression charges referred to in this subparagraph shall be increased to $1,500 per film, 3 effective immediately upon the acquisition of such interest. However, a distribution of the shares of Video Direct held by Videolocity International, Inc. and/or Merit to their respective shareholders shall not be deemed to result in the acquisition of 50% of the outstanding capital stock of Video Direct by any person under this subparagraph of this Agreement. (c) Merit has designed an Internet web page for use by Video Direct in connection with the WormHole Video System and shall assign to Video Direct all its right, title and interest in the domain name "TVWEBB." Any further development shall be at the expense and direction of Video Direct. (d) Merit shall, upon request, assist Video Direct in developing and interfacing a billing system and content catalog system for use in connection with the WormHole Video System. (e) Merit shall cause to be delivered to Video Direct 1,000,000 restricted shares of Merit common stock at no additional charge to Video Direct, the receipt of which is acknowledged by Video Direct. 5. Obligations of Video Direct. Video Direct shall provide the following: (a) Video Direct shall provide the personnel to operate and market the WormHole Video System and shall obtain all clearances or licenses required for the lawful use of the content provided by Video Direct for use with the WormHole Video System. (b) Video Direct currently has authorized 10,000,000 shares of common stock, par value $0.001 per share, of which 5,000,000 shares are issued and outstanding and owned by Videolocity International, Inc. Video Direct also has authorized 1,000,000 shares of preferred stock, par value $0.001, none of which has been issued. Video Direct shall issue Merit 2,500,000 restricted shares of its common stock as additional consideration for the license rights granted hereunder. (c) Video Direct shall use its best efforts in good faith to conduct an initial public offering of the authorized and unissued shares of its common stock (remaining after the issuance of shares to Merit as provided above) as quickly as practicable following the date the WormHole Video System becomes operational. The proceeds from such offering shall be used by Video Direct to continue with the implementation of its business plan and the WormHole Video System. 4 6. System Functions. Attached hereto as Exhibit "A" and incorporated herein by reference is a description of the WormHole Video System, including its design and functions. Merit represents and warrants that the WormHole Video System will perform in the manner described in Exhibit "A" and that the WormHole Video System will allow an end user to download a compressed, full length feature movie file in less than one minute and to decompress such file for viewing in less than 30 minutes. Merit further represents that the video files will be viewable on the end-users television set or monitor in the same resolution and quality as the original video file provided to Merit by Video Direct, Further, whatever video is supplied to Merit for compression it will be completely unaltered after unpegging by the Wormhole decompression software. If at any time during the term of this Agreement, the WormHole Video System should fail to function in the manner described in Exhibit "A", Merit agrees to immediately take all steps as may be necessary to remedy the problem and cause the system to perform in accordance with such description. Video Direct acknowledges that the WormHole Video System can process video files under any MPEG format but that Merit has built its Favos using the MPEG2 format and that delivery to Merit of video files in a format other than MPEG2 (e.g. MPEG4) would require Merit to build new Favos, which would take approximately thirty (30) days to accomplish. 7. Preserving Rights to Content. Merit shall not have any right whatsoever in or to the content provided by Video Direct to end users through the WormHole Video System, including but not limited to, the right to use, copy, or demonstrate such content. Merit acknowledges and agrees that any and all such content shall be and remain the sole and exclusive property of Video Direct or other persons holding the rights to such content and Merit shall take all necessary precautions to protect the confidentiality of such content. To the extent reasonably required by the studios, distributors, and other owners of content as a condition precedent to permitting such content to be compressed by Merit, Merit agrees to enter into agreements with such content owners containing reasonable provisions to the foregoing effect. 8. Audit Rights. Video Direct agrees to allow an independent certified public accountant selected by Merit and reasonably acceptable to Video Direct, which accountants shall not be compensated on a contingency basis and shall be bound to keep all information confidential except as necessary to disclose discrepancies to Merit, to audit and analyze relevant accounting records of Video Direct to ensure compliance with all terms of this Agreement. Any such audit shall be permitted within thirty (30) days of Video Direct's receipt from Merit of a written request to audit, during normal business hours, at a time mutually agreed upon. The cost of such an audit shall be borne by Merit unless a material discrepancy is found, in which case the cost of the audit shall be borne by Video Direct. A discrepancy shall be deemed material if it involves a payment or adjustment of more than five percent (5%) of the amount actually due from Video Direct in any given quarter. Audits shall occur no more frequently than once per calendar year and shall not interfere unreasonably with Video Direct's business activities and shall be conducted in Video Direct's facilities during normal business hours on reasonable notice. An audit may cover any period; provided that: (i) the period has not been previously audited; and (ii) 5 the period under audit is within a two-year period immediately preceding the commencement of the audit. Video Direct shall promptly reimburse Merit for the amount of any discrepancy arising out of such audit, which indicates that Merit is owed amounts hereunder as well as the costs of the audit, if applicable, as provided above. 9. Scope of License. The exclusive license granted in this Agreement shall be exclusive both as to Video Direct acting in its own name or for its own account, and as to any third parties that may be licensed or otherwise acting under authority of Video Direct. Specifically, but not by way of limitation of the foregoing, Merit agrees that as long as the license granted to Video Direct under this Agreement is exclusive, Merit will not in its own name or for its own account, nor will it authorize any third party, to sell, lease, license or otherwise market or sell the WormHole Video System anywhere in the world, nor will Merit use its WormHole Technology to provide compression services for content that would be competitive with the WormHole Video System. 10. Indemnification. Each party (the "Indemnifying Party") shall defend, indemnify and hold harmless the other party (the "Indemnified Party") and its agents, officers, board members and employees from and against any and all claims, damages, losses and expenses (including reasonable attorney's fees) for claims caused by (i) violation by the Indemnifying Party of any state, federal or other governmental license or regulations, and (ii) violation by the Indemnifying Party of any third party proprietary rights (including without limitation, patent, copyright, trade secret and trademark rights); and (iii) damages to property, injury or death to persons or for any other damage arising due to the active or passive negligence of the indemnifying party. 11. Infringement. Merit represents and warrants that it is not aware of any patent, copyright, trade secret or other property right of any third party that would be infringed or violated by the development, manufacture, use or sale of the WormHole Video System. In the event that any such infringement or violation is alleged by any third party against Video Direct, Merit agrees to indemnify and hold Video Direct harmless from and against all damages, claims and liabilities arising in connection therewith and Video Direct agrees to cooperate with Merit in the defense of such alleged infringement or violation. Video Direct shall promptly notify Merit of any such claim of infringement or violation. Video Direct shall refrain from making any admission of liability or from settling such claim without the prior written consent of Merit. Merit shall promptly and decisively assert its patent or other intellectual property rights against any third party infringer who is making, using or selling a device that infringes on any of the intellectual property rights pertaining to the WormHole Video System. Video Direct shall promptly notify Merit of any such infringing activity of which it becomes aware. 6 12. Termination. This Agreement may be terminated only: (a) By one party if the other party should be in default in the material terms or provisions this Agreement, and such defaulting party has failed to cure such default within thirty (30) days following written notice of such default from the non-defaulting party; (b) By one party, if the other party: makes a general assignment for the benefit of creditors; suffers or permits the appointment of a receiver for its business or assets; files, or has filed against it, an action under any state insolvency or similar law for the purpose of seeking its bankruptcy, reorganization, or liquidation, which action is not discharged within sixty (60) days of such filing; enters an order for relief under the Bankruptcy Code; or has its business affairs wound up or liquidated, voluntarily or involuntarily. 13. Confidentiality. Confidential Information means all proprietary data, concepts, projections, strategies, client lists, marketing plans, designs, processes, methods of operation, innovations, and other information pertaining to the business operations and other activities of Merit, on the one hand, and Video Direct and its affiliated companies on the other hand. Each party shall, during the term of this Agreement use the Confidential Information disclosed or provided by the other party, whether orally, written, by demonstration, in models or otherwise, only as permitted under this Agreement and shall maintain all such Confidential Information in confidence and shall not disclose or divulge such Confidential Information to any third party or to any of its own personnel not having a need to know such information, provided that the parties have informed their respective personnel of the parties' obligations under this Section 13, and provided further that each third party to whom such disclosure is made shall have entered into a non-disclosure agreement the terms of which require such third party to maintain the confidentiality of the Confidential Information. Notwithstanding the foregoing, a party shall not be liable for disclosure of any such Confidential Information which: (a) can be demonstrated by reasonable documentary evidence to have been in the possession of such party prior to receipt from the other party, provided that the source of such information was not known to the receiving party to be bound by a confidentiality agreement with or other contractual or fiduciary obligation of confidentiality to the delivering party or any other person with respect to such information; (b) is or becomes part of the public domain other than through an act or omission attributable to employees or agents of the receiving party; or (c) is or is made available to the receiving party by a third party unaffiliated with the delivering party and which has no obligation to the delivering party in respect thereof. 7 Upon the termination of this Agreement, each party agrees to promptly return to the other all Confidential Information provided by the other party hereunder, and all copies thereof, in its possession. 14. Notices. Any notice, consent, approval, request, authorization, direction or other communication under this Agreement ("Notice") that is required to be given in writing will be deemed to have been delivered and given for all purposes (i) on the delivery date if delivered by confirmed facsimile; (ii) on the delivery date if delivered personally to the party to whom the same is directed; (iii) one business day after deposit with a commercial overnight carrier, with written verification of receipt; or (iv) five business days after the mailing date, whether or not actually received, if sent by U.S. mail, return receipt requested, postage and charges prepaid, or any other means of rapid mail delivery for which a receipt is available. Such notices shall be addressed as follows: If to Merit: Michael John President Merit Studios, Inc. 1930 Village Center Circle PMB #402, Suite 3 Las Vegas, Nevada 89134 If to Video Direct: George Norman Chairman Videolocity Direct, Inc. 358 South 700 East, #B604 Salt Lake City, Utah 84102 or at such other address as any of the parties hereto may specify by notice to the other parties hereto in accordance with this Section 14. 15. Publicity. The parties shall issue a joint press release in mutually acceptable form announcing their execution of this Agreement. Thereafter, neither party shall issue any press release, file any report or make any other public communication that includes the name or describes the activities of the other party without first providing the other party with a copy of any such proposed release, filing or communication and providing such party with an adequate opportunity to comment thereon. 16. Assignment. None of the rights or obligations under this Agreement shall be assignable by either party without the prior written consent of the other party, which consent shall not be unreasonably withheld. 17. No Partnership. No agency, partnership, joint venture, or employment is created as a result of this Agreement and neither party nor its agents shall have any authority of any kind to bind the other party in any respect whatsoever. 8 18. Governing Law. This Agreement shall be deemed to have been entered into, and shall be construed and enforced in accordance with the laws of the State of Utah. 19. Expenses of Legal Proceedings. If any action, suit or proceeding is brought by a party with respect to a matter or matters governed by this Agreement, all costs and expenses of the prevailing party incurred in connection with such proceeding, including reasonable attorneys' fees, shall be paid by the nonprevailing party. 20. Severability. If any provision of this Agreement is or is deemed invalid, illegal or unenforceable in any jurisdiction, such provision shall be deemed amended to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the parties, it shall be stricken and the remainder of this Agreement shall remain in full force and effect. 21. Waiver. No waiver of any right under this Agreement shall be effective unless contained in a writing signed by the party charged with such waiver, and no waiver of any right arising from any breach or failure to perform shall be deemed to be a waiver of any future breach or failure or of any other right arising under this Agreement. 22. Section Headings. The headings of the sections contained herein are for convenience only and are not deemed to limit or construe the contents thereof. 23. Authorization. Each person signing this Agreement on behalf of the corporate party represents and warrants that he or she is a duly authorized and acting officer of the corporation on whose behalf he or she is signing, that the corporation has full power and authority to execute and enter into this Agreement, and that this Agreement has been duly and validly authorized and approved by the board of directors of the corporation in accordance with its charter, governing instruments and the provisions of applicable law. 24. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and supersedes any and all prior agreements, understandings, promises and representations made by either party to the other concerning the subject matter hereof. This Agreement may not be released, discharged, amended or modified in any manner except by an instrument in writing signed by duly authorized representatives of both parties hereto. 25. Binding Effect. The rights and obligations of the parties under this Agreement shall inure to the benefit of and shall bind the respective legal representatives, successors and assigns of the parties. 9 IN WITNESS HEREOF, Merit and Video Direct have caused this Amended and Restated License Agreement to be duly executed as of the date first written above. Merit: Merit Studios, Inc. A Delaware Corporation By /s/ Michael John -------------------------- Michael John Chairman Video Direct: Videolocity Direct, Inc. A Nevada Corporation By /s/ George Norman -------------------------- George Norman Chairman 10 EX-10.2 3 ex102.txt SERVICES AGREEMENT Exhibit 10.2 SERVICES AGREEMENT This Services Agreement (the "Agreement") is entered into as of April 26, 2001 between Sinclair-Davis Trading Corp., a New York corporation ("Sinclair-Davis"), and Videolocity International, Inc., a Nevada corporation ("Client"). WHEREAS, Sinclair-Davis is in business of planning, developing and implementing marketing and public relations services campaigns for corporations and other business entities; WHEREAS, Client desires to retain Sinclair-Davis to provide services to Client, and Sinclair-Davis desires to provide such services to Client, pursuant to the terms, conditions and provisions contained in this Agreement; NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Term/Services. The term of this Agreement shall commence with the date hereof and continue for a period of eighteen months. During the term of the Agreement, Sinclair-Davis shall assemble and manage a team of one or more professionals to provide Client with the following services and/or undertake the following tasks, as the case may be (collectively referred to herein as the "Services"): A. Attract and maintain reputable market makers of and for Client's common stock. B. Posture and present Client in the investment community through various actions, including but not limited to: (i) implementation of a national investor relations program; (ii) assistance with format, layout, presentation and timelines of Client's financial results in each Annual Report to Shareholders, press release, proxy statement and report on Form 10-KSB and 10-QSB; (iii) attraction of media and trade publication coverage of Client and/or its products; and (iv) arranging and managing presentation of Client by its senior management to strategic members of the investment community such as brokers, stockholders, financial analysts, other investment bankers, and institutions. C. Assist Client in implementing its strategic plan, including but not limited to: (i) design and development of merger and acquisition (M&A) strategies; (ii) identification and introduction of M&A candidates for such strategies; (iii) analysis of M&A proposals and counter-proposals (iv) development and implementation of a cash investment and management program, (v) analysis of and advice in relation to the Company's anticipated cash needs; and, (vi) identification and introduction to potential joint venture and/or trading partners. All such Services shall be performed by Sinclair-Davis in a first-class and professional manner, and Sinclair-Davis shall at all times conduct its activities in accordance with all applicable federal, state and local laws and regulations. 2. Representation and Warranties of Client. Client represents and warrants to Sinclair-Davis that: A. Organization. Client is a corporation duly organized, validly existing and in good standing under the laws of the State of its incorporation, and it is duly qualified to do business as a foreign corporation in each jurisdiction in which it owns or leases Property or engages in business and in which the failure to so qualify would have a material adverse affect on the business or financial condition of Client. B. Formal Action. Client has the corporate power and authority to execute and deliver this Agreement and to perform each of its obligations hereunder, and this Agreement has been duly approved by Client's Board of Directors. C. Valid and Binding Agreement. This Agreement has been duly executed and delivered by Client and is the valid and binding obligation of Client enforceable against it in accordance with its terms, subject to subject to bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization and similar laws of general applicability relating to or affecting creditors' rights and to general principles of equity). D. No Violation. The execution, delivery and performance of this Agreement does not and will not violate any provisions of the charter or bylaws of Client or any agreement to which Client is a party or any applicable law or regulation or order or decree of any court, arbitrator, agency or government applicable to Client and no action of or filing with, any governmental or public body or authority is required in connection with the execution, delivery or performance of this Agreement. 2 E. Litigation. Except as Client has disclosed in its public filings with the Securities and Exchange Commission (the "Commission"), there is no action, suit or proceeding which could reasonably be expected to have a material adverse effect on Client, which is pending or, to the knowledge of Client, threatened against Client. F. Accuracy of Information. Client has provided Sinclair-Davis with copies of its annual report on Form 10-KSB for the fiscal year ended October 31, 2000, its quarterly report on Form 10-QSB for the fiscal quarter ended January 31, 2001, and its current report on Form 8-K dated January 5, 2001, as amended March 6, 2001, all of which have been filed with the Commission (collectively referred to as the "Information Package"). Client represents and warrants that the reports contained in the Information Package are accurate and complete in all material respects as of their respective dates and do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3. Covenants and Agreements of Client. Client agrees to comply with the following covenants: A. Client Certification. Client acknowledges that it is responsible for the accuracy and completeness of the Information Package and for all other information furnished to Sinclair-Davis. Client agrees to promptly advise Sinclair-Davis in writing of any condition, event, circumstance or act that would constitute a material adverse change in the business, properties, financial condition or business prospects of Client or which would make any of the information contained in the Information Package or in any report or other document prepared by Sinclair-Davis for and on behalf of Client misleading in any material respect. Client agrees that Sinclair-Davis and its directors, officers, agents and employees may rely on the Information Package and on all other written information furnished by Client, and on each and every certification provided by an authorized senior executive officer of Client, until Sinclair-Davis is advised in writing by an authorized senior executive officer of Client that the information previously furnished to Sinclair-Davis is inaccurate or incomplete in any material respect. B. Books and Records. Client shall maintain true and complete books, records and accounts in which true and correct entries shall be made of its transactions in accordance with generally accepted accounting principles consistently applied ("GAAP"). 3 C. Financial and Other Information. Client agrees to furnish to Sinclair-Davis the following information: (1) Annual Financial Statements. As soon as practicable and in any event within 90 days after the end of Client's fiscal year, annual financial statements including a balance sheet, an income statement, a statement of cash flows, and a statement of stockholder's equity, and all notes thereto prepared in accordance with GAAP and audited by an independent certified public accountant. This requirement may be satisfied by the delivery of a copy of Client's annual report on Form 10-KSB as filed with the Commission. (2) Quarterly Financial Statements. As soon as practicable, and in any event within 45 days after the end of each of Client's fiscal quarters, quarterly financial statements including a balance sheet, a quarterly and year-to-date income statement, a statement of cash flows, and a statement of stockholder's equity, prepared by Client in accordance with GAAP and certified by the chief financial officer and chief executive officer of Client as fairly presenting, subject to normal year-end audit adjustments, Client' s financial position as of and for the periods indicated. This requirement may be satisfied by the delivery of copies of Client's quarterly reports on Form 10-QSB as filed with the Commission. D. Sinclair-Davis' Reliance on Client's Full Disclosure. Client will provide, or cause to be provided, to Sinclair-Davis all financial and other information requested by Sinclair-Davis for the purpose of rendering its services pursuant to this Agreement. Client recognizes and confirms that Sinclair-Davis will use such information in performing the services contemplated by this Agreement without independently verifying such information and that Sinclair-Davis does not assume any responsibility for the accuracy or completeness of such information. Client certifies that there is no fact, known to it which materially adversely affects or may (so far as the Client's senior management can now reasonably foresee) materially adversely affect the business, properties, condition (financial or other) or operations (present or prospective) of Client which has not been set forth in written form delivered by Client to Sinclair-Davis. Client agree to keep Sinclair-Davis promptly informed of any facts hereafter known to Client which materially adversely affect or may (so far as the Client's senior management can now reasonably foresee) materially adversely affect the business, properties, condition (financial or other) or operations (present or prospective) of Client. 4 E. Relationship Of the Parties. This Agreement pertains to the provision of Services by Sinclair-Davis to Client and the provisions of this Agreement pertaining to compliance with financial covenants, delivery of financial statements, and similar provisions are intended solely to provide Sinclair-Davis with information on which it may rely in providing the Services hereunder. Nothing contained in this Agreement shall be construed as permitting or obligating Sinclair-Davis to act as a financial or business advisor or consultant to Client, as permitting Sinclair-Davis to participate in the management of Client's business, or as creating or imposing any fiduciary obligations on Sinclair-Davis with respect to Client or its business. Sinclair-Davis shall have no duty or obligation to provide services to Client other than the Services. Sinclair-Davis shall have no authority to incur expenses on behalf of Client unless first approved in writing or obligate Client to enter into any agreement or arrangement or commit Client to any course of action. Client acknowledges that it has had the opportunity to obtain the advice of experienced counsel of its own choosing in connection with the negotiation and execution of this Agreement, the provision of Services hereunder and with respect to all matters contained herein. 4. Compensation. Client agrees to compensate Sinclair-Davis as follows for the provision of the Services hereunder: A. Client shall issue Sinclair-Davis 200,000 restricted shares of Client's Common Stock on the date of execution of this Agreement. B. Client shall issue Sinclair-Davis 200,000 restricted shares of Client's Common Stock on that date which is three months from the date of execution of this Agreement. C. During the term of this Agreement, Sinclair-Davis shall have the right to demand, on one occasion only, the registration under the Securities Act of 1933, as amended, of those shares of Client's Common Stock issued to Sinclair-Davis on or prior to the date of such demand. Sinclair-Davis shall also be entitled to "piggyback" registration rights (subject to the customary exclusion from any registration statement based on the reasonable objection of the managing underwriter), which shall remain in effect until such time as the shares of Client's Common Stock issued to Sinclair-Davis hereunder may be sold without registration under Rule 144. Sinclair-Davis shall cooperate with Client in connection with any registration statement filed by Client with respect to shares held by Sinclair-Davis and shall provide Client with such information, affidavits and indemnifications as may be reasonably requested by Client. 5 D. Following a demand for registration by Sinclair-Davis, Client will use its best efforts to file a registration statement on Form S-3 on an expeditious basis and have it declared effective at the earliest practicable date. In the event such registration statement is not declared effective by the Commission within 120 days of the exercise of the demand registration right by Sinclair-Davis, Client will issue 20,000 additional shares of its restricted Common Stock to Sinclair-Davis and will issue an additional 20,000 shares of its restricted Common Stock to Sinclair-Davis for each 30 days thereafter that the registration statement has not been declared effective. Sinclair-Davis shall be entitled to "piggyback" registration rights (subject to the customary exclusion from any registration statement based on the reasonable objection of the managing underwriter) with respect to any additional shares issued under this subparagraph, which rights shall remain in effect until such time as such additional shares may be sold without registration under Rule 144. E. The registration rights granted to Sinclair-Davis shall be transferable to any third party or parties, who may acquire the shares of Client's Common Stock from Sinclair Davis in a lawful transaction with the same rights and subject to the same restrictions as those applicable to Sinclair-Davis. F. While not included in the Services and not currently contemplated by Client, in the event Sinclair-Davis should introduce Client to an acquisition, a buyout, financing and/or a merger candidate, and a transaction is consummated, then Client shall pay Sinclair-Davis a finder's fee in an amount to be negotiated by the parties before Sinclair-Davis provides any such introduction. 5. Date Shares Earned. The Shares issuable to Sinclair-Davis pursuant to Sections 4(A) and 4(B) above shall be deemed to have been earned on the date such shares are delivered pursuant to the terms of such sections. 6. Termination. This Agreement may be terminated: (i) upon written notice by one party to the other party if the representations and warranties made by the other party are proved to have been inaccurate in any material respect; or (ii) upon written notice by one party to the other party if the other party should be in default in the performance of the material terms or provisions of this Agreement, and such defaulting party has failed to cure such default within thirty (30) days following written notice of such default from the non-defaulting party. In the event of termination by Sinclair-Davis, it may immediately cease the performance of services for Client under this Agreement. In the event of termination by Client, prior to the expiration of three months 6 from the date of this Agreement, Client shall have no obligation to issue to Sinclair-Davis the shares of Client's Common Stock described in Section 4(B) of this Agreement. 7. Indemnification. Client agrees to indemnify Sinclair-Davis and hold it harmless from all claims, damages, losses and expenses (including reasonable attorney's fees) for claims caused by any material inaccuracy in the Information Package or other written information provided by Client to Sinclair-Davis. Sinclair-Davis agrees to indemnify Client and hold it harmless from all and all claims, damages, losses and expenses (including reasonable attorney's fees) for claims caused by violation by Sinclair-Davis of the terms and conditions of this Agreement or of any state, federal or other governmental laws or regulations. 8. Confidentiality Information. Confidential Information means all proprietary data, concepts, projections, strategies, client lists, marketing plans, designs, processes, methods of operation, innovations, and other information pertaining to the business operations and other activities of Client and its affiliated companies. Sinclair-Davis shall use any Confidential Information disclosed or provided to it by Client, whether orally, written, by demonstration, in models or otherwise, only as permitted under this Agreement and shall maintain all such Confidential Information in confidence and shall not disclose or divulge such Confidential Information to any third party or to any of its own personnel not having a need to know such information, provided that Sinclair-Davis shall has informed its personnel of its obligations under this Section 8, and provided further any person to whom such disclosure is made shall have entered into a non-disclosure agreement, the terms of which require such person to maintain the confidentiality of the Confidential Information. Notwithstanding the foregoing, Sinclair-Davis shall not be liable for disclosure of any such Confidential Information which: (a) can be demonstrated by reasonable documentary evidence to have been in its possession prior to receipt from Client, provided that the source of such information was not known to Sinclair-Davis to be bound by a confidentiality agreement with or other contractual or fiduciary obligation of confidentiality to Client or any other person with respect to such information; (b) is or becomes part of the public domain other than through an act or omission attributable to employees or agents of Sinclair-Davis; or (c) is or is made available to Sinclair-Davis by a third party unaffiliated with Client and which has no obligation to Client with respect thereto. Upon the termination of this Agreement, Sinclair-Davis shall promptly return to Client all Confidential Information provided by Client to Sinclair-Davis, and all copies thereof, in its possession. This Section 8 shall survive the termination of this Agreement. 7 9. Miscellaneous. A. Governing Law. This Agreement shall be governed by the laws of the State of New York. B. Entire Agreement. This Agreement embodies the entire agreement of the parties with respect to its subject matter. There are no restrictions, promises, representations, warranties, covenants, or undertakings other than those expressly set forth or referred to herein. C. Amendments to be in Writing. This Agreement may be amended only in a writing signed by all of the parties. D. No Waivers by Course of Dealing; Limited Effect of Waivers. No waiver shall be effective against any party unless it is in a writing signed by that party. No course of dealing and no delay on the part of Sinclair-Davis in exercising its rights shall operate as a waiver of that right or otherwise prejudice Sinclair-Davis. Sinclair-Davis' failure to insist upon the strict performance of any provision of this Agreement, or to exercise any right or remedy available to Sinclair-Davis shall not constitute a waiver by Sinclair-Davis of such provision. No specific waiver by Sinclair-Davis of any specific breach of any provision of this Agreement shall operate as a general waiver of the provision or of any other breach of the provision. Client shall have no right to cure any breach except as specifically provided herein. E. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. F. Circulation of Rights and Remedies. No right or remedy of Sinclair-Davis under this Agreement is intended to preclude any other right or remedy and every right and remedy shall coexist with every other right and remedy now or hereafter existing whether by contract, at law, or in equity. G. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties and their successors and assigns. Neither party shall have any right to assign any of its rights or delegate any of its obligations or responsibilities under this Agreement without the prior written consent of the other party. H. Payment of Fees and Expenses of Enforcing Agreement. In the event of any dispute between the parties arising out of or related to this Agreement or the interpretation thereof, at the trial level or appellate level, the prevailing party shall 8 be entitled to recover from the non-prevailing party all costs and expenses, including reasonable fees and disbursements of counsel which may be reasonably incurred by it in connection with such proceeding, including without limitation, any costs and expenses of experts, witnesses, depositions and other similar costs. I. Notices. Any notices or other communications required or permitted to be given hereunder shall be in writing, and shall be delivered to the parties at the addresses set forth below (or to such other addresses as the parties may specify by notice to the other in the manner provided in this section). Notices or other communications shall be effective when received at the recipient's address (or when delivered to that location if receipt is refused). Notices or other communications given by facsimile transmission shall be presumed received at the time indicated in the recipient's automatic acknowledgment. Notices or other communications given by Federal Express or other recognized overnight courier service shall be presumed to have been received on the following business day. Notices or other communications given by certified mail, return receipt requested, postage prepaid, shall be presumed received 5 business days after the date of mailing. Client: Videolocity International, Inc. 358 South 700 East, #B-604 Salt Lake City, Utah 84102 Attention: D. T. Norman, Secretary Sinclair-Davis: Sinclair-Davis Trading Corp. 108 Harbor Road Head of the Harbor, NY 11780 J. No Partnership. No agency, partnership, joint venture, or employment is created as a result of this Agreement and neither party nor its agents shall have any authority of any kind to bind the other party in any respect whatsoever. K. Headings. The headings in this Agreement are intended solely for convenience of reference. They shall be given no effect in the construction or interpretation of this Agreement. L. Severability. The invalidity or unenforceability of any provision of this Agreement shall not impair the validity or enforceability of any other provision. 9 In Witness Whereof, the parties have executed this Agreement as of the date first above written. Client: VIDEOLOCITY INTERNATIONAL, INC. By /s/ Jerry E. Romney, Jr. ------------------------------- Jerry E. Romney, Jr., President Sinclair-Davis: SINCLAIR-DAVIS TRADING CORP. By /s/ Brooke Bray ------------------------------- Brooke Bray, President 10 -----END PRIVACY-ENHANCED MESSAGE-----