-----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, RxVbQiBYm8DjHeRd9lFeEqvcvG0v7H/UY6+ASGWrkc3z3EM5+2WWuSXbT8qkpt8i /VzlACedNVJoHaA03Bj4Dw== 0000931731-02-000246.txt : 20020705 0000931731-02-000246.hdr.sgml : 20020704 20020705163834 ACCESSION NUMBER: 0000931731-02-000246 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 20020705 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIDEOLOCITY INTERNATIONAL INC CENTRAL INDEX KEY: 0000786771 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 870429154 STATE OF INCORPORATION: NV FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-92042 FILM NUMBER: 02697347 BUSINESS ADDRESS: STREET 1: 1762-A PROSPECTOR DR CITY: PARK CITY STATE: UT ZIP: 84060 BUSINESS PHONE: 801-230-0839 MAIL ADDRESS: STREET 1: 1762-A PROSPECTOR DR CITY: PARK CITY STATE: UT ZIP: 84060 FORMER COMPANY: FORMER CONFORMED NAME: PINE VIEW TECHNOLOGIES CORP DATE OF NAME CHANGE: 19960608 FORMER COMPANY: FORMER CONFORMED NAME: PINE VIEW TECHNOLOGIES INC DATE OF NAME CHANGE: 20000124 SB-2 1 videolocitysb2.txt As Filed with the Securities and Exchange Commission on July 5, 2002 Registration No. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM SB-2 --------- REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 VIDEOLOCITY INTERNATIONAL, INC. - -------------------------------------------------------------------------------- (Name of small business issuer in its charter) Nevada 4899 87-0429154 - ------------------------------- --------------------- ------------------ (State or other jurisdiction of (Primary Standard (I.R.S. Employer incorporation or organization) Industrial Classifi- Identification Number) cation Code Number) 44 West Broadway, Suite 1405 South, Salt Lake City, Utah 84101 -------------------------------------------------------------- (801) 521-2808 (Address and telephone number of principal executive offices) 44 West Broadway, Suite 1405 South, Salt Lake City, -------------------------------------------------------------- Utah 84101 (Address of principal place of business or intended principal place of business) Larry R. McNeill Videolocity International, Inc. 44 West Broadway, Suite 1405 South Salt Lake City, Utah 84101 (801) 521-2808 (Name, address and telephone number of agent for service) Copy to: Leonard E. Neilson, Esq. Leonard E. Neilson, P.C. 8160 South Highland Drive, Suite 209 Sandy, Utah 84093 Approximate date of proposed sale to the public: As promptly as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. |X| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check he following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ]
CALCULATION OF REGISTRATION FEE Proposed Proposed Maximum Maximum Amount of Title each class of Securities Amount to be Offering Price Aggregate Registration to be Registered Registered Per Share Offering Price Fee(1) Common stock issuable under equity 21,200,000 $ 1.30 $ 27,560,000 $ 2,535.52 line of credit shares(2) per share(3) ========================================= ================== ================== ==================== ================= Additional common stock offered by 290,000 $ 1.30 $ 377,000 $ 34.69 Cornell Capital Partners L.P. shares per share(3) ========================================= ================== ================== ==================== ================= Common stock offered by Westrock 10,000 $ 1.30 $ 13,000 $ 1.20 Advisors, Inc. shares per share(3) ========================================= ================== ================== ==================== ================= TOTAL FEE $ 2,571.41
(1) The fee with respect to these shares and as required by Section 6(b) of the Securities Act of 1933, as amended, (the "Securities Act"), has been calculated pursuant to Rule 457(c) under the Securities Act and based upon the last sale price per share of the Issuer's common stock on a date within five (5) days prior to the date of filing this Registration Statement, as reported by the OTC Bulletin Board. (2) Estimated 21,200,000 shares issuable pursuant to our equity line of credit agreement with Cornell Capital Partners, L.P. (3) Estimated solely for purposes of calculating the registration fee and base on the last reported sale price per share on July 2, 2002. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Subject to completion dated July 5, 2002 ---------------------------------------- PROSPECTUS VIDEOLOCITY INTERNATIONAL, INC. 21,500,000 Shares of Common Stock This prospectus relates to the sale of up to 21,500,000 shares of our common stock by certain persons who are, or will become, stockholders of Videolocity International, Inc. Please refer to the "Selling Stockholders" section beginning on page 22. We are not selling any shares of common stock pursuant to this offering and, therefore, we will not receive any proceeds from the offering. However, we will receive funds upon the sale and issuance of shares under the equity line of credit agreement with Cornell Capital Partners, L.P. We will bear all costs associated with the registration statement to which this prospectus relates. Cornell Capital is entitled to retain 5.0% of the proceeds raised under the equity line of credit. The shares of common stock are being offered for sale on a best efforts basis by the selling stockholders at prices established on the Over-the-Counter Bulletin Board during the term of this offering. There are no minimum purchase requirements. These prices will fluctuate based on the demand for the shares of common stock. The selling stockholders are as follows: a. Cornell Capital Partners, L.P., who may offer and sell, from time to time, up to 21.2 million shares of common stock being issued pursuant to the equity line of credit, and 290,000 additional shares previously issued under that agreement; b. Westrock Advisors, Inc., who may offer and sell, from time to time, up to 10,000 shares of common stock previously acquired pursuant to the placement agent agreement We refer to Cornell Capital and Westrock Advisors, and other stockholders who may offer and sell shares of our common stock under this prospectus, as "selling stockholders." Cornell Capital and Westrock Advisors are underwriters within the meaning set forth in the Securities Act of 1933 with respect to the shares to be offered and sold by each of them. Cornell Capital will pay us 95% of the market price of our common stock. The 5% discount on the purchase of the common stock received by Cornell Capital is considered an underwriting discount. None of the proceeds from the sale of shares by selling stockholders will be placed in escrow, trust or similar account. Broker- dealers who act in connection with the sale of the common stock may also be deemed to be underwriters. Profits on any resale of the common stock as a principal by these broker-dealers and any commissions received by the broker-dealers, may also be deemed underwriting discounts and commissions under the Securities Act. Our common stock currently trades on the OTC Bulletin Board, also referred to as the OTC-BB, under the symbol "VCTY." The last reported selling price as of July 2, 2002 was $1.30. These securities are speculative and involve a high degree of risk. Investing in our common stock involves risks which are described in the "Risk Factors" section beginning on page 9 of this prospectus. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this Prospectus is July __, 2002 -1- VIDEOLOCITY INTERNATIONAL, INC. A True Digital Information and Entertainment End-to-End Solution o Fully integrated software driven hardware application o Fully scalable for any size deployment o Fully adaptable to all architecture o Fully customizable and designed for each application [Graphic Omitted] Our technology allows us to deliver true video-on-demand streaming in Mpeg4 format at 900kbps or less achieving near DVD quality over wireless, Ethernet or DSL WAN & LAN network architectures. Accordingly, we can offer the following innovations and features:
* Property/Facility Information * Personal and Corporate E-mail * Specific Application Content / Information * Music on Demand * Specific Educational Content / Information * Internet Games * Dietary Menus * Wireless Headset * Movies/Videos on Demand * Wireless Keyboard * High Speed Internet Access * Handheld Remote Control
-2-
TABLE OF CONTENTS Page PROSPECTUS SUMMARY........................................................................... 3 RISK FACTORS................................................................................. 9 USE OF PROCEEDS.............................................................................. 17 DILUTION..................................................................................... 18 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY.............................................. 19 CAPITALIZATION............................................................................... 20 EQUITY LINE OF CREDIT........................................................................ 20 PLAN OF DISTRIBUTION......................................................................... 21 SELLING STOCKHOLDERS......................................................................... 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS................................... 23 BUSINESS..................................................................................... 26 MANAGEMENT................................................................................... 36 STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................. 41 RELATIONSHIPS AND RELATED PARTY TRANSACTIONS................................................. 42 DESCRIPTION OF CAPITAL STOCK................................................................. 43 SHARES ELIGIBLE FOR FUTURE SALE.............................................................. 45 LEGAL MATTERS................................................................................ 46 EXPERTS...................................................................................... 46 WHERE YOU CAN FIND MORE INFORMATION.......................................................... 46 CONSOLIDATED FINANCIAL STATEMENTS............................................................ F-1 TO F-25 --------------
You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, theses securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date. All references in this prospectus to "we," "us" and "our" refer to Videolocity International, Inc., unless indicated otherwise. -3- (This page intentionally left blank) -4- PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus, but does not contain all of the information that may be important to you. This prospectus includes specific terms of the offering, information about our business and financial data. We encourage you to read this prospectus in its entirety, particularly the "Risk Factors" section, financial statements and notes, before making an investment decision. WHAT WE DO We are a solution engineering and marketing company involved in the deployment of the Videolocity "Digital Entertainment SystemTM" (DES) and other advanced digital information and entertainment solutions. DES delivers video-on-demand in near DVD quality, including movies and other videos, medical information and educational material to individuals, residents, hotel guests, and patients and attendants in the healthcare industry. DES permits viewers to select from an extensive library of movie titles or informational/educational content and view their selections on their television screens, lap top computers or PDA's. All content is protected through our proprietary encryption and encoding process, which limits viewing to the person, or persons, authorized to access the movie or other content and prevents unauthorized digital reproduction or rebroadcast. Our system also provides digital music-on-demand, Internet games, high-speed Internet access and many other e-commerce applications. We operate our business through five subsidiaries which perform various functions strategic to their market place or core competency. To date, our activities have been limited to DES and other technologies. We are presently commencing the initial marketing of DES into various marketplaces. ABOUT US Our principal executive offices are located at 44 West Broadway, Suite 1405 South, Salt Lake City, Utah 84101, telephone number (801) 521-2808. Our operations offices are located at 1762-A Prospector Avenue, Park City, Utah 84060, and our telephone number is (435) 615-8338. We also maintains a Salt Lake City mailing address at 358 South 700 East, #B-604, Salt Lake City, Utah 84102, telephone number (801) 230-0839. OUR BUSINESS STRATEGY Our current business strategy is to drive demand of the wireless usage of our DES worldwide in the hospitality, healthcare and residential markets. We are committed to continued development and installation of innovative, high quality, cost effective solutions and systems to build an increased and ongoing revenue stream. We provide a revolutionary wireless quality solution and also offer a parallel quality solution over wire (Ethernet, DSL, CATV) and Fiber architectures. Our DES is available on either a Mircosoft or Linux operating system in a stand alone set top box or integrated in a television set. HISTORICAL INFORMATION We originally incorporated in Nevada on November 5, 1985 as Pine View Technologies, Inc. In 1987, we completed a public offering of shares of common stock, from which we realized net proceeds of approximately $103,361. We had limited operations until 2000. On December 4, 2000, we finalized the acquisition of Videolocity, Inc., a Nevada corporation, pursuant to a reorganization agreement dated as of November 15, 2000. Videolocity, Inc. was created as Moviesonline, Inc. to develop and market systems, products and solutions for the delivery of video and other content to end users on demand. It also developed a business plan, assembled an experienced management team, acquired rights to proprietary technology, and raised $519,000 as initial working capital through the private placement of common stock. In connection with the acquisition, we issued 3,028,125 shares of our common stock to the shareholders of Videolocity, Inc. We also sold 610,000 shares of our common stock for $500,000 pursuant to a private placement, that was subject to the completion of the acquisition and was closed immediately following the transaction. As a result of the acquisition and private placement, 15% of our outstanding shares were held by our shareholders prior to the acquisition, 71%, were held by former shareholders of Videolocity, Inc., and 14%, were held by purchasers in the private placement. At the closing of the acquisition, our incumbent directors resigned and the persons nominated by Videolocity, Inc. were elected as our new directors. -5- In connection with our acquisition of Videolocity, Inc., we adopted its stock incentive plan and reserved 1.0 million shares of its common stock for issuance in connection with awards made under the plan to their key employees and consultants. Also, we amended and restated our articles of incorporation that included the following: * changing our corporate name from Pine View Technologies, Inc. to Videolocity International, Inc.; * increasing our authorized capitalization to 125 million shares of common stock, par value $0.001, and 10 million shares of preferred stock, par value $0.001; * limiting the liability of our directors and officers to the maximum extent permitted by Nevada law; and * other miscellaneous items. The acquisition and related proposals were approved by the written consent of shareholders holding a majority of our issued and outstanding shares of common stock. The acquisition and reorganization was treated for accounting purposes as a reverse acquisition of our company by Videolocity, Inc., although for corporate purposes we are the acquiring entity. On December 4, 2000, we effected a reverse stock split of our issued and outstanding shares on a 0.61 share for one share basis. On March 1, 2002, we effected a second reverse stock split, this split being on a one share for ten shares basis. In July 2000, we change our authorized capitalization to 50 million shares of common stock. Unless otherwise noted, all share figures in this prospectus have been adjusted to give effect to the two stock splits. SELLING STOCKHOLDERS This prospectus relates to shares of our common stock being offered by the selling stockholders, Cornell Capital and Westrock Advisors, who may offer and sell shares under this prospectus. On May 28, 2002 we entered into an equity line of credit agreement with Cornell Capital. Under the equity line, Cornell Capital agrees to provide to us private financing up to $20 million during the 24 months following the effective date of the registration statement, to which this prospectus relates. Cornell Capital received an additional 290,000 shares of our common stock under the equity line of credit agreement and Westrock Advisors received 10,000 shares to act as our exclusive placement agent in connection with the equity line of credit. A provision of the equity line of credit agreement and placement agent agreement requires that we file a registration statement with the SEC for the purpose of registering the shares of common stock issued, and to be issued pursuant to the agreements. The equity line permits us to draw, at our option, up to $250,000 a maximum of four times per month. The total amount of shares issuable under the equity line is based upon the sale of shares at 95% of the current market price at the time of sale. The following table sets forth the total amount of shares issuable under the equity line if the maximum $20 million is used and presumes the issuance of shares at various prices, based upon the formula set forth in the equity line of credit agreement. You should note that there is no minimum price at which shares may be issued under the equity line. Accordingly, if the price of our stock declines and we elect to draw against the equity line at the lower stock prices, we would issue more shares. Investor's Number Current Price(1) Price(2) of Shares(3) ---------------- --------------- ------------ $ 1.00 $ 0.95 21,052,631 1.25 1.1875 16,842,105 1.50 1.425 14,035,087 2.00 1.90 10,526,315 2.50 2.375 8,421,053 3.00 2.85 7,017,544 (1) Assumed current market price of common stock at time we draw against the equity line. (2) Price to Cornell Capital based on 95% of current market price. (3) Represents total shares issued if the entire $20 million is drawn at the prices depicted, but does not include the 300,000 shares issued upon entering into the equity line. -6- This prospectus relates only to 21.5 million shares of our common stock. Thus, if we were to issue more that this amount under the equity line of credit agreement, we would have to file a new registration statement to accommodate the additional shares. -7-
THE OFFERING Securities offered by selling stockholders .... 21,500,000 shares of our common stock Offering price................................. Determined at the time of sale by the selling stockholders Common stock outstanding before offering:...... 5,748,011 shares(1) Common stock outstanding after offering:....... 27,248,011 shares(2) OTC Bulletin Board Symbol...................... Common Stock: "VCTY" Use of proceeds................................ We will not receive any proceeds from the shares offered by the selling stockholders. Any proceeds we receive under the equity line of credit agreement will be used for general corporate purposes. Risk Factors................................... The common stock offered involve a high degree of risk, immediate substantial dilution, and should not be purchased if you cannot afford the loss of your entire investment. Before purchasing any of the offered shares, you should review carefully and consider all information contained in this prospectus, particularly the items set forth under "Risk Factors."
(1) As of June 28, 2002 and includes: / 290,000 shares issued to Cornell Capital under the equity line of credit agreement; and / 10,000 shares issued to Westrock under the placement agent agreement. The amount of outstanding shares excludes outstanding options, warrants, convertible promissory notes and convertible debentures which, if exercised or converted in our common stock, would result in an additional 282,800 shares outstanding. The amount also excludes 50,000 shares of common stock that has been authorized for issuance under our 2002 Stock Award Plan, but has not been issued. (2) Assumes 21.2 million shares of common stock issued under the equity line of credit agreement at a price equal to 95% of the current market price, plus the 300,000 previously issued. USE OF PROCEEDS We will not receive any proceeds from shares offered by the selling stockholders. Proceeds from the sale of our stock under the equity line of credit will be used for general corporate purposes. -8- SUMMARY FINANCIAL INFORMATION The following information was taken from our financial statements for the six months ended April 30, 2002 and 2001 (unaudited) and the fiscal years ended October 31, 2001 and 2000 appearing elsewhere in this prospectus. This information should be read in conjunction with such financial statements and the notes thereto. In management's opinion all adjustments, consisting of normal recurring items, considered necessary for a fair presentation have been included. Consolidated Statements of Operations Data
Six Months Years Ended Ended April 30, Ended October 31, -------------------------- -------------------------- 2002 2001 2001 2000 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) Revenues: $ -- $ 6,218 $ 5,578 $ -- ----------- ----------- ----------- ----------- Expenses: Administrative 876,727 595,622 1,353,710 129,778 Interest 192,799 -- 201,449 -- Depreciation and amortization 8,200 46,188 69,260 -- ----------- ----------- ----------- ----------- Total expenses 1,077,726 641,810 1,624,419 (129,778) ----------- ----------- ----------- ----------- Net loss - from operations (1,077,726) (635,592) (1,618,841) (129,778) ----------- ----------- ----------- ----------- Other income (loss) Minority interests 34 -- (4,712) -- Loss of good will -- -- (958,628) -- Net gain from sale of investment stock -- 199,800 338,049 -- Net loss from transfer of license agreement (150,000) -- (135,491) -- ----------- ----------- ----------- ----------- Net loss $ 1,227,692) $ (435,792) $(2,379,623) $ (129,778) =========== =========== =========== =========== Loss per common share - Basic $ (.25) $ (.10) $ (.06) $ (.02) ----------- ----------- ----------- ----------- Average outstanding common shares (stated in 1000's) 4,963 4,299 43,087 6,406
Consolidated Balance Sheet Data April 30, 2002 October 31, 2001, ----------- ----------- (Unaudited) Assets Current assets Cash $ 22,609 $ 441 Notes receivable - net or provision of for doubtful accounts 200,000 350,000 ----------- ----------- Total current assets 222,609 350,411 ----------- ----------- Equipment - net of accumulated depreciation 90,282 73,012 Other assets Advance deposits 5,292 4 732 ----------- ----------- Total assets $ 318,183 $ 428,1155 =========== =========== Liabilities and stockholders equity Current Liabilities Notes payable - related parties $ 573,000 450,000 Notes payable 868,800 300,000 Accrued interest - notes payable 63,855 13,949 Accounts payable 223,114 143,123 ----------- ----------- Total current liabilities 1,728,769 907,072 ----------- ----------- Redeemable preferred capital stock Series A issued -- 950 Capital in excess of par value -- 3,957,380 ----------- ----------- -- 3,958,330 Minority interest 5,004 5,038 Stockholders' equity - (deficiency) Common stock 5,072 43,187 Capital in excess of par value 2,316,431 (1,976,071) Deficit accumulated during development stage (3,737,083) (2,509,401) Total stockholders; equity (deficiency) (1,415,590) (4,442,155) ----------- ----------- Total liabilities and stockholders deficiency$ 318,183 $ 428,155 =========== ===========
-9- RISK FACTORS A purchase of our common stock is speculative and involves a high degree of risk. You should consider carefully the following risks, together with all other information included in this prospectus, before you decide to buy our common stock. Please keep these risks in mind when reading this prospectus, including any forward- looking statements appearing herein. If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer materially. As a result, the trading price of our common stock may decline and you could lose all or part of the money you paid to buy our common stock. Risks Relating to Our Business Our extremely limited operating history makes it difficult to evaluate our business and prospects We commenced our current business operations in January 2001 and have conducted only minimal operations since that time. As a result of our short operating history, we have only limited financial data and business information for you to evaluate our business strategies, past performance and an investment in our common stock. We have a history of losses and anticipate future losses We have not achieved any significant revenues to date and we may not achieve, or subsequently maintain profitability if anticipated revenues occur more slowly than we expect, or not at all. At April 30, 2002, our accumulated deficit was approximately $3,737,093. We expect to continue to incur significant expenses in connection with: * funding for research and development; * costs of our sales and marketing efforts; * increased general and administrative expenses; and * additional non-cash charges relating to amortization of intangibles and other deferred expenses. Accordingly, we need to generate significant revenues to achieve and sustain profitability. If we do achieve profitability, we may be unable to sustain or increase profitability on a quarterly or annual basis. Any of these factors could cause our stock price to decline. The current economic downturn has resulted in reduced entertainment spending in many of the markets that we serve worldwide. There is substantial doubt about our ability to continue as a going concern due to working capital shortages, which means that we may not be able to continue operations unless we obtain additional funding The report of our independent accountants on our October 31, 2001 financial statements and note 13 thereto, indicates that there is substantial doubt about our ability to continue as a going concern due to working capital shortages. Our ability to continue as a going concern depends on our ability to obtain additional funding. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. The video-on-demand market is new and may not gain broad market acceptance; our potential customers may not purchase our video-on-demand systems We are focusing our initial sales efforts on various video-on-demand markets. The growth and future success of our business depends largely upon our ability to penetrate new markets and sell our systems to individuals, residents, hotel guests, and patients and attendants in the healthcare industry. Because the video-on- demand market is relatively new, there can be no assurance that there will be broad customer acceptance. If these potential customers determine that video-on-demand is not viable as a business proposition, or if they decide to delay their purchase decisions or to purchase systems from our competitors, our business, financial condition and results of operations will be significantly adversely affected. -10- If our technology and solutions are not accepted by the market, our revenues will decline Our technology and solutions are ready for deployment in the marketplace. Market acceptance of our technology is critical to our future success. Factors that may affect the market acceptance of our technology include: * market acceptance of our DES and related technology; * features, performance, and cost of installation and use of our technology; * availability of competing solutions and technologies; * success and development of our marketing and distribution channels; * the length of the sale cycle for our products; * our ability to control costs; * quality of our customer service and support of our technology; and * general political and economic conditions in the United States and abroad, including, but not limited to, results of terrorist events throughout the world. Failure of our existing or future technology to achieve and maintain meaningful levels of market acceptance would materially adversely affect our business, financial condition, results of operations and market penetration. Operating results are likely to fluctuate significantly and cause our stock price to be volatile, which could cause the value of your investment in our company to decline Our future quarterly and annual operating results are likely to fluctuate significantly due to a variety of factors, many of which are outside our control. If operating results do not meet the expectations of investors and securities analysts, the trading price of our common stock could significantly decline, which may cause the value of your investment in our company to decline. Some of the factors that could affect our quarterly or annual operating results or impact the market price of our common stock include: * given the nature of the markets in which we participate, we may not be able to reliably predict future revenue and profitability; * our ability to develop, market and support our technology and any technological advancements; * the timing and amount of, or cancellation or rescheduling of, orders for our technology, particularly large orders for key installations; * our ability to retain key management, sales and marketing and engineering personnel; * our ability to obtain sufficient supplies of sole or limited source components for our DES technology; * a decrease in the average rental prices of our content; * changes in costs of components; and * the mix of technologies that we sell and the mix of distribution channels through which they are marketed. Due to these and other factors, quarterly and annual revenues, expenses and results of operations could vary significantly and period-to-period comparisons should not be relied upon as indications of future performance. Because we currently depend on a single family of products, any decline in demand for those products may harm our operating results We presently anticipate that initially, substantially all of our revenues will be derived from implementation of the DES. There may not be an immediate demand for our technology and products, or the demand may not continue and we may not be successful in marketing any new or enhanced products. Any reduction in the demand for our current products or our failure to successfully develop or market and introduced new or enhanced products could materially adversely affect our business, financial condition and results of operations. Accordingly, we will strive to: -11- * properly identify customer needs; * differentiate our technology and products from our competitors; * price our products competitively; and * anticipate our competitors new technology, products, services and innovations. Our future success requires that we develop and market additional products that achieve market acceptance and enhance our current products; if we fail to develop and market new products and product enhancements in a timely manner, our business could be adversely affected We generally sell our products and services in markets that are characterized by technological changes, frequent new product and service introductions and changing industry standards. The failure to make timely introductions of new products and service enhancements, or the failure of such new products or enhancements to achieve market acceptance, could result in a material adverse affect on our business, financial condition and results of operations. We recently completed development of our DES. There can be no assurance that we will be successful in developing and marketing new or enhanced products. System errors, failures, or interruptions could cause delays in delivery or require design modifications, which may have a negative impact on our business and damage our reputation and customer relationships. System errors or failures may adversely affect our business, financial condition and results of operations. Despite our testing and testing by current and potential customers, all errors or failures may not be found in our products or, if discovered, successfully corrected in a timely manner. These errors or failures could cause delays in product introductions and delivery or require design modifications that could adversely affect our competitive position. Our reputation may also suffer if our customers view our products as unreliable, whether based on actual or perceived errors or failures in our products. Further, a defect, error or performance problem with our DES could cause our customers' cable television systems to fail for a period of time. Any such failure would cause customer service and public relations problems for our customers. As a result, any failure of our customers' systems caused by our technology could result in delayed or lost revenue due to adverse customer reaction, negative publicity regarding us and our products and services and claims for substantial damages against us, regardless of our responsibility for such failure. Any claim could be expensive and require us to spend a significant amount of resources, regardless of whether we prevail. If we lose key personnel, we may be unable to successfully operate our business We depend on the continued contributions of our executive officers and other technical personnel to work effectively as a team, to execute our business strategy and to manage our personnel. The loss of key personnel or their failure to work effectively could have a material adverse effect on our business, financial condition and results of operations. There is intense competition amongst employers to attract certain technical specialties. Although the labor market has changed dramatically within the last year, our attrition rate has been low. If we are unable to attract and retain additional qualified personnel, our future business may suffer Our business strategy requires us to attract and retain additional qualified technical and marketing personnel. We may experience difficulty in recruiting qualified personnel, which is an intensely competitive and time consuming process. We may not be able to attract and retain the necessary personnel to accomplish our business objectives as our business develops and grows. Accordingly, we may experience constraints that will adversely affect our ability to satisfy future customer demand in a timely fashion or to support our customers and operations. This could cause an adverse effect on our business, financial condition and results of operations. Our limited ability to protect our intellectual property may prevent us from retaining our competitive advantage Our future success and ability to compete are dependent, in part, upon our proprietary technology. Taken as a whole, we believe our intellectual property rights are significant and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in loss of a competitive advantage and decreased revenues. In addition, the laws of many foreign countries do not protect our intellectual property to the same extent as the laws of the United States. Also, it may be possible for unauthorized third parties to copy or reverse engineer aspects of our products, develop similar technology independently or otherwise obtain and use information that we regard as proprietary. Furthermore, policing the unauthorized use of our products is difficult. Litigation may be necessary in -12- the future to enforce our intellectual property rights, to protect our trade secrets or patents that we may obtain, or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our future operating results. Intellectual property claims against us can be costly and restrict our business The digital video industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. As the number of entrants into our market increases and the functionality of our products is enhanced and overlaps with products of other companies, we may become subject to claims of infringement or misappropriation of the intellectual property rights of others. Any claims asserting that our products infringe or may infringe proprietary rights of third parties, if determined adversely to us, could have a material adverse effect on our business, financial condition or results of operations. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays or require us to enter into royalty or licensing agreements. Any of these outcomes could have a material adverse effect upon our operating results. Legal action claiming patent infringement could be commenced against us. If such an event occurs, we cannot assure you that we would prevail in litigation given the complex technical issues and inherent uncertainties in patent litigation. If a claim against us was successful and we could not obtain a license to the relevant technology on acceptable terms, license a substitute technology, or redesign to avoid infringement, this could have a material adverse effect on our business, financial condition and results of operations. Additional required capital may not be available To date, we have financed much of our operations through cash from the private sale of our securities and by borrowing funds. If we are unable to finance our future operations from private sources or from operating revenues, we may be required to secure additional debt and/or equity financing. We cannot assure that such financing will be available when required or, if available, it can be secured on acceptable terms. Selling additional stock, either privately or publicly, could dilute the equity interests of our stockholders. If we borrow more money, we will have to pay interest and may also have to agree to restrictions that limit our operating flexibility. Further, we may only be able to secure funding on terms that are unattractive or unfavorable to us, or not at all. Because we are a new business and significantly smaller than the majority of our national competitors, we may lack the financial resources required to capture an increased market share or to compete successfully against our current and future competitors, which would adversely affect our business The market for our DES technologies and products is highly competitive and rapidly changing. Given that there have been limited commercial deployments of video-on-demand systems to date, the respective market shares of companies competing in this market are uncertain. We are significantly smaller than the majority of our competitors and we face such competition on a local, regional and international basis. If we compete with them for the same geographical markets, their financial strength could prevent us from capturing those markets. New technologies we may develop will bring us into further competition with various companies. Additional new competitors may also enter the market and competition may intensify. Although we believe our technology and products are better than those offered by our competitors, they may be able to narrow or eliminate the differences. We believe that the primary factors influencing competition in the video-on-demand market include the flexibility of the video-on-demand system, product quality and reliability and established relationships with providers of interactive television services, including cable operators. In the video-on-demand market, our competitors currently include the following: * in the domestic cable, international cable and digital subscriber line market, principally SeaChange International Inc., nCUBE Corporation, Concurrent Computer Corporation and DIVA Systems Corporation; * in the education market, principally Silicon Graphics, Inc., Cisco Systems, Inc. and International Business Machines Corp., as well as other third parties; and * in the Video-on-Demand market, principally Lodgnet, OnCommand and Hospitality Networks -13- If we do not manage our anticipated business growth, we may not be able to operate our business effectively; our failure to manage growth could disrupt operations and adversely affect our business. We anticipate that initially, substantially all of our future revenue growth will come from our DES operations. Our anticipated growth could place a strain on our management systems and other resources. Our ability to successfully implement our business plan in a rapidly evolving market will require an effective planning and management process. We cannot assure you that we will be able to successfully manage our anticipated expansion. If we fail to manage our growth, our operations may be disrupted and our business may be adversely affected. We must continue to improve and effectively use our existing operational, management, marketing and financial systems and successfully recruit, hire, train and manage personnel, which we may be unable to do. Further, we must maintain close coordination among our technical, finance, marketing, sales and production staffs. Future acquisitions, alliances, joint ventures or divestitures that we may possibly undertake could be difficult to integrate and disrupt our business, dilute stockholder value and harm our operating results If appropriate opportunities arise in the future, we may possibly consider acquiring or making investments in complementary businesses, technologies, services or products, entering into joint ventures, or divesting certain operations. The process of integrating any acquired business, technology, service or product into our business and operations may result in unforeseen operating difficulties and expenditures. Integration of an acquired company also may consume significant management resources that would otherwise be employed in the ongoing development of our business. In addition, we may not realize the expected benefits of any acquisition, joint venture or divestiture. We may be unable to successfully identify, negotiate or finance future acquisitions or integrate any acquisitions with our current business. Future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could harm our business and financial results. Risks Relating to Our Industry Implementation of our products is complex, time consuming and expensive, and we may experience long sales and implementation cycles, which may cause our quarterly revenues, expenses and operating results to vary significantly in future, period-to-period comparisons of our results of operations Video-on-demand products are relatively complex and their purchase generally involves a significant commitment of capital, with delays frequently associated with large capital expenditures and implementation procedures within an organization. Moreover, the purchase of such products typically requires coordination and agreement among a potential customer's corporate headquarters and its regional and local operations. As a result, the sales cycles associated with the purchase of our products may be lengthy and subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews, over which we have little or no control. The success of our business is dependent upon the emerging digital video market, which may not gain broad market acceptance; any failure by the market to accept digital video technology will have a material adverse effect on our business Video-on-demand is a new and emerging technology, and we cannot assure you that it will attract widespread demand or market acceptance. Further, the potential size of the video-on-demand market and the timing of its development are uncertain. Our success in the video-on-demand market will depend upon the commercialization and broad acceptance of video-on-demand by residential cable subscribers and other industry participants, including cable system operators, content providers, set-top box manufacturers, and educational and healthcare institutions. Cable television operators historically have relied on traditional analog technology for video management, storage and distribution. Interactive technology installation, which is necessary to provide video-on-demand, requires a significant initial investment of capital. The future growth of our business will depend on the pace of the installation of interactive digital cable and digital set-top boxes, the rate at which television operators deploy digital infrastructure and the rate at which digital video technology expands to additional market segments. -14- The success of our business is dependent on the availability of, and the distribution windows for, movies, programs and other content and, if sufficient video-on-demand content is not available on a timely basis, our business will be adversely affected The success of DES will largely be dependent on the availability of a wide variety and substantial number of movies, programs, educational matter and other material, which we refer to as content, in digital format. We do not produce or provide digital video-on-demand content. Therefore, the future success of our business is dependent in part on content providers, such as traditional media and entertainment companies, providing significant content for video-on-demand. Further, we are dependent in part on other third parties to convert existing analog content into digital content so that it may be delivered via video-on-demand. In addition, we believe that the ultimate success of video-on-demand will depend in part on the timing of the video-on-demand distribution window. The distribution window is the time period during which different mediums, such as home movie rental businesses, receive and have exclusive rights to motion picture releases. Currently, video rental businesses have an advantage of receiving motion picture releases on an exclusive basis. This is before most other forms of non-theatrical movie distribution, such as pay-per-view, premium television, video-on- demand, basic cable and network syndicated television. The length of the exclusive distribution window for movie rental businesses varies, typically ranging from 30 to 90 days for domestic video stores. Thereafter, movies are made sequentially available to various television distribution channels. We believe the success of video-on-demand will depend in part on movies being available for video-on-demand distribution either simultaneously with, or shortly after, they are available for video rental distribution. The order, length and exclusivity of each window for each distribution channel is determined solely by the studio releasing the movie. Given the size of the home video rental industry, the studios have a significant interest in maintaining that market. We cannot assure you that favorable changes, if any, will be made relating to the length and exclusivity of the video rental and television distribution windows. Several major studios have entered into agreements with certain cable operators and content aggregators to provide digital movies for distribution through video-on-demand. However, not all of the major studios have reached agreements regarding the content for video-on-demand. If studios fail to reach agreements regarding content or cancel existing agreements, our customers could delay or cancel video-on-demand system orders, which would adversely affect our video-on-demand business. We cannot assure you that our products and services will keep pace with technological developments and emerging industry standards, address the changing needs of our customers or achieve market acceptance, any of which could materially adversely affect our business. The markets for our products are characterized by rapidly changing technology, evolving industry standards and new product introductions and enhancements. There can be no assurance that we will be successful in enhancing our real-time or video-on-demand products or developing, manufacturing and marketing new products that satisfy customer needs or achieve market acceptance. In addition, services, products or technologies developed by others may render one or more of our products or technologies uncompetitive, unmarketable or obsolete. Future technological advances in the real-time, television and video industries may result in the availability of new products and services that could compete with our solutions or reduce the cost of existing products or services. Our future success will depend on our ability to continue to enhance our existing products, including development of new applications for our technology, and to develop and introduce new products to meet and adapt to changing customer requirements and emerging technologies. Further, announcements of currently planned or other new product offerings by our competitors, may cause customers to defer purchase decisions or to fail to purchase our existing solutions. Our failure to respond to rapidly changing technologies could adversely affect our business, financial condition and results of operations. Recent attempts to establish industry-wide standards for interactive television software include an initiative by cable network operators in the United States to create a uniform platform for interactive television called OpenCable. The OpenCable standard is not yet defined, and we do not know whether our video-on-demand system will be compatible with OpenCable or any other industry standard. The establishment of this standard or other industry standards could hurt our video-on-demand business, particularly if our products require significant redevelopment in order to conform to the newly established standards. -15- We are subject to certain governmental regulations and any finding that we have been, or are in noncompliance with such laws, could result in, among other things, governmental penalties; changes in existing laws or new laws may adversely affect our business Our business may be subject to various international, federal, state, local, health, safety, labor and product regulations. The regulations may be complex, change frequently and may require significant expense in order to comply. The television industry is subject to extensive regulation in the United States and other countries. Our video-on-demand business is dependent upon the continued growth of the digital television industry in the U.S. and internationally. Television operators are subject to extensive government regulation by the Federal Communications Commission and other federal and state regulatory agencies. These regulations could have the effect of limiting capital expenditures by television operators and thus could have a material adverse effect on our business, financial condition and results of operations. The enactment by federal, state or international governments of new laws or regulations could adversely affect our cable operator customers, and thereby materially adversely affect our business, financial condition and results of operations. Further, our products and services may be subject to the rules of industry standards bodies like the International Standards Organization, as well as regulation of other agencies such as the FCC. If we fail to adequately address any of these regulations, our business may be significantly harmed. Risks Relating to Ownership of Our Common Stock The price of our common stock after this offering may be lower than the price you pay Our stock is currently traded on the OTC Bulletin Board on a limited basis. If you purchase shares of our common stock in this offering, you will pay a price established by the current market place. The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay. Our stock price has been volatile in the past and may be volatile in the future In the past, there has been a limited public market for our common stock and there can be no assurance that an active trading market for our stock will develop or be maintained. Because there has been little trading volume in our shares, the price has been quite volatile. Also, we have effected two reverse stock splits since December 2000. The market price of our common stock may fluctuate significantly in the future in response to various factors, some of which are beyond our control, including the following and the other risks discussed under the heading "Risk Factors:" * variations in our quarterly operating results; * the development of the video-on-demand market in general; * changes in market valuations of similar companies * announcement by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; * loss of a major customer or failure to complete significant transactions; * additions or departures of key personnel; and * fluctuations in stock market price and volume. Additionally, in recent years the stock market in general, and the OTC-BB and the market for technology companies in particular, have experienced extreme price and volume fluctuations. In some cases, these fluctuations have been unrelated or disproportionate to the operating performance of these companies. These market and industry factors may materially and adversely affect our stock price, regardless of our operating performance. In the past, class action litigation often has been brought against companies following periods of volatility in the market price of those companies' common stock. If we become involved in this type of litigation in the future, it could result in substantial costs and diversion of management attention and resources, thus harming our business. -16- Purchasers of the shares offered hereby will suffer immediate and substantial dilution in the value of your investment You will incur immediate and substantial dilution in the net tangible book value of common stock based on the current market price of $1.30 per share, and assuming all the equity line of credit is fulfilled. There are no limits on the maximum number of shares that may be issued under the equity line. The lower the stock price at the time shares are issued under the equity line, the more shares investor will receive which will increase dilution. Also, to the extent that the investor under the equity line sells their shares into the market, the price of our shares may decrease due to the additional shares in the market. We do not intend to pay dividends To date, we have never declared or paid any cash dividends on shares of our common stock. We currently intend to retain our future earnings for growth and development of our business and, therefore, we do not anticipate paying any dividends in the foreseeable future. Our executive officers, directors and principal stockholders own a significant percentage of our company and will be able to exercise significant influence over our company, which could have a material and adverse effect on the market price of our common stock After this offering and assuming all of the shares of common stock to which this prospectus relates are issued, our executive officers, directors and other principal stockholders and their affiliates will together control approximately 11% of our outstanding common stock. As a result, these stockholders, if they act together, may be able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will continue to have significant influence over our affairs. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale and might affect the market price of our common stock. The market price of our common stock may drop significantly when the restrictions on resale by our existing securityholders lapse Following this offering, we will have approximately 27,248,011 shares of common stock outstanding, premised on the maximum number of shares being offered under the equity line. Approximately 4,897,157 shares, or 18%, of our outstanding common stock will be subject to restrictions on resale under United States securities laws. As these restrictions on resale end, the market price of our common stock could drop significantly if holders of these shares sell them or are perceived by the market as intending to sell them. These sales also may make it difficult for us to sell equity securities in the future at a time and price that we deem appropriate. Possible "Penny Stock" Regulation Trading of our common stock on the OTC Bulletin Board may be subject to certain provisions of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), commonly referred to as the "penny stock" rule. A penny stock is generally defined to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. If our stock is deemed to be a penny stock, trading in our stock will be subject to additional sales practice requirements on broker-dealers. These may require a broker dealer to: o make a special suitability determination for purchasers of penny stocks; o receive the purchaser's written consent to the transaction prior to the purchase; and o deliver to a prospective purchaser of a penny stock, prior to the first transaction, a risk disclosure document relating to the penny stock market. Consequently, penny stock rules may restrict the ability of broker-dealers to trade and/or maintain a market in our common stock. Also, prospective investors may not want to get involved with the additional administrative requirements, which may have a material adverse effect on the trading of our shares. -17- CAUTIONARY STATEMENT REGARDING FORWARD LOOKING-STATEMENTS This prospectus, including the sections entitled "Summary," "Risk Factors," "Management's Discussion and Analysis or Plan of Operations" and "Business," contains forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks and uncertainties. These factors may cause our company's or our industry's actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These risks and other factors include those listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as "may," "will" "should," "expects," "intends," "plans," anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. These statements are only predictions. Although we believe that the expectations reflected in the forward- looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. USE OF PROCEEDS We will not receive any proceeds from the sale of our shares by the selling stockholders, although we will receive proceeds from the shares issued pursuant to the equity line. We cannot predict the total amount of proceeds to be raised in this transaction because we cannot determine the total amount of advances we intend to draw. If we use the entire line of credit, we will realize net proceeds of approximately $18.95 million, after deducting the 5% discount to Cornell Capital and estimated offering expenses of approximately $50,000 payable by us. We expect to use substantially all of the net proceeds for general corporate purposes, including working capital, research and development, and sales and marketing activities. The amounts we actually expend for such working capital and other purposes may vary significantly and will depend on a number of factors including, but not limited to, the actual net proceeds received, the amount of future revenues and other factors described under "Risk Factors." Accordingly, our management will retain broad discretion in the allocation of the net proceeds of this offering. We intend to use a portion of the net proceeds to repay certain debts and obligations, such as any and all short term loans together with any interest due thereon of approximately $1,700,000. Of this amount, $1,500,000 is secured with a UCC-1 Financing Statement of the corporation's technology. Pending such uses, the net proceeds will be invested in short-term, interest-bearing, investment grade securities or guaranteed obligations of the U.S. government. For illustrative purposes, we have set forth below a probable use of proceeds for the range of net proceeds indicated below to be received under the equity line of credit. The table assumes estimated offering expenses of $50,000 and fees of 5.0% of the gross proceeds raised under the equity line have been deducted from the gross proceeds.
Gross proceeds................... $3,000,000 $5,000,000 $10,000,000 $15,000,000 $20,000,000 Net proceeds .................... 2,800,000 4,700,000 9,450,000 14,200,000 18,950,000 ---------- ---------- ----------- ----------- ----------- Use of proceeds: Inventory and installation....... 25,000 1,300,000 3,900,000 5,400,000 7,100,000 Research and development......... 175,000 1,800,000 2,800,000 4,300,000 5,700,000 Repayment of debt................ 1,700,000 - - - - Operations / overhead............ 850,000 1,550,000 2,700,000 4,450,000 6,100,000 General working capital.......... 50,000 50,000 50,000 50,000 50,000
-18- DILUTION As of April 30, 2002, our net tangible book value was ($1,410,586), or ($0.28) per share of common stock. Net tangible book value per share is determined by dividing our tangible book value (total tangible assets less total liabilities) by the number of outstanding shares of our common stock. Because this offering is being made solely by selling stockholders and none of the proceeds will be paid to us, our net tangible book value will be unaffected by this offering. Net tangible book value, however, will be impacted by the common stock to be issued under the equity line of credit. The amount of dilution will depend on the offering price and the number of shares to be issued under the equity line. The following example shows the dilution to new investors at an offering price of $1.00 per share. For illustration purposes, we will assume that at April 30, 2002 we had issued 20 million shares of common stock under the equity line of credit at an assumed sale price of $1.00 per share, less commitment fees of $1.0 million and $50,000 of other offering expenses. At a price of $1.00 per share, we would receive net revenues of approximately $18,950,000. Accordingly, our net tangible book value at April 30, 2002 would have been $17,539,414 or $0.70 per share. Such an offering would represent an immediate increase in net tangible book value to our existing shareholders of $0.98 per share and an immediate dilution to new stockholders of $0.30 per share, or30%. The following table illustrates the per share dilution: Assumed sale price per share $ 1.00 Net tangible book value per share before the sale (0.28) Increase attributable to new investor 0.98 Net tangible book value per share after this offering 0.70 Dilution per share to new investor 0.30 - ---------------------- The offering price of our common stock to new investors by this prospectus is based on the then-existing market price. To give prospective investors an idea of the potential dilution per share they may experience, we have prepared the following table showing the dilution per share at various assumed offering prices to new investors: Assumed No. of Shares to Be Dilution per Share to Offering Price Issued(1) New Investors -------------- --------- ------------- $ 1.00 21,052,631 $ 0.30 - (30%) 1.25 16,842,105 0.47 - (38%) 1.50 14,035,087 0.61 - (41%) 2.00 10,526,315 0.92 - (46%) 2.50 8,421,053 1.26 - (50%) 3.00 7,017,544 1.63 - (54%) - ---------------------- (1) Based on the number of shares issued at 95% of the current market price at the time of sale for the maximum $20 million under the equity line. -19- PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Our common stock trades in the over-the-counter market and quotations are published on the OTC Bulletin Board under the symbol "VCTY." The table below sets forth the high and low bid prices of our common stock for each quarterly period indicated since July 2000 as reported by the OTC-BB. There was no established market prior to the third quarter of 2000. Prior to March 2002 our shares traded under the symbol "VIDC" and, prior to December 2000, our stock's symbol was "PVTC." All quotations have been adjusted to give effect to the .61 for 1 reverse stock split effected by us on December 4, 2000, and the 1 share for 10 shares reverse split effected March 1, 2002. On July 2, 2002, the last reported sales price of our common stock on the OTC-BB was $1.30 per share. High Bid Low Bid -------- ------- 2000 Third Quarter $ 9.21 $ 9.21 Fourth Quarter 50.00 32.50 2001 First Quarter $ 53.75 $ 30.00 Second Quarter 51.00 22.50 Third Quarter 20.50 10.50 Fourth Quarter 10.10 1.10 2002 First Quarter $ 1.50 $ 0.90 Second Quarter(1) 1.75 1.05 ---------------------- (1) Through July 2, 2002. The foregoing quotations represent inter-dealer prices without retail mark-up, mark-down, or commission, and may not represent actual transactions. Despite the publication of quotations during the above periods, there was light trading volume in our shares and the quotations may not be indicative of an established trading market. We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. At June 28, 2002, there were approximately 308 holders of record of our common stock, including broker- dealers and clearing firms holding shares on behalf of their clients, as reported by our transfer agent. Equity Compensation Plan Information The following table sets forth the number of securities that we may issue pursuant to our equity compensation plans and the remaining number of shares available under the plan. Presently, there are no options outstanding under the plans.
Number of securities remaining available for Number of Securities to be Weighted-average exercise future issuance under Issued upon exercise of exercise price of equity compensation plans outstanding option, outstanding options, (excluding securities warrants and rights warrants and rights reflected in column (a) Plan category (a) (b) (c) Equity compensation -0- -0- 749,872(1) plans approved by security holders - ----------------------
(1) The number of shares available for future issuance does not include 250,075 share that have been reserved for plan units that have been issued, but not yet vested under the 2000 Stock Incentive Plan, and 50,000 shares that have been authorized for issuance under the 2002 Stock Award Plan, but have not been certificated. -20- CAPITALIZATION The following table sets forth our capitalization as of April 30, 2002 on an actual basis. You should read this table together with the consolidated financial statements and accompanying notes that we include later in this prospectus.
April 30, 2002 (Unaudited) -------------- Cash....................................................................... $ 22,609 ============== Long-term debt............................................................. 0 Stockholders' equity (deficit) Common stock: 50,000,000 shares authorized of $0.001 par value, 5,072,410_shares issued and outstanding............................... 5,072 Capital in excess of par value............................................. 2,316,431 Deficit accumulated during development state............................... (3,737,093) -------------- Total stockholders' equity (deficiency) .............................. $ (318,183) Total capitalization.................................................. $ (318,183) ==============
EQUITY LINE OF CREDIT On May 28, 2002, we entered into an equity line of credit agreement with Cornell Capital, a private limited partnership. Pursuant to the agreement, Cornell Capital will provide to us private equity financing up to a maximum $20 million over a period of up to 24 months from the effective date of the registration statement to which this prospectus relates. By the terms of the equity line, we may, from time to time, in our sole discretion, sell shares of our common stock to Cornell Capital at a price per share equal to 95% of the average market price established during the pricing period related to a particular sale. Each periodic sale is referred to as an advance. The pricing period is defined as the five consecutive trading days after we give Cornell Capital notice of an advance. A closing will take place seven trading days after our notice of an advance. At the closing, we will deliver shares of our common stock and Cornell Capital will pay the advance amount. Cornell Capital will retain 5% of each advance under the terms of the equity line. The equity line permits us to draw, at our option, up to $250,000 a maximum of four times per month. The total amount of shares issuable under the equity line is determined by the price of the actual sales. There is no minimum price at which shares can be sold under the equity line of credit. Accordingly, if the price of our stock declines, we will be obligated to issue more shares. In connection with the equity the line of credit agreement, we issued to Cornell Capital 290,000 shares of our common stock as a commitment fee upon execution of the agreement. We also issued to Westrock Advisors 10,000 shares of common stock to act as our exclusive placement agent pursuant to the placement agent agreement. The equity line of credit agreement provides that Cornell Capital will purchase up to $20 million of our shares and that we must register with the SEC the resale of the common stock issuable under the equity line. We are also required to register the additional 300,000 shares issued to Cornell Capital and Westrock Advisors. Registration enables Cornell Capital and Westrock Advisors to resell their common stock from time to time in the market or in privately-negotiated transactions. We will prepare and file amendments and supplements to the registration statement as may be necessary in order to keep the registration statement effective as long as the selling stockholders hold shares of our stock or until such shares can be sold pursuant to an appropriate exemption from registration. We have agreed to bear certain expenses (other than broker discounts and commissions, if any), including certain legal fees for Cornell Capital not to exceed $10,000 plus $500 for escrow fees per closing of each advance under the equity line. We anticipate that we will draw against the equity line up the applicable maximum amount as we deem prudent and necessary based upon our corporate needs. Our ability to put shares of our common stock to Cornell Capital is subject to certain conditions and limitations, including, but not limited to the following: -21- o the registrations statement, of which this prospectus is a part, must have previously become effective and shall remain effective on the date of each put; o our representations and warranties to Cornell Capital set forth in the equity line of credit agreement must be true and correct in all material respects as of the date of each put; o no statute, rule, regulation, executive order, decree, ruling or injunction shall be in effect that prohibits, nor any action, suit or proceeding shall be in progress, pending or threatened that seeks to enjoin or prohibit, the transactions contemplated under the equity line of credit agreement, or otherwise has a material adverse effect on our business, operations, properties or financial condition; o at the time of a notice to draw against the equity line, there shall have been no material adverse change in our business, operations, properties, prospects or financial condition, except as disclosed in our reports filed with the SEC pursuant to the Exchange Act; and o our common stock shall not have been delisted from its principal market (currently the OTC-BB) nor suspended from trading. We intend to use our best efforts to satisfy the conditions required under the equity line of credit agreement with Cornell Capital and believe we will be able to sell shares to Cornell Capital thereunder. We cannot predict the actual number of shares of our common stock that will be issued pursuant to the equity line, in part, because we cannot estimate the total number of advances we intend to make and the purchase price of the shares will fluctuate based on prevailing market conditions. Assuming we draw down the entire $20 million available under the equity line in a single advance, which is not permitted, and the purchase price was equal to $1.00 per share, then we would issue 20 million shares of common stock to Cornell Capital. These shares would represent approximately 73% of our then outstanding common stock upon issuance. If the price of our common stock declines, we would be required to issue a greater number of shares under the equity line. Cornell Capital (or any other underwriter) has the right to review this prospectus, the registration statement, and our records and properties to obtain information about us and the accuracy of this registration statement and prospectus. Cornell Capital has the opportunity to comment on the registration statement and prospectus, but is not entitled to reject a notice to draw against the equity line based on its review. Cornell Capital may be entitled to indemnification by us for any lawsuits based on the interpretation of the language in this prospectus with which it does not agree. PLAN OF DISTRIBUTION Pursuant to our equity line of credit agreement with Cornell Capital and subject to certain conditions contained therein, we may from time to time, in our sole discretion, sell or "put" shares of our common stock to Cornell Capital. Thereafter, Cornell Capital may resell these shares pursuant to this prospectus. Other than the equity line of credit agreement, we do not have any material relationship with Cornell Capital. We will not receive any of the proceeds from the sale of our common stock by the selling stockholders. However, we will receive funds upon the sale and issuance of shares under the equity line of credit agreement. We will bear all costs relating to the registration of the common stock offered by this prospectus, including printing, accounting, legal and filing fees. Such costs are estimated by us to be approximately $50,000. This prospectus relates to the offer and sale by selling stockholders of our common stock. We are not aware of how or when selling stockholders will choose to make such sales. Selling stockholders will be able to sell their shares, from time to time, in any of several ways including, without limitation; * one or more market transactions at the prevailing market prices and terms; * in negotiated transactions; * block sales; or * individual sales. Sales by selling stockholders will be without the payment of any underwriting discounts or commissions, except for usual and customary selling commissions paid to brokers or dealers. Selling stockholders also may sell their shares, from time to time, as permissible under Rule 144 promulgated under the Securities Act, if applicable. -22- Under the securities laws of certain states, the selling stockholders may sell their shares in such states only through registered or licensed brokers or dealers. In addition, in certain states the shares of common stock may not be sold unless the shares have first been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. Each selling stockholder has represented to us that it currently has no plans, proposals, arrangements or understandings with any potential sales agent with respect to participating in the distribution of our common stock. Each selling stockholder has further represented that no securities selected dealer agreement or similar agreement is intended to be used with respect to the offering and sale of our common stock. Selling stockholders may sell their shares in an ordinary brokerage transaction, without any placement or other agent, and for normal and customary brokerage fees and/or commissions. The selling stockholders are deemed to be underwriters with respect to the shares sold by them. Also, broker-dealers, agents or other persons acting in connection with such sales may also be deemed to be underwriters. Any commission received by them or discounts or concessions allowed to such persons, and any profits received on the resale of the shares may be deemed to be underwriting discounts and commissions under the Securities Act. Cornell Capital will pay to us 95% of the lowest closing bid price on our shares reported by the OTC-BB, or other principal trading market on which our shares may be traded, for the 5 days immediately following the notice date. The 5% discount on the purchase price is deemed to be an underwriting discount for Cornell Capital. Cornell Capital will also retain 5% of the gross proceeds raised under the equity line. In connection with the equity line, we have issued 290,000 shares of our common stock to Cornell Capital as a commitment fee, and 10,000 shares to Westrock Advisors as a placement agent fee. We have advised the selling stockholders that during the time each is engaged in distribution of the securities covered by this prospectus, each must comply with Rule 10b-5 and the anti-manipulation provisions of Regulation M under the Exchange Act. Accordingly, each selling stockholder: * must not engage in any stabilization activity in connection with our securities; * must furnish each broker through which securities covered by this prospectus may be offered the number of copies of this prospectus which are required by each broker; and * must not bid for or purchase any of our common stock or attempt to induce any person to purchase any of our common stock other than as permitted under the Exchange Act. Any Selling Stockholders who may be "affiliated purchasers" of us as defined in Regulation M, have been further advised that pursuant to Securities Exchange Act Release 34-38067 (December 20, 1996), they must coordinate their sales under this prospectus with each other and with us for purposes of Regulation M. None of the selling stockholders has been an officer, director or otherwise an affiliate of our company during the last three years. SELLING STOCKHOLDERS We entered into the equity line of credit with Cornell Capital to provide financing for a period of up to 24 months from the effective date of the registration statement. As Cornell Capital provides funds under the equity line, it receives shares of our common stock. As a provision of the equity line and placement agent agreement, we issued and additional 290,000 shares and 10,000 shares to Cornell Capital and Westrock Advisors, respectively. As a condition of the equity line of credit agreement, we agreed to file a registration statement with the SEC for the purpose of registering the shares of common stock issued under the equity line and placement agent agreements. This prospectus relates to the offer of common stock by the selling stockholders into the public market. All expenses associated with the sale of shares of common stock by the selling stockholders will be paid by the selling stockholders. Following effectiveness of our registration statement, the selling stockholders' shares, upon issuance, will be free of restrictions, other than restrictions under the Securities Act with respect to persons who may be deemed to be our affiliates. The selling stockholders may sell their respective shares of common stock: (1) directly through broker-dealers acting as agents for them; or (2) to broker-dealers who may purchase shares as principal and thereafter sell the shares from time to time in negotiated transactions or otherwise. Such -23- broker-dealer, if any, may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or the purchasers for whom such broker-dealers may act as agents or to whom they may sell as principals or both. Compensation as to a particular broker-dealer may be in excess of customary commissions. None of the selling stockholders have held a position or executive office, or had any other material relationship with us, except as follows: o Cornell Capital is the investor under the equity line of credit. All investment decisions for Cornell Capital are made by its general partner, Yorkville Advisors, LLC. Mark Angelo, the managing member of Yorkville Advisors, makes the investment decisions on behalf of Yorkville Advisors. o Westrock is the placement agent to us in connection with the equity line of credit. The following table sets forth as of the date hereof, certain information regarding the beneficial ownership of our common stock, or the maximum number of shares to be received upon fulfillment of the equity line of credit, by each selling stockholder. Except as otherwise noted, the persons shown in the table have sole voting and investment power with respect to the shares. These selling stockholders are presented together in this table for convenience of presentation only.
Number Beneficial Ownership Prior to Offering Of Shares Name Number of Shares Percent of Class(1)(2) To Be Sold - -------------- -------------- -------------- -------------- Cornell Capital Partners, L.P............... 21,490,000(3) 78.9% 2,490,000 Westrock Advisors, Inc...................... 10,000 0%(4) 10,000 -------------- -------------- -------------- Totals............................ 21,500,000 78.9% 21,500,000 ============== ============== ==============
(1) Total outstanding shares includes 5,748,011 shares issued and outstanding as of June 28, 2002 plus the maximum number of shares being offered by Cornell Capital and Westrock Advisors. (2) Computation of percentages assumes maximum number of shares issued under the equity line of credit. However, percentage does not take into account: (i) additional shares that may be issued upon the exercise of various options presently outstanding and exercisable; or (ii) additional shares of common stock that may be issued upon conversion of certain other convertible securities, either presently outstanding or that may be issued in the future. See "Description of Securities", and "Risk Factors." (3) Based on 290,000 shares previously issued to Cornell Capital and the issuance of approximately 21,200,000 additional shares pursuant to the equity line. Shares are issued under the equity line at 95% of the market price of our common stock. (4) Less than .01%. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion regarding our financial condition should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this prospectus. Overview We are a solution engineering and marketing company involved in the deployment of the DES and other advanced digital information and entertainment solutions. DES delivers video-on-demand in near DVD quality, including movies and other videos, medical information and educational material to individuals, residents, hotel guests, and patients and attendants in the healthcare industry. During fiscal 2001 and the first six months of fiscal 2002 ended April 30, 2002, we were a research and development company and received no revenues from operations. During this period we did realize minimal interest income. -24- Plan of Operation We operate our business through five subsidiaries which perform various functions, strategic to their market place or core competency. A sixth subsidiary is inactive. To date, our activities have been limited to developing the DES and other technologies. We are presently commencing the initial marketing of DES into various marketplaces. We intend to use our existing capital, together with proceeds from prospective future financings, to continue deployment and sales of DES, which includes high-speed Internet access. Management estimates that minimum expenses during the next twelve months will be approximately $1.8 million, consisting of $1.4 million in payroll, $70,000 for office rent, and $261,000 for general and administrative expenses including legal and accounting fees. Research and development expenses are estimated to be approximately $69,000 during the next twelve months. These expenses will be directed at further development of the DES and integration in television sets and other monitors. We will also incur substantial additional costs in connection with the manufacture and deployment of DES. Management further estimates that such costs will be a minimum of $10 million, but we are optimistic that we will be able to cover most of those costs, either from future financing, or based on contracts entered into and financed on an individual basis for the deployment of each individual system. We have entered into a strategic relationship with Tech Flex Funding, Inc., wherein funding is available for all future installations on a lease back program without recourse to Videolocity. We anticipate generating future revenues from the delivery of video and other content to the end users of our DES, together with high-speed Internet access. Management believes revenues from contracts will commence by September 30, 2002 from contracts now in process. We will charge a fee for each movie or other item of content viewed through our system and/or high-speed Internet access and we will remit a portion of each fee to the studio or other content provider. We also plan to sell or lease our set-top boxes for use with the DES to viewers at a price calculated to return it's out of pocket costs and a small profit over a period of three to five years. During the next twelve months, we plan to seek additional debt funding in the form of credit lines for up to approximately $50 million. This would permit us to cover our minimum expenses described above and accelerate deployment of our DES. We have entered into a $20 million equity line of credit agreement with Cornell Capital, which we anticipate will provide us with adequate working capital for at least the next 24 months. Without drawing against the equity line and based on current costs of operation, contract commitments, and availability of credit, management estimates that our current assets will be sufficient to fund our cost of operation for approximately the next three months and that we must obtain additional financing during that time in order to continue operations. During the six month period ended April 30, 2002, we have received an aggregate of $716,000 in loans from various individuals, including $173,000 from related parties. These loans are evidenced by 8% notes and the funds are being used for general operational expenses. In April 2002 we filed a UCC-1 financing statement, with the State of Nevada, covering the six Provisional Patent applications held in the name of Videolocity Technologies, Inc., a wholly owned subsidiary. The financing statement extends, without penalty, certain promissory notes totaling $1,050,000 to September 1, 2002, which amount and filing also includes a note payable of $300,000 due to WAJ Enterprises LLC, which releases a prior collateral security assignment of our Merit Studios, Inc. note receivable, and a provision for the inclusion of additional future loans of $450,000 under the security agreement. Of this amount, $270,000 in new loans have been received in June 2002. On July 30, 2001, the board unanimously authorized the offering of up to $750,000 in 60-day secured notes bearing interest at 8% per annum. An aggregate of $750,000 of the secured notes had been placed by August 1, 2001, and have been extended until September 1, 2002 under the UCC-1 financing statement. A total of $450,000 of the notes are with affiliated parties. On April 30, 2001, the board of directors unanimously authorized the sale at the price of $1.00 per share of up to 1 million shares of the Common Stock of Healthcare Concierge, Inc., formerly Videolocity Direct, Inc., and which shares are issued and outstanding as an asset of Videolocity International, Inc. Upon our acquisition of 5th Digit Technologies, LLC. in December 2000, we issued 950,000 shares of Series A Preferred Stock, which shares were 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. On January 2, 2002, we filed a lawsuit alleging fraud and misrepresentation. Three of the individuals originally comprising 5th Digit ownership, settled with us in an exchange (sale and purchase) of one share of their Series "A" Preferred shares for three shares Videolocity common stock. Subsequently, the Court canceled the remaining 350,000 Series "A" shares, leaving no shares outstanding. -25- On July 30, 2001, the Board of Directors unanimously authorized the offering of up to $750,000 in 60-Day Secured Notes bearing interest at 8% per annum. An aggregate of $750,000 of the secured Notes had been placed by August 1, 2001 and have been extended until September 1, 2002. A total of $450,000 of the notes are with affiliated parties. To date, we have not realized material revenues from our operations. For the six months ended April 30, 2002, we had no revenues and only nominal revenues of $6,218, in the form of interest, for the comparable 2001 period. For the six months ended April 30, 2002, total expenses increased 68% from the comparable 2001 period. This is attributed primarily to the 47% increase in administrative expenses in 2002 which reflects our increased activities related to readying the DES for installation. Administrative expenses include ongoing research and development of our technology. Also, we had interest expense of $192,799 for the six month ended April 30, 2002 compared to $0 for the same 2001 period, reflecting our financing activities in 2002. Management anticipates that as we scale up the installation of the DES, our expenses will increase proportionately. Liquidity and Capital Resources During the first half of fiscal 2002 our total current assets decreased from $350,411 at October 31, 2001 to $222,609 at April 30, 2002. This decrease is attributed primarily to the $150,000 reduction in notes receivable due to the decrease in the liquidation value of the security collateralizing the note. During this same period, cash increased from $411 to $22,609. Total assets decreased from $428,155 at October 31, 2001 to $318,183 at April 30, 2002, primarily due to the reduction in notes receivable. Total current liabilities increased from $907,072 on October 31, 2001 to $1,728,769 at April 30, 2002. The change is attributed to the increase from $750,000 in notes payable to $1,441,800 during the six month period, due to additional borrowing. Accounts payable also increased during the six month period from $143,123 to $223,114 due to insufficient operating capital. Inflation In the opinion of management, inflation has not and will not have a material effect on the operations in the immediate future. Net Operating Loss At April 30, 2002, Videolocity and its subsidiaries had accumulated a net operating loss carryforward of approximately $3,737,093, with a tax benefit of approximately $1,121,128. No tax benefit has been recorded in the financial statements because the tax benefit has been fully offset by a valuation reserve as the use of the future tax benefit is in doubt. The net operating loss will expire in 2023. In the event of certain changes in control, there will be an annual limitation on the amount of net operating loss carryforwards which can be used. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities. The new standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Accounting for changes in the values of those derivatives depends on the intended use of the derivatives and whether they qualify for hedge accounting. SFAS 133, as amended by SFAS 137 and SFAS 138, was adopted as of April 1, 2001. We believe the adoption of this statement will have no material impact on our financial statements. In June 2001, the FASB issued SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocatable to an assembled workforce may not be accounted for separately. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with estimatable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. -26- We adopted SFAS 141 upon issuance and SFAS 142 effective April 1, 2001. The adoption of SFAS 141 and 142 did not affect our consolidated financial statements. On August 16, 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations," which is effective for fiscal years beginning after June 15, 2002. It requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing an accrued retirement obligation, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. Although we have not completed the process of determining the effect of this new accounting pronouncement, we currently expect that the effect of SFAS No. 143 on our consolidated financial statements, when it becomes effective, will not be significant. In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Although SFAS 144 supersedes SFAS 121, it retains many of the fundamental provisions of SFAS 121. SFAS 144 also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting- the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in APB 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of, by sale, abandonment, or in a distribution to owners, or is classified as held for sale. SFAS 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. We believe the adoption of SFAS 144 will not have a significant effect on our consolidated financial statements. BUSINESS Overview We are a development stage company engaged in solution engineering, marketing and deployment of our proprietary Videolocity "Digital Entertainment SystemTM," or DES, that we completed in 2001, as well as other advanced digital information and entertainment solutions. Our DES delivers to the end user true video-on-demand in near DVD quality over Ethernet, DSL, or Wireless WAN and LAN network architectures, combined with Wireless High Speed Internet Access. DES is designed to deliver specific digital content, including video, medical information and educational material to individuals, residents, hotel guests, and patients and attendants in the healthcare industry. DES offers streaming video-on-demand technologies that permit viewers to select from an extensive library of movie titles or medical/educational content. Users can view their selections on their television screens, lap top computers or PDA's on-demand, in quality equivalent to DVD, in real-time, full-screen and full-motion. All content is protected through our proprietary encryption and encoding process to limit viewing to the person or persons paying for the movie or other content. Our security protocol also prevents unauthorized digital reproduction or rebroadcast of the ordered movies and/or other content. Additionally, our system provides digital music-on-demand, Internet games, high-speed Internet access and many other e-commerce applications. We have five subsidiaries which perform various functions of our business. One of our subsidiaries, Videolocity Technologies, Inc., holds six Provisional Patent Applications encompassing and protecting our proprietary technology. To date we have concentrated on the acquisition and development of our technology and are now positioned to begin initial marketing of DES and related technology and products. Our subsidiaries and a summary of their primary functions are set forth below: Videolocity, Inc. (Operations, management and marketing) A wholly owned subsidiary that we created to provide operational, marketing and management support for the other subsidiaries. -27- Videolocity Technologies, Inc. (Licensing: internal and external) A wholly owned subsidiary that we created to research and develop solutions for the delivery of digital entertainment and information. Videolocity Technologies, Inc. holds our Provisional Patents on file with the U.S. Patent & Trademark Office. Hospitality Concierge, Inc. (Hospitality: hotel, timeshare and resort) A wholly owned subsidiary that we created to develop and market systems, products, and solutions for the delivery of video and other digital content, to include high-speed Internet, to end users on demand. This subsidiary is focused entirely on the hospitality industry. Healthcare Concierge, Inc. (Healthcare: assisted living) A 94% owned subsidiary that we created to develop and market technology solutions for the healthcare industry for the delivery of specific digital content, including video, medical information and educational information, to patients, families and attendants. Videolocity Direct, Inc. (Residential: intelligent communities) A wholly owned subsidiary that we created to develop and distribute competitive last mile digital entertainment solutions to the residential community. Industry Background Management believes that the market for our products represent a combination of several large existing and rapidly expanding target areas. The current market wave of broadband delivery into hotels, resorts, retirement homes, universities, hospitals, extended stay facilities and residential communities enables us to deliver content to many diverse market segments. We believe the combined market place represents more than $50 billion a year. Management further believes that there is a $15 billion per year existing market in video rentals that can be served through alliances with existing video distribution channels. There is also a strong potential for strategic alliances and partnerships with network and content providers such as Telecommunications Companies, Cable Companies, and Internet/Broadband based content providers. With such a large and dynamic market, we do not require significant market penetration in any specific market segment in order to become a successful enterprise. Because of the incremental scalability of the Videolocity business model, relatively small percentages in any number of the potential market categories may result in a profitable scenario. These multiple markets also help mitigate risk from competition or technological changes that could potentially affect any single market segment. [GRAPHIC OMITTED] North American Video-on-Demand Service Revenues After years of trials and tentative service introductions, the past year has seen interactive services become a common sight on most pay-TV /networks. Cable TV operators, terrestrial broadcasters, and satellite TV providers have all been active in testing different interactive applications in the quest to increase average subscriber revenues," says Mike Paxton, a Senior Analyst with In-Stat/MDR. "The expanded capabilities that two-way, digital transmission networks offer to both subscribers and service providers have resulted in greater penetration of interactive applications like Electronic Programming Guides and Video-on-Demand. -28- In-Stat/MDR also found that: * Of all the different iTV applications, "on-demand" applications, like video-on-demand and personal video recording, have sparked the most industry interest due to their great potential for adoption by today's TV viewers. The number of television households using on-demand services worldwide will jump from 1.3 million in 2001 to over 33 million in 2005. * North American Video-on-Demand service revenues are forecasted to grow from $86 million in 2001 to over $1.75 billion in 2005. * In a recent survey of consumers, 75% of the respondents were familiar with several different iTV applications, but had rarely or never used them. Strategic Partnerships ONSAT Network Communications, Inc. Videolocity has entered into a strategic relationship with ONSAT Network Communications, Inc. The relationship is designed to enhance the Videolocity product family with a satellite bandwidth backbone and with earthbound 802.11 wireless network infra structure. The complimenting technologies enable the deployment of the DES virtually anywhere in North and South America, which system has already been deployed in the Park City, Utah area with approximately 40mbps in available bandwidth. TechFlex Funding, Inc. Videolocity Inc., our wholly owned subsidiary, has executed a non-exclusive contract with Tech Flex Funding Inc., of Mission Viejo, Calif., for financing the DES Videolocity or its customers can now take advantage of the comprehensive and competitive leasing package to finance the total installation and equipment cost of Videolocity's proprietary DES. The Tech Flex financing package is underwritten by American Express Equipment FinanceTM and includes maintenance and service calls as well as future technology upgrades. All Videolocity products have been fully approved to be included in the financing package. Foundry Networks, Inc. Foundry Networks, Inc. (NASDAQ: FDRY) is a leading next-generation networking company providing end-to-end Global Ethernet and intelligent traffic-management solutions. Foundry's products include Internet routers, Layer 2/3 LAN switches, and Layer 4-7 web switches with integrated Internet traffic and content management. Foundry has more than 3,300 customers worldwide, including leading enterprises, Internet-based businesses, metro area and Internet service providers and other institutions. We have selected the Foundry Layer 3 Fast Iron switch as a core switch for its network infrastructure. VenturCom VenturCom's strategic services offer complete expertise and support in the development, deployment and maintenance of next generation systems on all Win32 platforms including Windows NT Embedded, Windows 2000, and Windows CE. In addition, VenturCom Strategic Services provides expert consulting, training and support services. Videolocity has entered into an agreement with the company to purchase and implement their BootNIC and embedded Windows products for "DES". Viator Networks, Inc. Viator Networks, Inc. is an Internet infrastructure company that manufactures hardware and software solutions for the hospitality, commercial offices, multiple-dwelling and multiple-tenant units, and residential markets. We have partnered with Viator Networks to integrate and enhance their billing/reporting server. It is now being deployed as an integrated as part of our back end solution. Major Events 5th Digit Technologies, LLC. Acquisition On December 21, 2000 we acquired 5th Digit Technologies, LLC in exchange for 950,000 shares of Series "A" Preferred stock, with a one year put of $5.00 per share. -29- At the time of the acquisition, it was represented in the contract that we were acquiring three Provisional Patent Applications representing exclusive proprietary technologies which were ready to deploy. However, we subsequently learned that 5th Digit did not own the Provisional Patent Applications and that the exclusive proprietary technologies where not ready to deploy, as had been represented. As a result of the transaction, we filed a lawsuit in January 2002 alleging fraud and misrepresentation. Three of the holders of the Preferred shares settled with us by exchanging their 600,000 Preferred shares for 180,000 shares of our common stock. The remaining 350,000 Preferred shares were tendered for liquidation at $5.00 per share and were subsequently deposited with the Court pending the outcome of the legal action. In April 2000, the Court issued a default judgment ordering cancellation of the 350,000 shares and ruling that any and all redemption or other rights vested in and related to the shares be voided. The 350,000 shares were canceled on April 12, 2002, leaving no Series "A" Preferred shares outstanding. Merit Studios, Inc. License Agreements On October 27, 2000 Videolocity, Inc. acquired an exclusive license from Merit Studios, Inc., who represented their Wormhole technology to be a video packing (compression) technology. On March 6, 2001 the license acquired from Merit was transferred, by mutual agreement, to our newly created subsidiary, Videolocity Direct, Inc. (now known as Healthcare Concierge, Inc.), wherein Merit Studios was issued 2.5 million shares of Videolocity Direct and we retained 5.0 million shares. The license agreement guaranteed a completed Wormhole video technology on or before April 30, 2001. On May 29, 2001 Videolocity Direct acquired a second Wormhole license from Merit for the packing (compression) of all data. We paid Merit and/or expended a total of $600,000 hoping to commercialize the promised technology. The promised deployable Wormhole technology was never demonstrated or received by Videolocity Direct. After many months of delay and the inability to prove the compression capability and/or marketability of the Wormhole technology, as represented to us by Merit, Merit agreed to repurchase the two Wormhole licenses. Merit agreed to pay $600,000 on or before March 1, 2002 and immediately return for cancellation the 2.5 million shares of Videolocity Direct stock it held. Upon full payment and receipt of the $600,000 by us, we agreed to return 1.0 million shares of Merit common stock we had acquired coincidental with the execution of the initial October 27, 2000 license agreement, together with any and all rights under the two Wormhole license agreements, and as amended. We have no assurance that Merit will be able to fulfill the cash obligation of $600,000 under its license repurchase agreement. However, because of the original and continued representations by Merit to us as to the accuracy concerning the Wormhole capabilities and the deployment dates of the Wormhole technology, we will aggressively pursue the collection of the total amount due under the contract. The $600,000 due from Merit will repay us the sums expended by us on behalf of Merit and the Wormhole technology. Healthcare Concierge, Inc. In November 2001 we decided to change the corporate name of our 90% + owned subsidiary, Videolocity Direct, Inc., to Healthcare Concierge, Inc. We have transferred the healthcare technology and solutions and our healthcare business division to Healthcare Concierge. Healthcare Concierge develops total solutions for the delivery of specific digital content (video, medical information, educational material) to patients and attendants in the healthcare Industry. Healthcare Concierge offers streaming video-on-demand technologies that permit viewers to select from an extensive library of titles and or medical/educational content, and view them on their television screens. "on-demand." The system is designed to play video in like-DVD quality, in real-time, full-screen and in full-motion. All content is protected through proprietary encryption and encoding process to limit viewing to the patients and or persons receiving the video and to prevent unauthorized reproduction or rebroadcast of all content ordered. The video content is being streamed through a proprietary, multi-functional Digital Healthcare & Entertainment System. Additionally, the system provides digital music-on-demand, Internet games, high-speed Internet access and other e-commerce applications together with certain specialized bedside patient care functionality. It is our present intention, most likely during the second half of 2002, to file a registration statement for Healthcare Concierge for the purpose of raising equity for the implementation of its healthcare technology and solutions in the healthcare marketplace. Completion and filing of the registration statement and proposed IPO is subject to market conditions and there can be no assurance that such an offering will be successful. -30- 60 Day Secured Notes On July 30, 2001 our Board of Directors authorized the borrowing of $750,000 in 60 day secured notes bearing 8% simple interest. The notes are secured by an assignment and collateral pledge of 100% of the outstanding stock of our subsidiary, Videolocity Technologies, Inc. (5 million shares), which holds our five (5) Provisional Patent Applications. We owed certain of our affiliates approximately $320,000 which was due as of July 29, 2001. The affiliates loaned us an additional $30,000 and agreed to convert their total outstanding loans of $350,000 to the 60 day notes. One additional affiliate loaned us $100,000 and three independent, unaffiliated individuals each loaned an additional $100,000, bringing the total notes payable to $750,000. These funds provided us with necessary operating capital. We also expected certain other funds due to an agreement with Millennium International, LLC. These funds suddenly became unavailable, according to Millennium, because of the overall market conditions created by the September 11, 2001 tragedy. The total of $750,000 in notes, which was due and payable on or before October 31, 2001, has been continued from time to time until February 28, 2002. As bonuses for these loans and the extensions thereof, we have issued an aggregate of 685,000 shares of our common stock and 300,000 shares of common stock of our subsidiary, Videolocity Direct, Inc., which is now known as Healthcare Concierge, Inc. These notes remain outstanding as of the date hereof, however extended until September 1, 2002. UCC-1 and Extension of Secured Notes On April 1, 2002, together with our subsidiary Videolocity Technologies, Inc., we entered into a security agreement with the holders of certain promissory notes totaling $1,050,000. The note holders were granted a security interest, pro rata their loan amount, in the Provisional Patent Applications which embrace the proprietary technology and intellectual property held by Videolocity Technologies, Inc. On April 1, 2002 WAJ Enterprises, LLC entered into an agreement rescinding its interest in the assignment of the Merit Agreements, wherein Merit was to repurchase its technology, and WAJ accepted a 20% interest in the UCC-1 filing for the total amount of its outstanding $300,000 note and all interest earned to date, extending the due date until September 1, 2002. On April 30, 2002 the UCC-1 financing statement was filed with the Secretary of State of Nevada. The filing of the financing statement extended, without penalty, the due date of the promissory notes totaling $1,050,000 until September 1, 2002, which amount included the $300,000 WAJ Enterprises, LLC note. Greenwood Technology Group In October 2001 we entered into an agreement with The Greenwood Technology Group, Potomac, MD., wherein Greenwood would arrange for and/or provide capital (debt and/or equity) to us. However, no guarantees were given that any such funding would be made available at acceptable terms or at all. On December 12, 2001, we entered into a letter of intent with Greenwood wherein it agreed to provide an initial bridge loan of $750,000 on or before December 31, 2001, enabling us to continue operations. Greenwood also committed to provide up to $1.7 million by March 1, 2002, and an additional $1.2 million prior to April 1, 2002. These additional funds would retire any and all outstanding payables and outstanding notes and, together with other funding, would finance future operations. From December 12, 2001 through December 31, 2001, Greenwood provided only $50,000 and, from December 12, 2001 through May 23, 2002, Greenwood provided an aggregate of $392,800 of the initial bridge loan. To date, Greenwood has not fulfilled its commitment under the letter of intent. WAJ Enterprises, LLC. In November 2001 Healthcare Concierge and Videolocity International executed a promissory note for $300,000 in favor of the WAJ Enterprises, LLC. As collateral security for the promissory note, we agreed to transfer to WAJ all of our rights, title and interest to the first $300,000 payable under the Merit License Repurchase Agreement. We also issued 50,000 shares of our common stock as additional consideration for the loan. -31- On April 1, 2002, WAJ entered into an agreement rescinding its interest in the collateral assignment of the Merit License Repurchase Agreements. In exchange for rescinding its interest, WAJ accepted a 20% interest in the UCC-1 filing of the Provisional Patent Applications for the total amount of its outstanding $300,000 note and all interest earned to date, thus extending the due date until September 1, 2002. Hospitality: Hospitality Concierge, Inc. The worldwide hospitality market is as diverse as it is large. There are over 4.1 million hotel rooms in the U.S. alone. Because our technology is deployable without prejudice as to the type of broadband delivery system, it is ideal for installation in all types of hospitality facilities. While the competition for high-end, large-scale properties is significant for both video-on-demand systems and broadband access in the rooms, the mid-range and lower-range properties are significantly underserved with either service. Properties in this segment, ranging from 75 to 300 rooms, represent more than 56% of the total rooms in the U.S. The following is a percentage breakdown of properties based on the number of rooms per property: 2001 United States Property / Room Breakdown Size of Property(1) Rooms(2) By Size Under 75 rooms............ 51.5% 22.5% 75-149 rooms.............. 33.5% 35.1% 150-299 rooms............. 10.9% 21.3% 300-500 rooms............. 2.8% 9.9% Over 500 rooms............ 1.3% 11.2% ------------------------------ (1) Based on a total of 53,500 properties (2) Based on a total of 4.1 million rooms Numbers based on 2001 Lodging Industry Profile from he American Hotel & Motel Association Health Care: Healthcare Concierge, Inc. The worldwide health-care market is a rapidly growing and completely underserved, as far as video-on- demand and broadband access are concerned. We believe the current trend includes hospitals focusing on customer care, satisfaction and amenities. There are approximately 6,000 registered hospitals with approximately 1 million beds in the U.S. This does not include the number of assisted living centers, which we estimate to include approximately 17,000 locations and 1.7 million rooms.- Source: 2001 American Hospital Association - AHA survey. Residential: Videolocity Direct, Inc. Management has determined that anywhere a head-end for broadband delivery can be found is a potential distribution point for the DES. Practically, however, most service providers of broadband have made little impact into the home marketplace. DSL has been agonizingly slow and both fiber and cable systems have limited reach. However a new use of an old technology, radio, is rapidly emerging as the solution to existing markets, not served by fiber or cable. Wireless deployments of broadband are emerging across the U.S. and abroad. Because both low bandwidth utilization and scalability in the head-end equipment are attractive to radio networks, our product is ideally suited for this environment. Videolocity, Inc. Our wholly owned subsidiary, Videolocity, Inc., provides operational, marketing and management support for the other subsidiaries. Videolocity Technologies, Inc. Videolocity Technologies, Inc. our wholly owned research and development subsidiary, holds the following six Provisional Patent Applications, which encompass the proprietary technology and intellectual property of our company: -32- * Videolocity Digital Entertainment Solution; * Videolocity Video Encoding & Compression Process; * Videolocity Graphical User Interface; * Videolocity Embedded Software Image; * Videolocity Proprietary PCI Video Card; * Videolocity Digital Entertainment System Linux Version. In addition to these six Provisional Patent Applications, we presently have a U.S. Patent Application and an International Patent Application pending which encompasses the Videolocity Digital Entertainment Solution. We also have a backlog of viable proprietary concepts that are in the advanced research and development stages. We have obtained or filed trademark and/or servicemark applications preserving our right to use the following trademarks and servicemarks: * Videolocity * Videolocity Technologies * Videolocity Direct * VideolocityTV * Videolocity and Design (logo) * Digital Entertainment System * DES As we proceed forward with the commercialization of our current products and other products, we will file U.S. and foreign trademark applications to protect selected product names. We intend to obtain copyright protection on our product packaging, instruction sheets, and such other materials that we believe are significant to warrant procurement of copyrights. 5th Digit Technologies, LLC We acquired 5th Digit Technologies in December 2000 specifically to acquire three Provisional Patent Applications representing exclusive proprietary technologies which were ready to deploy. However, we subsequently filed a lawsuit when we learned that 5th Digit did not own the applications and that the technologies were not ready to deploy. The lawsuit has been resolved and the subsidiary has been inactive for more than a year. Our Technology We provide a pay-per-view system that delivers video-on demand at the highest quality level available today. Our system can be deployed in closed system environments such as in hotels, resorts, hospitals, rehabilitation or assisted living facilities, or over a wide area wireless network throughout communities, campuses and developments. Using a proprietary encoding process, the video files are standardized to run on Microsoft's Windows Media Player (or other player) as ASF files at 900 Kbps or less, where a like-DVD quality is achieved. With the proprietary encoding process, smaller files at higher quality are delivered. Smaller files mean smaller servers, more simultaneous users on a network segment, and the ability to download the movie and/or other content from or to a remote library. The system provides high availability of the local Internet connection to support multiple users with the web surfing, email, and web radio. The exclusive server software on the caching server improves overall network capacity, and improves video quality of service on the network. Again, this allows the use of smaller servers and more efficient and cost effective network segments. The system can deliver digital media-on-demand to a multimedia PC, or to our proprietary DES. It displays full-resolution text and graphics onto any standard TV in high resolution. The system is fast, reliable, and powered by a high-level CPU and customized chip sets using 128 megabytes (or 64 megabytes) of SDRAM, audio and video out, modem and printer ports, plus a wireless, Ethernet or DSL connection. We provide an entirely software based design, thus eliminating the need for hard drives in our digital set top boxes. In addition to video content viewing, the DES provides digital music, games, full web surfing and a variety of computer applications such as e-mail and messaging. The customized Web Browser is fully compliant with the HTML 4.0 plus standard and JavaScript, ensuring proper web page display. It also supports the most commonly used graphics and audio formats such as FIF87, animated GIF, JPEG, WAV, AU, AIFF, Flash, Shockwave, RealAudio, RealVideo, QuickTime, and Windows Media. Our software based design lets us upgrade and update any and all software versions, players and plug-ins remotely and quickly. With an easy, user-friendly graphic user interface, or GUI, the digital entertainment solution -33- allows sending and receiving text, data, graphics and video at the click of a keyboard and/or handheld remote control. All content can be enjoyed using wireless headsets and therefore ensuring privacy for the end user. DES is a true digital information and entertainment end-to-end solution. It provides fully integrated software driven hardware application and is fully scalable for any size deployment. The system is adaptable to all architecture and is customized for each application. Our technology allows us to deliver true video-on-demand streaming in Mpeg4 format at 900kbps or less achieving near DVD quality over wireless, Ethernet or DSL WAN & LAN network architectures. Accordingly, we can offer the following innovations and features:
* Property/Facility Information * Personal and Corporate E-mail * Specific Application Content / Information * Music on Demand * Specific Educational Content / Information * Internet Games * Dietary Menus * Wireless Headset * Movies/Videos on Demand * Wireless Keyboard * High Speed Internet Access * Handheld Remote Control
The features are very flexible and are delivered over an entirely software based platform, available on either a Microsoft or Linux Operating Systems. Our Business Strategy Our current business strategy is to drive demand of the wireless usage of our digital entertainment and information system worldwide in the hospitality, healthcare and residential markets. We intend to take full advantage of the advanced technologies we have developed. We will market our products to the initial market segments identified based on a strong revenue share model and anticipate generating residual income on an ongoing basis. Any additional markets that have need for our technologies may be approached with established partners using a licensing scenario. Both business models will support ongoing revenue streams for all entities. We are committed to continued development and installation of innovative, high quality, cost effective solutions and systems to build an increased and ongoing revenue stream. We provide a revolutionary wireless quality solution and also offer a parallel quality solution over wire (Ethernet, DSL, CATV) and Fiber architectures. Our DES is available on either a Mircosoft or Linux OS in a stand alone set top box or integrated in a television set. All functions that are not part of our core expertise will be outsourced to strategic partners specializing in those fields. This will allow us to focus on continued technical development and will ensure that our technologies will continue to provide competitive advantages. Research and Development We have devoted the majority of our resources to developing advanced technology on a new operating system (Linux OS), conducting beta testing and engineering supporting our wireless delivery platforms, and deploying infrastructures. For the past two years, we have spent substantial resources, approximately $2.5 million, to facilitate the engineering and technical development of our DES using a Microsoft Operating System and beta testing it, both wired and wireless, though our facilities in Park City, Utah. We catagorize pure research and development expenditures (for tax purposes) in the fiscal years of 2000 and 2001 and the first eight months of fiscal 2002 as $0, $27,818, and $60,000 respectively. Manufacturing To date, we have engineered, selected, and are contracting all sourcing and outsourcing of components, manufacturing, assembly, testing and shipping. All supplies are available and ready for shipment to or through U.S. based assembly. Our alliances are ready to produce, assemble, test and ship all products. We do not anticipate significant delays or back orders, all of which are scaleable with relatively short notice. Marketing Our initial marketing effort is focused on hotels, hospitals, long-term care homes, retirement centers as well as developments, universities, resorts, multi-dwelling units/timeshares and planned residential communities. We are using existing channels to pursue the hospitality and healthcare markets. Management believes that there exists strong potential for strategic alliances -34- and partnerships with network and content providers such as telecommunications companies, cable companies, and Internet/broadband based content providers to further our efforts and impact residential applications. The sales and distribution will focus on the following primary channels: * Traditional Distribution channels for target markets * Strategic Alliances and Partnerships * Trade Shows and Conferences * Leverage existing contacts of management team and investors * Website and Hyperlinks to trade sites * Advertising in trade publications * Direct mailing campaign and telemarketing efforts Our sales and channel support is headquartered in Park City, Utah with additional regional support organizations planned throughout the country. Members of the support team will be compensated with base salary, commission and stock option programs. We intend to promote our products aggressively through Internet websites and will ensure that the sites are easily searchable through all the major search engine companies under a variety of topics and key words. We also intend to place advertisements on strategic websites to attract the target markets described above. Competition While competition for high-end large-scale properties is significant for both video-on-demand systems and broadband access in the rooms, we believe the mid-range and lower-range properties are significantly underserved with either service. Properties in this segment ranging from 75 to 300 rooms, represent more than 56% of the total rooms in the U.S. Because our cost for deployment is far less on a per location basis than other existing technologies, we believe we are ideally suited for this market. Present competition mainly comes from cable TV or satellite pay- per-view services that lack the ability to provide true video-on-demand, broadband access or easily navigated Internet access. Two smaller companies, Hospitality Networks and KoolConnect, are both currently trying to deploy their solutions. Competition in the hospitality sector comes mainly from LodgeNet and On-Command. According to published information from their respective websites, On-Command currently has more than 750,000 hotel rooms world-wide but only 35,000 of them have current true video-on-demand systems. Both companies are deploying systems that use high bandwidth MPEG 2 formats while Videolocity uses the more efficient MPEG 4 format. These type systems are readily available for purchase and represent the main technology of the competition to our DES. Comparable cost for these systems typically starts at approximately $150,000 to $200,000, not including set-top- boxes. The equivalent for our system would be approximately $35,000. While companies like On-Command and LodgeNet rely on direct sales, we will mainly use existing companies/channels that are presently specifically serving our target market segments with related products. We market our products to the hospitality industry through our subsidiary Hospitality Concierge. There currently exists little competition for video-on-demand in the healthcare industry. Most companies, such as HCORP and Get Well Network, provide limited functionality at lower delivery quality. We market our products to the healthcare industry through our subsidiary Healthcare Concierge. The home entertainment industry is extremely competitive and is dominated by several large companies with worldwide name brand recognition and substantial financial resources. In attracting subscribers to our video-on- demand system, we will be competing with traditional video rental chains such as Blockbuster Video, Hollywood Video, and Movie Gallery; providers of video entertainment over cable and satellite networks, such as DirectTV, Dish Network, and AT&T; video stores, supermarkets, mass merchandisers, club stores, and other retail outlets that sell video cassettes; web-based video channels; and movie theaters, live theater, sporting events, and other similar businesses that compete for the general public's entertainment dollar. -35- In addition, numerous companies including Blockbuster Video, Microsoft WebTV, EchoStar, and TIVO, all of which have substantially greater resources and name recognition than us, have announced their intent to deliver state of the art video-on-demand systems in the near future, although to the best of our knowledge, no such systems are available for widespread public use as of this date. Several major movie studios, including Sony, Walt Disney Co. and 20th Century Fox have also announced their intention to develop systems for the delivery of movies directly to consumers over the Internet, which could impede our ability to obtain content for use with its video-on-demand systems and could provide significant additional competition from large, established companies with a high degree of name recognition in the entertainment industry. There can be no assurance that other companies will not develop technologies superior to ours, that new technology will not emerge that renders our technology obsolete, that we will be precluded from licensing the video content we require to effectively compete in the market, or that a competing company or companies will not be able to capture more market share than us due to name recognition and the expenditure of greater amounts for marketing and advertising. We will market to the residential market segments through our subsidiary Videolocity Direct. Backlog We presently do not have a backlog for any of our products and do not foresee a backlog in the immediate future. We have entered into certain letters of agreement that anticipate future contracts with the following businesses: * Fandango Resorts - Hotels Park City (includes other Fandango Resorts properties) We will deploy our DES in the new Fandango Hotel Park City, a new all-suite, condominium luxury resort hotel currently under construction and scheduled to open in Park City, Utah in the fall of 2002. Fandango Resorts is a premier resort development and management company that specializes in the programming, marketing and management of upscale, full service boutique resorts. The Fandango projects integrate beautiful accommodations, personalized service and luxurious amenities found only in the finest hotels with the specialized requirements of condominium ownership. Headquartered in Park City, Utah, Fandango Resorts' founders have 45 years of experience with deluxe hotels and resorts. Our projected installation date for the Fandango Park City property is October 1, 2002. * Jameson Health System Jameson Hospital is committed to providing convenient, affordable, high quality healthcare to the people of Lawrence County. Serving as the primary subsidiary of Jameson Health System, Inc., Jameson Hospital continues to be a healthcare leader as well as the largest employer in Lawrence County. Jameson Hospital is a 204 bed facility featuring a skilled nursing unit, inpatient and outpatient rehabilitation units, senior adult day health care, an inpatient geriatric psychiatric unit, a maternity care center, pediatrics unit, cardiac services and emergency department. Our project finalization date for the Jameson Hospital is scheduled for the last week of July 2002, with a projected installation date of November 1, 2002. * Emerald Suites Hotel Las Vegas Emerald Suites is located on the Las Vegas strip, four miles south of Mandalay Bay Resorts. There are a total of 396 suites, of which 300 are single bedroom suites and 96 are two-bedroom suites. This represents one of the higher counts of two bedroom suites found at any extended stay property in Las Vegas. We completed installation of the high speed internet access, but have yet to install our DES. Regulation We are not required to obtain any government approval as a condition to marketing our DES. However, such systems will be required to operate in compliance with applicable regulations of the FCC, when in wireless mode, and the set-top boxes used in connection with such systems may require approval from Underwriters' Laboratories. We will also be subject to various federal, state and local laws that govern the conduct of our business, including state and local advertising, consumer protection, credit protection, licensing, and other labor and employment regulations. We have not incurred any notice, warning or expenses resulting from compliance or non- compliance with federal, state or local environmental laws. -36- Properties Our technical and marketing offices are located at 1762 A Prospector Avenue, Park City, Utah 84060, and our telephone number is (435) 615-8338. Such offices consist of approximately 2800 square feet. We are currently evaluating the need for additional space and may relocate our corporate offices in the near future. We maintain our corporate offices at 44 W. 300 S., Salt Lake City, mailing address at 358 S. 700 E., # B-604, Salt Lake City, Utah 84102, and our Salt Lake City telephone numbers are (801) 521-2807/2808 and Fax (801) 521- 2844. Product Liability and Liability Insurance We may be exposed to potential product liability claims by users of our products. We currently maintain general business liability insurance limited to $200,000 coverage per occurrence and in the aggregate. We have not obtained product liability insurance to date, however it is available. Employees We presently have nine full-time employees, one consultant, and one part-time consultant. We do not anticipate a need to hire additional high-level employees for the next several months, except for possibly a technical director, marketing and sales project manager, and two or more assistants. In addition to our employees, we may use the services of certain consultants on a contract basis. Presently, we do not believe that our employees will be represented by unions and considers our relationship with our employees to be good. Legal Proceedings On January 4, 2002 we filed an action in the Third Judicial District Court of Salt Lake County, Utah, against the holders of our Series "A" Preferred stock, issued pursuant to our acquisition of 5th Digit Technologies. The suit alleges fraud and misrepresentation of the technology which induced our acquisition of 5th Digit. Three of the individuals originally comprising 5th Digit ownership, settled with us by exchanging their 600,000 Series "A" Preferred shares for 180,000 shares of our common stock. The remaining 350,000 Preferred shares were tendered for liquidation at $5.00 per share on January 24, 2002, however, the shares were deposited with the Court. On April 11, 2002 the Court entered a default judgment against the holder of the 350,000 Preferred shares, ordering cancellation of the shares. It was further adjudged and decreed that any and all redemption or other rights vested in and related to the shares be voided. The 350,000 Preferred shares were cancelled on April 12, 2002. MANAGEMENT Executive Officers and Directors Our executive officers and directors, their ages and positions held as of May 31, 2002, are as follows:
Name Age Position ---- --- -------- Bennie L. Williams............... 65 Chairman of the Board and Director Robert E. Holt................... 38 President, Chief Executive Officer and Director Larry R. McNeill................. 60 Vice President, Chief Financial Officer and Director Dan Driscoll..................... 45 Vice President Corporate Development and Director Dr. James P. Hill................ 65 Vice Chairman and Director D. T. Norman..................... 41 Secretary / Treasurer and Director
Currently we have six members on our board of directors. Each of these directors will hold office until the next annual meeting of our stockholders and until his or her successor is elected and qualified, subject to removal by the board of directors and or shareholders. Certain biographical information of our directors and officers is set forth below. Bennie L. Williams. Mr. Williams was appointed Chairman and a director in 2001. He has spent 36 years in the broadcasting industry in general management, sales management, marketing, promotion and advertising of several radio stations. Mr. Williams was Vice President of sales for Intermountain Radio Network, with 132 affiliates. From to 1970 to 1987, he was Vice President of -37- sales for Communications Investment Corporation's twelve owned and operated stations in Utah, Idaho and Montana. In addition he was general manager of KALL AM and KLCY FM until his retirement in 1988. At that time he founded his own company, Business Idea Company of America, an investment portfolio management firm that also provided marketing, advertising and consulting services to select clients. Mr. Williams is currently serving his sixth year as Chairman of the Board of Governors of Shriners Hospital for Children, Intermountain, in Salt Lake City. Robert E. Holt. Mr. Holt acted until recently as Chief Operating Officer of Greenwood Technology Group. Prior to joining Greenwood Technology Group, Mr. Holt held a series of leadership positions with high-tech companies including Qualcomm Inc., where he was head of the Wireless Campus Group, overseeing product development, marketing, and technology introduction. Mr. Holt also served as a Director of the $500m Qualcomm Ventures and Wireless Infrastructure Products Division. He has 10 years of P&L responsibility between the U.S. Army Signal Corps, GTE Government Systems, PrimeCo PCS and Sprint PCS where he led the development and deployment of wireless networks in over thirty countries. His expertise is around the following issues: Strategic Planning/Partnership, Competitive Intelligence, Operations and Implementation. Mr. Holt has earned a Bachelor of Science degree in electrical engineering and a master of science degree in communications. He has also earned certification in project management, PCS technologies, call processing and systems engineering. Larry R. McNeill. From 1998 to the present, Mr. McNeill has been the Chief Financial Officer of Theatre Candy Distributing Company, Inc. of Salt Lake City, Utah. In 1996, Mr. McNeill retired from Salt Lake City based Smith's Food & Drug Centers, Inc. after 17 years as an executive officer of that company, most recently Senior Vice President of Corporate Development. In that capacity he managed over 60 employees within the real estate, legal, and research departments of that company. Mr. McNeill is a director of Theatre Candy Distributing Company, Inc.; American Polymer Corp.; Water and Wellness Centers LLC; Construction.com, LLC; and Financial Services, LLC. He is the President of the West Valley Colonels Association and past president and founder of the Cystic Fibrosis Foundation of Utah. Mr. McNeill holds a B.A. degree in Business Administration, Economics and Russian, a MBA degree in Business Management, and is pursuing his Ph.D. in Business Administration.. Dan Driscoll. Mr. Driscoll is Senior VP of Business Development of the Wireless Division of CommScope, Inc. The CommScope Wireless Division was created in 1997; Mr. Driscoll has spearheaded the sales and business development since 1998. CommScope Wireless Division produces cable, connectors and accessories for Wireless Telecom operators, AT&T and Sprint among others and Mr. Driscoll's leadership has positioned CommScope as the No. 2 worldwide supplier. Mr. Driscoll has 20 years experience in sales and business development in the Wireless Telecom arena, his expertise in developing strategic partners was instrumental in Hewlett Packard's entrance in the RF/Microwave component market through its purchase of Avantek. Mr. Driscoll holds both a BSBA and BSEE from Villanova University. He also holds multiple business certificates from PCS technology to process control programs. Mr. Driscoll is actively involved in his community, and has created two non-profit organizations that promote youth activities; which organizations currently generate over $200,000 of revenue each year. Mr. Driscoll has been chairman of the local Parks and Recreation of his community for the past 15 years and previously played football in the CFL and NFL. Dr. James P. Hill. Dr. Hill is the Executive Director of the Home Challenge Trust Fund of the Indianapolis Neighborhood Housing Partnership. Prior to his current position, he served as the Chief Development Officer of Community Hospitals Indianapolis Foundation in Indianapolis, Indiana. Prior to that he served as Vice President and Associate Dean of Southern Illinois University School of Medicine; President of Indiana Wesleyan University; Academic Dean, Peidmont Community College; Division Chair of Math and Science, Virginia Western Community College; and Department Chair of Chemistry, Virginia Western Community College. Dr. Hill has served on numerous boards and community civic groups including the Chamber of Commerce Board, Economic Development Council, Crisis Nursery Center Board, Symphony Board and President, and Area Scout Council Board. He also holds memberships in several national and state professional associations and honor societies. Dr. Hill holds a Doctorate in Administration and Statistical Research Design Methodology from Virginia Polytechnic Institute and State University, a Masters degree in Chemistry and Biology from the University of Virginia, and a Bachelor's degree in Biology and Chemistry from Roanoke College. Dr. Hill is the brother-in-law of George Norman, a co- founder, officer and director of Videolocity, Inc. D. T. Norman. D.T. Norman is a co-founder of Videolocity, Inc. and serves as Secretary, Treasurer and a director of that company. She is also Secretary, Treasurer and a director of Brain Tree International, Inc., an inactive public company, and is Secretary and a director of Dynamic Software, past Secretary and a director of Santa Barbara Oil Corp., past Secretary and director of Pacifica Financial Corp., a director of Worldwide Ministries and Education Fund, and a director of the Stubbs Foundation. D.T. Norman is the wife of George Norman, a co-founder, officer and director of Videolocity, Inc. -38- Committees of the Board of Directors Our audit committee presently consists of Ms. Norman and Messrs. McNeill and Williams. It is responsible for reviewing the scope of annual audits, considering specific problems and questions that arise during the course of audits, monitoring the adequacy of accounting and audit controls, and such other functions as the board of directors may from time to time delegate to it. Our audit committee must report to the board of directors when asked to do so. Our executive committee consists of Ms. Norman and Messrs. McNeill and George Norman and is authorized to exercise the powers of the board during intervals between board meetings. The executive committee also handles matters concerning compensation and salaries, subject to review and approval by the board. A nominating committee consisting of Ms. Norman and Messrs. Hill and Williams reviews the qualifications of potential candidates for the board, evaluates the performance of incumbent directors and recommends to the board nominees for election to the board at the annual meeting of stockholders. Director Compensation Presently, we do not provide monetary compensation to directors for serving on our board of directors or the boards of our subsidiaries, or for attendance at board or committee meeting. We anticipate that as we acquire adequate funding, we will consider instituting a policy to compensate our directors. In that event, we believe that any proposed compensation will be equivalent to that of companies of similar size and stature as ours. We have issued compensation shares totaling 250,000 under our 2002 Stock Incentive and Stock Award Plan to our directors for past service rendered in 2000 and 2001. Significant Employees, Consultants and Directors of Our Subsidiaries The following tables set forth information with respect to current directors and executive officers of five of our subsidiaries. 5th Digit Technologies, LLC is presently inactive. These persons are expected to make a significant contribution to our business.
Videolocity, Inc. Name Age Positions ---- --- --------- Robert E. Holt................... 38 President, Chief Executive Officer and Director Larry R. McNeill................. 60 Chief Financial Officer and Director D. T. Norman..................... 41 Secretary / Treasurer and Director George Norman.................... 71 Chairman of the Board and Director Martin P. Senn................... 39 Senior Vice President and Chief Operating Officer
Please note that the directors and executive officers for Hospitality Concierge, Inc. and Videolocity Direct, Inc. are the same as for Videolocity, Inc. The resumes for Ms. Norman and Messrs. Holt and McNeill are set forth above under the information for our parent company. Biographical information for Messrs. Norman and Senn is set forth below. George Norman. Mr. Norman is the co-founder of Videolocity, Inc. and served as its president through July 1999. Prior to founding Videolocity, he was semi-retired. He is President and a director of Dynamic Software, past President and a director of Santa Barbara Oil Corp., past President and director of Pacifica Financial Corp., a director of Worldwide Ministries and Education Fund, and a director of the Stubbs Foundation. Approximately thirty years ago, in 1970, Mr. Norman was convicted of two counts of aiding and abetting the misapplication of bank funds and was sentenced to two years on each of the counts, of which he served nine months at the Federal Medical Center in Rochester, Minnesota. Prior to 1970, Mr. Norman spent many years in the operation and ownership of broadcasting properties and other general business activities. Mr. Norman is the husband of D.T. Norman and the brother-in-law of Dr. James P. Hill. Mr. Norman notified the board in June 2002 of his intention to retire and leave our company in September 2002. -39- Martin P. Senn. From 1999 until he joined Videolocity in November 2000, Mr. Senn was Vice President, Sales & Marketing of Teleflex Systems, Inc., a provider of state-of-the-art billing solutions, voice/data processing platforms, calling cards, and operator services software, where he handled public relations and corporate development. From 1995 to 1999, Mr. Senn served as Vice President of Sales & Marketing for Teltrust Inc, forming and managing its Teleservices division and actively working on applications and designs with Teltrust's Internet division. The Teleservices division grew in 4 years to annual revenue of over $10 million with over 700 employees. From 1993 to 1995, Mr. Senn managed Online Reservations Systems, Inc., a Park City, Utah based company providing wholesale and retail travel operations. Mr. Senn holds a Masters degree in Travel Industry Management, Marketing and Languages from the University of Zurich, Switzerland. He speaks fluent English, German, Italian and French, and speaks conversational Spanish. Healthcare Concierge, Inc. The following table sets forth information with respect to the current directors and executive officers of Healthcare Concierge, Inc., (formally named Videolocity Direct, Inc.) our 93% owned operating subsidiary. These persons are expected to make a significant contribution to our business.
Name Age Positions ---- --- --------- Bennie L. Williams............... 65 Chairman and Director Robert E. Holt................... 38 President, Chief Executive Officer and Director Martin P. Senn................... 39 Vice President, Chief Operating Officer and Director Larry R. McNeill................. 60 Chief Financial Officer and Director D.T. Norman...................... 41 Secretary / Treasurer and Director
The resumes for Ms. Norman and Messrs. Williams, Holt and McNeill are set forth above under the information for our parent company. Mr. Senn's resume is set forth above under Videolocity, Inc. The following table sets forth information with respect to the current directors and executive officers of Videolocity Technologies, Inc., our wholly owned operating subsidiary. Videolocity Technologies, Inc. Name Age Position ---- --- -------- George Norman.................... 71 Chairman / Director Robert E. Holt................... 38 President / CEO / Director Bennie L. Williams............... 65 Director Martin P. Senn................... 39 Vice President / COO / Director Larry R. McNeill................. 60 CFO / Director D.T. Norman...................... 41 Secretary / Treasurer / Director The resumes for Ms. Norman and Messrs. Holt, Williams and McNeill are set forth above under the information for our parent company. Resumes for Messrs Norman and Senn resume are set forth above under Videolocity, Inc. Executive Compensation The following table sets forth all cash compensation actually paid (and not deferred) by us for services rendered for the years ended October 31, 2001 and 2000 to our Chief Executive Officer and to each of the next four most highly compensated executive officers whose total annual salary and bonus was in excess of $100,000.
Summary Compensation Table Other Name and Annual Compensation Annual All Other Principal Position Year Salary Bonus Compensation Compensation ---- -------- ------------ ------------ Jerry E. Romney, Jr, 2001 $ 150,000 $ -0- $ -0- $ 5,000 (1) President 2000 -0- -0- -0- -0- Martin P. Senn, 2001 128,000 -0- -0- -0- C.O.O. 2000 -0- -0- -0- -0- - ----------------
(1) Vested 5,000 shares of common stock under our 2000 Stock Incentive Plan. -40- Employment Agreements We have entered into employment agreements with Mr. Holt and Mr. Senn. Certain aspects of these agreements are specific to the individual's agreement: Mr. Holt: Pursuant to his employment agreement dated January 16, 2002, Mr. Holt is serving as our Chief Executive Officer and receives an annual base salary of $240,000. His employment has an initial term of three years ending January 15, 2005. Mr. Holt is entitled to 90,000 plan units under our 2000 Stock Incentive Plan, of which 5,000 have vested. Mr. Holt received a bonus of 100,000 shares under our 2002 Stock Incentive Stock Award Plan. In addition, upon our receiving a minimum of $1 million in capital funding, Mr. Holt will receive a bonus of 100,000 shares of our common stock and the right to purchase at $0.01 per warrant, 900,000 stock purchase warrants, exercisable at $1.00 per share. Mr. Senn: Pursuant to his employment agreement dated November 16, 2000 with our subsidiary Videolocity, Inc. (formerly Moviesonline, Inc.), Mr. Senn is serving as its Chief Operating Officer and receives an annual base salary of $137,000, increased in October 2001 from an initial base salary of $125,000. His employment has an initial term of three years ending November 16, 2003. Mr. Senn is also entitled to 118,750 plan units under our 2000 Stock Incentive Plan, of which he has vested rights in 6,875 shares of our common stock. Each of the above-described employment agreements has the following uniform terms: Assignment of Inventions: During the terms of the employment agreements, any invention, discovery, concepts and ideas, whether or not patentable or subject to copyright protection, which the employee discovers or conceives, will become our sole property. Non-Compete: During the term of their agreement with us and for two years after the expiration of Mr. Senn's agreement, and three years after the expiration of Mr. Holt's agreement, the employees agree not to: * own, manage operate or control any business that competes with us; * provide services to any business in the video-on-demand industry that is directly competitive with us; * solicit any business similar to ours from, or sell any products or services that are in direct competition with ours to, any business that within one year prior to the date of termination of employment, was a customer or client of ours or any of our subsidiaries; and * solicit the employment of any of our full-time executives or employees as of the date of termination of the agreement. Change of Control: In the event of a change of control of our company, whether by merger, acquisition, consolidation, reorganization, liquidation or otherwise, the employee will be entitled to voluntarily terminate his agreement and receive certain benefits set forth below: * the annual base salary through the date of termination, to the extent not theretofore paid; * reimbursement for any monies advanced by employee through the date of termination; * all other payments and benefits to which the employee is entitled through the date of termination; * for six months after the termination date, continued health and medical insurance coverage; and * all unvested plan units under the stock incentive plan will vest. Indemnification of Directors and Executive Officers and Limitation on Liability We have adopted certain provisions in our articles of incorporation that limit the liability of our directors and executive officers and provide for indemnification by us for our directors and officers to the fullest extent permitted by Nevada law. Such provisions substantially limit the shareholders' ability to hold directors and officers liable for monetary damages resulting from breaches of their fiduciary duties. -41- Benefit Plans Videolocity, Inc. 2000 Stock Incentive Plan We adopted the Videolocity, Inc. 2000 Stock Incentive Plan in connection with our acquisition of Videolocity, Inc. We have reserved one million shares of common stock for issuance under the plan. As of June 28, 2002, plan awards with respect to 282,283 shares have been made, of which 32,208 plan awards have vested and 32,208 shares issued. Plan awards with respect to 717,717 shares remain available under the plan. All awards made under the plan are made in plan units. Each plan unit becomes convertible, at the option of the participant, into one share of our common stock on the date vesting requirements for the plan units have been satisfied. Shares to be issued under the plan will be registered under the Securities Act of 1933. The awards granted to date provide certain continued vesting as set forth and determined in each individual employment agreement, to be vested on the first day of each consecutive fiscal quarter. If a plan participant voluntarily terminates his employment or is terminated for cause, any unvested plan awards will be forfeited. If a plan participant is terminated without cause, terminates for good reason (including a change of control), dies, or becomes disabled, all as defined in the plan, any unvested plan awards will vest on the date of such termination. Videolocity International, Inc. 2002 Stock Option and Stock Award Plan Also at the time of our acquisition of Videolocity, Inc., we adopted an omnibus stock option and stock award plan. The plan was inactive until it was formalized on March 1, 2002 as the Videolocity International, Inc. 2002 Stock Option and Stock Award Plan The plan may be administered either by the board or by a committee to be appointed from time to time by the board. Awards granted under the plan may be stock options, appreciation rights, or stock awards which are awarded to employees, including officers and directors, who, in the opinion of the board or the committee, have contributed, or are expected to contribute, materially to the success of our company. In addition, at the discretion of the board or the committee, options or bonus stock may be granted to individuals who are not employees, but contribute to our success as advisors or consultants. All of our employees, officers, directors, advisors and consultants are eligible to participate under the plan. A maximum of 500,000 shares of our common stock are available for grant under this plan. The identification of individuals entitled to receive awards, the terms of the awards, and the number of shares subject to individual awards, are determined by the board or the committee, at their sole discretion. As of June 28, 2002, a total of 467,855 shares have been granted under the plan, of which 417,855 shares have been issued, leaving 32,155 shares remaining to be granted and issued. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table provides information, to the best of our knowledge as of May 31, 2002, regarding beneficial ownership of our common stock by: * each of the named executive officers; * each or our directors; and * each person known to us to own beneficially more than 5% of our common stock; * all executive officers and directors as a group. Beneficial ownership is determined based on the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are exercisable, or exercisable within 60 days of June 28, 2002, are counted as outstanding. These shares, however, are not counted as outstanding for purposes of computing the percentage ownership of any other person. Except as may be indicated in the footnotes to this table and pursuant to applicable community property laws, each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite that stockholder's name. -42- Unless otherwise indicated, the address for each director, executive officer and 5% owner is c/o Videolocity International, Inc. 358 South 700 East, Suite B604, Salt Lake City, Utah 84102.
Beneficial Ownership Name of Beneficial Owner Shares Percent ------------------------ ----------- ------- Directors and Executive Officers: Dan Driscoll............................................. 225,122 3.9 % Dr. James P. Hill, Ph.D(1)............................... 650,000 11.3 % Robert E. Holt........................................... 105,000 1.8 % Larry R. McNeill......................................... 236,000 4.1 % D. T. Norman............................................. 300,000 5.2 % Martin P. Senn(2)........................................ 43,125 .8 % Bennie L. Williams....................................... 335,000 5.8 % 5% Owners Kirk Schneider(3)........................................ 372,000 6.5 % Mark Schneider(4)........................................ 357,700 6.2 % Cornell Capital Partners, L.P............................ 290,000 5.0 % All executive officers and directors as a group (7 persons) 1,894,247 32.9 %
(1) Includes 625,000 shares held of record by a limited liability company of which Dr. Hill is the manager. (2) Includes 31,250 shares held of record by a limited liability company of which Mr. Senn is the manager. (3) Includes 250,000 shares held of record by a limited liability company of which Kirk Schneider is the manager. Kirk Schneider's address is 1201 S. Main Street, Salt Lake City, Utah 84111. Kirk Schneider is the brother of Mark Schneider. (4) Includes 20,000 shares held of record by Mark Schneider's minor child and 10,000 shares held by a family limited partnership. Does not include 20,000 shares held by Mr. Schneider's spouse with respect to which he disclaims beneficial ownership. Mark Schneider's address is 265 E. 100 S., Suite 250, Salt Lake City, Utah 84111. Mark Schneider is the brother of Kirk Schneider. RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Transactions with 5% Stockholders The following persons purchased shares of our common stock in the private placement of 610,000 shares completed on December 4, 2000 and immediately following the acquisition of Videolocity, Inc.: Stephen B. Cluff, a former officer and director, 12,200 shares; Kirk Schneider, a greater than 5% shareholder, 61,000 shares; Mark Schneider, a greater than 5% shareholder, 54,900 shares; Noland Schneider, the father of Kirk Schneider and Mark Schneider, 122,000 shares; and Jeri Staten, the sister of Kirk Schneider and Mark Schneider, 61,000 shares. Such persons purchased the shares at a price of approximately $0.82 per share, which was the same price paid by the other purchasers in the private placement. Noland Schneider provided assistance in locating an entity to be used in the acquisition of Videolocity, Inc. and assisted in negotiating the terms of the reorganization, but did not receive any compensation for such activities. Transactions with Officers and Directors In July 2001, two of our current directors Larry R. McNeill and Bennie L. Williams loaned to us $135,000 and $100,000, respectively, pursuant to certain 60-day secured notes issued by us. The notes have been extended to September 1, 2002. As additional consideration for the loans, we issued to Mr. McNeill and Mr. Williams 67,500 shares and 50,000 shares, respectively, of Videolocity Direct, Inc. common stock (now known as Healthcare Concierge, Inc.). On November 9, 200, as consideration for extending the term of the notes, we issued to Mr. McNeill and Mr. Williams 13,500 shares and 10,000 shares, respectively, of Videolocity International, Inc. common stock. A third director, D.T. Norman, through ISOZ, L.C. of which she is the manager, also loaned to us in July 2001 an aggregate of $215,000 pursuant to the secured notes. ISOZ received 107,500 shares of Videolocity Direct stock as additional consideration for the loan. During the second quarter of fiscal 2002, Ms. Norman, on behalf of ISOZ, L.C., voluntarily contributed back to us for cancellation, a total of 50,000 shares of Videolocity International common stock to offset some of the additional shares that we had to issue as consideration to acquire certain loans and extensions from other parties. All of the aforementioned notes remain outstanding as of the date hereof, having been secured under a UCC-1 filing and are due September 1, 2002. -43- Through June 28, 2002, the following officers, employees and consultant received an aggregate of 32,559 shares of our common stock under the Videolocity Inc. 2000 Stock Incentive Plan: Jerry E. Romney, Jr., Martin P. Senn, Luigi A. DeAngelis, David M. Smith, Joshua L. Hamer, Wilford T. Lee, and Steven Fogarty. On July 30, 2001 our board of directors authorized the borrowing of $750,000 in 60 day secured notes bearing 8% simple interest. The notes are secured by an assignment and collateral pledge of 100% of the outstanding stock of Videolocity Technologies, Inc. (5 million shares), which holds our six Provisional Patent Applications. We owed certain of our affiliates approximately $320,000 which was due as of July 29, 2001. The affiliates loaned an additional $30,000 and agreed to convert their already outstanding loans of $320,000, wherein the affiliates became part of the $750,000 loan package. One additional affiliate loaned $100,000 and three independent unaffiliated individuals each loaned an additional $100,000 bringing the total notes payable to $750,000. This provided us with very necessary operating capital. There were certain expected funds having been introduced and anticipated with the help of Millennium International, LLC. that suddenly became unavailable because of the overall market conditions created by the September 11, 2001 tragedy. The total of $750,000, which was due and payable on or before October 31, 2001, has been continued from time to time until September 1, 2002, having been secured under our UCC-1 filing. As bonuses for these loans and the extensions thereof, we have issued an aggregate of 68,500 of our restricted shares of common stock and 300,000 restricted shares of Videolocity Direct, Inc., now known as Healthcare Concierge, Inc. DESCRIPTION OF CAPITAL STOCK Common Stock We are authorized to issue 50 million shares of common stock. At June 28, 2002, there were 5,748,011 shares of common stock outstanding and held of record by approximately 308 stockholders. All of our shares of common stock have equal rights and privileges with respect to voting, liquidation and dividend rights. Each share of common stock entitles the holder thereof to: * one non-cumulative vote for each share held of record on all matters submitted to a vote of the stockholders; * to participate equally and to receive any and all such dividends as may be declared by the board of directors; and * to participate pro rata in any distribution of assets available for distribution upon our liquidation. Our stockholders have no preemptive rights to acquire additional shares of common stock or any other securities. All outstanding shares of common stock are, and the shares offered in this prospectus will be upon issuance and sale, fully paid and non-assessable. Preferred Stock We are also authorized to issue one million shares of preferred stock , par value $.001 per share. Our preferred shares may be issued in various series with terms, rights, voting privileges and preferences to be determined at the discretion of the board of directors at the time of issuance. All fully paid shares of preferred stock of the Company shall not be liable to call or assessment. In December 2000, we issued 950,000 shares of series A Preferred stock pursuant to our acquisition of 5th Digit Technologies, LLC. On February 1, 2001, we sold 40,000 series A Preferred shares at $2.50 per share, which sale was rescinded in March 2001 and all monies paid were returned. During 2001, the 600,000 shares of series A Preferred stock were cancelled and 180,000 shares of our common stock were issued to the holders. Pursuant to the legal action we filed against the holder of the remaining 350,000 preferred shares, the Court ordered the shares to be canceled, which they were on April 12, 2002 -44- Presently, we do not have any shares of preferred stock outstanding. Options As of June 28, 2002, we had outstanding options to purchase an aggregate of 282,800 shares of our common stock at the exercise price of $1.00 per share, all of which are presently exercisable. Registration Rights Under the terms of the equity line of credit agreement and placement agent agreement, Cornell Capital and Westrock Advisors have registration rights for their shares of common stock derived from those agreements. Accordingly, this prospectus and the registration statement to which it relates, includes the shares of common stock of Cornell Capital and Westrock Advisors derived from their respective agreements with us. Indemnification Matters As permitted by the provisions of the Nevada Revised Statutes (NRS), we have the power to indemnify any person made a party to an action, suit or proceeding by reason of the fact that they are or were a director, officer, employee or agent of our company, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by them in connection with any such action, suit or proceeding if they acted in good faith and in a manner which they reasonably believed to be in, or not opposed to, the best interest of our company and, in any criminal action or proceeding, they had no reasonable cause to believe their conduct was unlawful. Termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which they reasonably believed to be in or not opposed to our best interests, and, in any criminal action or proceeding, they had no reasonable cause to believe their conduct was unlawful. We must indemnify a director, officer, employee or agent of Videolocity who is successful, on the merits or otherwise, in the defense of any action, suit or proceeding, or in defense of any claim, issue, or matter in the proceeding, to which they are a party because they are or were a director, officer employee or agent of Videolocity, against expenses actually and reasonably incurred by them in connection with the defense. We may make provisions to pay the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding as the expenses are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that they are not entitled to be indemnified by us. The NRS also permits a corporation to purchase and maintain liability insurance or make other financial arrangements on behalf of any person who is or was a director, officer, employee or agent of Videolocity, or is or was serving at the request of the corporation as a director, officer, employee or agent, of another corporation, partnership, joint venture, trust or other enterprise for any liability asserted against them and liability and expenses incurred by them in their capacity as a director, officer, employee or agent, or arising out of their status as such, whether or not we have the authority to indemnify them against such liability and expenses. Insofar as indemnification for liabilities arising under the Securities Act, as amended, may be permitted to officers, directors or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in such Act as is therefore unenforceable. Amendment of Articles of Incorporation Any amendment to our articles of incorporation must first be approved by a majority of the board of directors and, thereafter, by a majority of the total votes eligible to be cast by holders of our voting stock with respect to such amendment. Approval by shareholders may be by written consent in lieu of shareholders' meeting. By-Law Provisions Our By-Laws provide that a special meeting of stockholders may be called by the board of directors or by holders of a majority of our outstanding shares. Further, only those matters included in the notice of the special meeting may be considered or acted upon at that special meeting, unless otherwise provided by law. In addition, our By-Laws include advance notice and informational requirements and time limitations on any director nomination or any new proposal which a stock holder wishes to make at an annual meeting of stockholders. -45- Transfer Agent The transfer agent and registrar for our common stock is Colonial Stock Transfer Company, 66 Exchange Place, Salt Lake City, Utah 84111, telephone (801) 355-5740. SHARES ELIGIBLE FOR FUTURE SALE If our current stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options and/or warrants, into the public market following this offering, the market price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Upon completion of this offering, we will have outstanding approximately 27,248,011 shares of our common stock, assuming all of the shares offered by this prospectus are issued. All of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. Of the balance of the shares to be outstanding, approximately 850,854 shares are held by public stockholders and may also be freely traded without restriction. This leaves approximately 4,897,157 restricted shares eligible for future sale in the public market pursuant to Rule 144 as follows: Date Number of Shares ---- ---------------- After the date of this prospectus. 3,638,125 shares After 180 days from the date 148,500 shares of this prospectus (subject, in some cases, to volume limitations) At various times after 180 days from 1,110,532 shares the date of this prospectus (subject, in some cases, to volume limitations). Lock- Up Agreements. In connection with the equity line of credit agreement, our officers and directors have executed lock-up agreements concerning our common stock. Each lock-up agreement provides that during the term of the equity line of credit agreement, the officer or director may not, without the prior written consent of Cornel Capital, sell or otherwise dispose of their Videolocity shares except pursuant to Rule 144. Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of * 1% of the number of shares of our common stock then outstanding, which will equal to approximately 272,480 shares immediately after this offering; or * the average weekly trading volume of our common stock on a national securities exchange and/or reported through the automatic quotation system of a registered securities association during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k). Under Rule 144(k), a person who is not deemed to have been affiliate at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the completion of this offering. As of June 28, 2002, there were outstanding options to purchase an aggregate of 282,800 shares of our common stock at the exercise price of $1.00 per share, all of which are presently exercisable. Shares of our common stock issued upon conversion of these options would be eligible for sale under Rule 144 one year after the holders exercises the option and makes full payment for the shares. -46- LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Leonard E. Neilson, P.C., Attorney at Law. Mr. Neilson is the beneficial owner of 46,000 shares of our common stock and is the custodian for his children that own 4,000 shares. EXPERTS The financial statements as of October 31, 2001 and 2000 included in this prospectus have been so included in reliance on the report of Andersen Andersen & Strong, L.C., independent accountants, given on the authority of said firm as experts in auditing and accounting. The auditors' report contains an explanatory paragraph relating to our ability to continue as a going concern which is further explained in note 13 to the financial statements. We have prepared the unaudited financial statements for the period ended April 30, 2001. WHERE YOU CAN FIND MORE INFORMATION We have filed a registration statement on Form SB-2 with the SEC for the stock offered by this prospectus. This prospectus does not include all of the information contained in the registration statement. You should refer to the registration statement for additional information about us, our common stock and this offering, including the full texts of the exhibits, some of which have been summarized in this prospectus. We are subject to certain reporting requirements of the Securities Exchange Act of 1934 and, in accordance with that Act, we file reports, and other information with the SEC. We intend to furnish our stockholders with annual reports containing financial statements audited by independent accountants, quarterly reports containing unaudited financial statements for the first three quarters of each fiscal year, and other periodic reports as we may deem appropriate or as we may be required by law. You may inspect and copy our registration statement, reports and other information at the SEC's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains our registration statement, reports and other information that was filed electronically. The address of the SEC's Internet site is "http://www.sec.gov." -47- VIDEOLOCITY INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS October 31, 2001 F-1
VIDEOLOCITY INTERNATIONAL, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Certified Public Accountant....................................... F-3 Consolidated Balance Sheet as of October 31, 2001....................................... F-4 Consolidated Statements of Operations................................................... F-5 Statement of Changes in Stockholders' Equity............................................ F-6 Consolidated Statements of Cash Flows .................................................. F-7 Notes to Financial Statements........................................................... F-8
F-2 941 East 3300 South, Suite 202 Salt Lake City, Utah 84106 Telephone 801 486-0096 Fax 801 486-0098 ANDERSEN ANDERSEN & STRONG, L.C. - -------------------------------- Certified Public Accountants and Business Consultants Member SEC Practice Section of the AICPA Board of Directors Videolocity International Inc. and Subsidiaries Salt Lake City, Utah REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have audited the accompanying consolidated balance sheet of Videolocity International Inc. and Subsidiaries (development stage company) at October 31, 2001 and the related statements of operations, stockholders' equity, and cash flows for the year ended October 31, 2001, and the period May 26, 2000 to October 31, 2000 and the period May 26, 2000 (date of inception - note 6 ) to October 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Videolocity International Inc. and Subsidiaries at October 31, 2001 and the results of operations, and cash flows for the year ended October 31, 2001, and the period May 26, 2000 to October 31, 2000 and the period May 26, 2000 (date of inception - note 6 ) to October 31, 2001, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company does not have sufficient working capital to service its debt and for its planned activity, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 13. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. Salt Lake City, Utah February 8, 2002 /s/ Andersen Andersen and Strong -------------------------------- Andersen Andersen and Strong F-3
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES (Development Stage Company) CONSOLIDATED BALANCE SHEET October 31, 2001 - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $ 411 Note receivable - net of provision for doubtful accounts - Note 3 350,000 ----------- Total Current Assets 350,411 ----------- EQUIPMENT - net of accumulated depreciation - Note 2 73,012 ----------- OTHER ASSETS Advance deposits 4,732 ----------- $ 428,155 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable - related parties - Note 5 $ 450,000 Notes payable - Note 5 300,000 Accrued interest - notes payable - Note 5 13,949 Accounts payable 143,123 ----------- Total Current Liabilities 907,072 ----------- REDEEMABLE PREFERRED CAPITAL STOCK 10,000,000 shares authorized at $0.001 par value; 950,000 series A issued - Notes 1, 9, &12 950 Capital in excess of par value - Note 9 & 12 3,957,380 ----------- 3,958,330 MINORITY INTERESTS 5,038 ----------- STOCKHOLDERS' EQUITY - (deficiency) Common stock 125,000,000 shares authorized, at $0.001 par value; 43,186,860 shares issued and outstanding 43,187 Capital in excess of par value - Note 12 (1,976,071) Deficit accumulated during the development stage - Note 2 (2,509,401) ----------- Total Stockholders' Equity (deficiency) (4,442,285) ----------- $ 428,155 ===========
The accompanying notes are an integral part of these financial statements. F-4
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES ( Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS For The Year Ended October 31, 2001 and the Period May 26, 2000 to October 31, 2000 and the Period May 26, 2000 ( date of inception - note 6 ) to October 31, 2001 - -------------------------------------------------------------------------------- May 26, 2000 Oct 31, Oct 31, to 2001 2000 Oct 31, 2001 ----------- ----------- ----------- REVENUES $ 5,578 $ -- $ 5,578 ----------- ----------- ----------- EXPENSES Administrative 1,353,710 129,778 1,483,488 Interest 201,449 -- 201,449 Depreciation and amortization 69,260 -- 69,260 ----------- ----------- ----------- 1,624,419 129,778 1,754,197 ----------- ----------- ----------- NET LOSS - from operations (1,618,841) (129,778) (1,748,619) ----------- ----------- ----------- OTHER INCOME (LOSS) Minority interests (4,712) -- (4,712) Loss of good will (958,628) -- (958,628) Net gain from sale of investment stock 338,049 -- 338,049 Net loss from transfer of license agreement - Note 3 (135,491) -- (135,491) ----------- ----------- (760,782) (760,782) ----------- ----------- ----------- NET LOSS $(2,379,623) $ (129,778) $(2,509,401) =========== =========== =========== LOSS PER COMMON SHARE Basic $ (.06) $ (.02) -- ----------- ----------- ----------- AVERAGE OUTSTANDING COMMON SHARES Basic (stated in 1000's) 43,087 6,406 -- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-5
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES (Development Stage Company) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Period May 26, 2000 ( date of inception - note 6 ) to October 31, 2001 - -------------------------------------------------------------------------------- Capital in Preferred Stock Common Stock Excess of Accumulated Shares Amount Shares Amount Par Value Deficit ----------- ----------- ---------- ----------- ----------- ----------- Balance May 26, 2000 -- $ -- 6,406,098 $ 6,406 $ 79,920 $ -- Net operating loss for the period May 26, 2000 to October 31, 2000 -- -- -- -- -- (129,778) ----------- ----------- ---------- ----------- ----------- ----------- Balance October 31, 2000 -- -- 6,406,098 6,406 79,920 (129,778) Issuance of common stock for bonus interest expense at $.50 - August 2001 -- -- 150,000 150 74,850 -- Issuance of common stock for acquisition of Videolocity International Inc. - Dec 4, 2000 -- -- 30,280,762 30,281 359,165 -- Issuance of class A preferred stock for Acquisition of 5thDigit Technology LLC - Dec 5, 2000 950,000 950 -- -- 949,050 -- Issuance of common stock for cash at $.082 - Dec 7, 2000 -- -- 6,100,000 6,100 493,900 -- Issuance of common stock for incentive stock plan at $.10 - September 2001 -- -- 50,000 50 4,950 -- Issuance of common stock for public relations agreement at $.10 - August 2001 -- -- 200,000 200 19,800 -- Provision for redemption value of preferred stock - note 9 - -- -- -- -- (3,957,380) -- Net operating loss for the year ended October 31, 2001 -- -- -- -- (2,379,623) Less minority interest -- -- -- -- (326) -- ----------- ----------- ---------- ----------- ----------- ----------- Balance October 31, 2001 950,000 $ 950 43,186,860 $ 43,187 $(1,976,071) $(2,509,401) =========== ========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-6
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES (Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS For The Year Ended October 31, 2001 and the Period May 26, 2000 to October 31, 2000 and the Period May 26, 2000 ( date of inception - note 6 ) to October 31, 2001 - ------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Oct 31, Oct 31, May 26, 2000 2001 2000 to Oct 31, 2001 ---------- ----------- ----------- Net loss $(2,379,623) $ (129,778) $(2,509,401) Adjustments to reconcile net loss to net cash provided by operating activities Minority interest 4,712 -- 4,712 Loss of good will 958,628 -- 958,628 Change in short term note receivable (350,000) -- (350,000) Change in accounts and short term notes payable 687,152 19,920 687,152 Depreciation and amortization 69,260 -- 69,260 Issuance of common stock for services and expenses 70,000 -- 70,000 Net gain from sale of investment stock (452,558) -- (452,558) ---------- ----------- ----------- Net Decrease in Cash From Operations (1,392,429) (109,858) (1,522,207) ---------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (78,763) (6,433) (78,763) Advance deposits 5,924 -- (4,732) Acquisition costs of good will (8,628) -- (8,628) Cost of investment stock and licenses 571,373 -- 595,516 ---------- ----------- ----------- 489,906 (6,433) 503,393 ---------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common capital stock - Note 6 500,000 519,225 1,019,225 ---------- ----------- ----------- Net change in Cash (402,523) 402,914 411 Cash at Beginning of Period 402,934 -- -- ---------- ----------- ----------- Cash at End of Period $ 411 $ 402,914 $ 411 ========== =========== =========== NON CASH FLOWS FROM OPERATING AND INVESTING ACTIVITIES Issuance of 30,280,762 common shares for all outstanding stock of Videolocity Inc. $ 389,446 ----------- Issuance of 950,000 preferred shares for members' interests in 5th Digit Technologies LLC 950,000 ----------- Issuance of 150,000 common shares for expenses 75,000 ----------- Issuance of 250,000 common shares for services 25,000 -----------
The accompanying notes are an integral part of these financial statements. F-7 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. The Company has not started operations. 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 $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 October 31, 2001, the Company and its subsidiaries had an accumulated net operating loss available for carryforward of $2,259,401. The tax benefit of approximately $677,820 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 Agreements - --------------------------------------- The license agreements are being amortized to expense over ten years. Concentration of Credit Risk - ---------------------------- Financial instruments that potentially subject the Company to significant concentration of credit risk consists of a note receivable. (note 3) F-8 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Equipment Office equipment and the digital entertainment system is being depreciated over five years. Office equipment $31,717 Digital entertainment system 47,046 Less accumulated depreciation (5,751) ------ 73,012 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. Principals of Consolidation - --------------------------- The consolidated financial statements shown in this report includes the assets and liabilities of all subsidiaries 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. (Note 6 and 8) All intercompany transactions have been eliminated Financial Instruments - --------------------- The carrying amounts of financial instruments, including cash, a note receivable, 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. Recognition of Income - --------------------- The Company is installing the equipment needed to deliver digital information an entertainment content in selected hotels. After the equipment is operational, the user will pay for its use with a credit card and the Company will receive approximately 80% of the proceeds. F-9 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. Good Will - --------- The pronouncement regarding the valuation of good was adopted on July 1, 2001. (Note 8) 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. NOTE RECEIVABLE The Company has a note receivable of $600,000 (outlined in note 4) due within 120 days from October 31, 2001, with no interest, secured by 1,000,000 common shares of Merit Studios, Inc., held by the Company. At the report date Merit Studios, Inc. common stock was trading over the counter with a liquidation value of $.35 per share. For reporting purposes the value of the note receivable is shown at $350,000, the liquidation value of the security. The note receivable has been used as partial security on a note payable given by the Company outlined in Note 12. 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 was $250,000, with $50,000 being allocated to the purchase price of the 1,000,000 common shares of Merit Studios, Inc. 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. On May 29, 2001, the Company, through its subsidiary Videolocity Direct, Inc., entered into an additional technology license agreement with Merit Studios, Inc., pertaining to Merit's proprietary compression technology for all aspects and applications in addition to the video application previously licensed. The terms of the license extend for a period commencing on May 29, 2001 and continuing through May 28, 2011. The license will continue on a non-exclusive F-10 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 4. ACQUISITION OF LICENSE AGREEMENT - continued basis from May 29, 2011 until the expiration or termination of the agreement. The terms of the agreement provides for a payment of $200,000 upon execution and future advance royalty payments. Royalties are provided at 20% of net revenues and 40%of the initial upfront payments received by Videolocity Direct Inc. from the sale of sublicenses of the Wormhole technology. On October 31, 2001, which was amended on November 2, 2001, the Company, through its subsidiary Videolocity Direct, Inc., agreed to sell and reassign the above two license agreements to Merit Studios Inc. The terms of the agreement included a note receivable of $600,000 due to Videolocity Direct, Inc. (subsidiary) within 120 days from October 31, 2001 with no interest, the return of 2,500,000 common shares of Videolocity Direct, Inc. to Videolocity Direct, Inc for cancellation, and the reassignment of the 1,000,000 common shares of Merit Studios Inc. held by Videolocity Inc.(subsidiary). The shares in Merit Studios Inc. will be held as security until the note receivable is paid. (note 3) 5. NOTES PAYABLE The Company has short term financing of $750,000 and has issued notes payable, to six individuals and companies, with a due date of February 28, 2002, including 8% interest. The loans are secured by all of the stock of Videolocity Technologies Inc. (subsidiary) held by the Company. During November 2001, 535,000 common shares of the Company were issued to the note holders as bonus interest. $450,000 of the $750,000 was received from related parties. 6. 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 30,280,762 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. 7. RELATED PARTY TRANSACTIONS Officers, directors, employees and their affiliates, have acquired 41 % of the common stock issued. Included in the notes payable outlined in note 5 is $450,000 due to related parties. F-11 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 8. 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, valued at $1.00 per share, in which good will of $950,000 was recognized. Prior to June 30, 2001 the good will was being amortized over ten years, or a shorter period if an impairment in value was determined. On October 31, 2001 the remaining value of the good will was determined to be zero and was expensed, which resulted from the conditions outlined in note 12. 5th Digit was organized on October 10, 2000 and began operations after December 22, 2000. The acquisition was recorded as a purchase and the operating statements of 5th Digit after November 1, 2001 are included in the consolidated operating statements. There was no contingent consideration in the merger agreement. 9. REDEEMABLE 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. (ii 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 as an addition to the capital in excess of par value under the redeemable preferred capital stock. (ii 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. F-12 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 9. PREFERRED CAPITAL STOCK - continued (ii 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. Subsequent to October 31, 2001 600,000 of the outstanding series A preferred shares were retired. ( note 12) 10. 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 reserved 10,000,000 common shares that can be issued under the plan. During August 2001, 50,000 shares had been issued under the plan for services rendered and During December 2001 an additional 50,000 shares were issued. 11. CONTINUING AND CONTINGENT LIABILITIES On August 1, 2001 the Company entered into a public relations agreement with Millennium International, LLC in which 200,000 common shares were issued during August 2001 and an additional 100,00 shares were issued during December 2001 and 100,000 shares to be issued during February 2002. The terms of the agreement is for 18 months after August 1, 2001. The Company is obligated under an office lease for $6,500 per month through Dec 2002. 12. SUBSEQUENT EVENTS On November 6, 2001 the Company entered into a stock repurchase agreement to buy back 200,000 shares of Videolocity Direct, Inc. (subsidiary), including a new loan to the Company of $100,000, for a note payable of $300,000, including 8% interest. The due date of the note is the date on which the note receivable of $600,000 is paid to the Company as outlined in Note 3. The note payable is secured by the note receivable to the extent of amount due on the note payable. During November 2001, 500,000 common shares of the Company were issued to the note holder as bonus interest. During February 2002 the Company issued 1,800,000 common shares for the retirement of 600,000 series A preferred stock. A legal action was started against the holder of the remaining 350,000 shares outstanding alleging misrepresentation of the technology acquired as part of the merger with 5th Digit Technologies, LLC as outlined in note 8. Legal council believes the Company will be successful in its effort to have the shares returned to the company and canceled. F-13 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 13. GOING CONCERN The Company does not have the working capital necessary to service its debt and for its planned activity. Continuation of the Company as a going concern is dependent upon obtaining additional working capital and the management of the Company has developed a strategy, which it believes will accomplish this objective through additional equity funding and long term financing which will enable the Company to operate for the coming year. F-14 VIDEOLOCITY INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS April 30, 2002 (Unaudited) F-15
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES (Development Stage Company) CONSOLIDATED BALANCE SHEETS April 30, 2002 - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $ 22,609 Note receivable - net of provision for doubtful accounts - Note 3 200,000 ----------- Total Current Assets 222,609 ----------- EQUIPMENT - net of accumulated depreciation - Note 2 90,282 ----------- OTHER ASSETS Advance deposits and patents 5,292 ----------- $ 318,183 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable - related parties - Note 6 $ 573,000 Notes payable - Note 6 868,800 Accrued interest - notes payable - Note 6 63,855 Accounts payable 223,114 ----------- Total Current Liabilities 1,728,769 ----------- MINORITY INTERESTS 5,004 ----------- STOCKHOLDERS' EQUITY - (deficiency) Common stock 12,500,000 shares authorized, at $0.001 par value; 5,072,410 shares issued and outstanding 5,072 Capital in excess of par value 2,316,431 Deficit accumulated during the development stage (3,737,093) ----------- Total Stockholders' Equity (deficiency) (1,415,590) ----------- $ 318,183 ===========
The accompanying notes are an integral part of these financial statements. F-16
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES (Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS For the Three and Six Months Ended April 30, 2002 and 2001 and the Period May 26, 2000 ( date of inception - note 7 ) to April 30, 2002 - -------------------------------------------------------------------------------- Three Months Six Months May 26, 2000 Apr 30, Apr 30, Apr 30, Apr 30, to 2002 2001 2002 2001 Apr 30, 2002 ----------- ----------- ----------- ----------- ----------- REVENUES $ -- $ 2,961 $ -- $ 6,218 $ 5,578 ----------- ----------- ----------- ----------- ----------- EXPENSES Administrative 620,441 389,494 876,727 595,622 2,360,215 Interest 85,001 -- 192,799 -- 394,248 Depreciation and amortization 4,100 36,929 8,200 46,188 77,460 ----------- ----------- ----------- ----------- ----------- 709,542 426,423 1,077,726 641,810 2,831,923 ----------- ----------- ----------- ----------- ----------- NET LOSS - from operations (709,542) (423,462) (1,077,726) (635,592) (2,826,345) ----------- ----------- ----------- ----------- ----------- OTHER INCOME (LOSS) Minority interests 20 -- 34 -- (4,678) Loss of good will -- -- -- -- (958,628) Net gain from sale of investment stock -- 199,800 -- 199,800 338,049 Net loss from transfer of license agreement - Note 3 (150,000) -- (150,000) -- (285,491) ----------- ----------- ----------- ----------- ----------- (149,980) 199,800 (149,966) 199,800 (910,748) ----------- ----------- ----------- ----------- ----------- NET LOSS $ (859,522) $ (223,662) $(1,227,692) $ (435,792) $(3,737,093) =========== =========== =========== =========== =========== LOSS PER COMMON SHARE Basic $ (.18) $ (.05) $ (.25) $ (.10) -- ----------- ----------- ----------- ----------- ----------- AVERAGE OUTSTANDING COMMON SHARES Basic (stated in 1000's) 4,837 4,299 4,963 4,299 -- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-17
VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES (Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended April 30, 2002 and 2001 and the Period May 26, 2000 (date of inception - note 7) to April 30, 2002 - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Apr 30, Apr 30, May 26, 2000 2002 2001 to Apr 30, 2002 ---------- ----------- ----------- Net loss (1,227,692) $ (435,792) $(3,737,093) Adjustments to reconcile net loss to net cash provided by operating activities Minority interest (34) -- 4,678 Loss from transfer of license 150,000 -- 150,000 Loss of good will -- -- 958,628 Change in accounts receivable -- (54,500) -- Change in accounts and short term notes payable 821,697 19,255 1,128,849 Depreciation and amortization 8,200 46,188 77,460 Issuance of common stock for services and expenses 496,057 20,000 596,057 Net gain from sale of investment stock -- -- (452,558) ---------- ----------- ----------- Net Changes in Cash From Operations 248,228 (404,849) (1,273,979) ---------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Patents (560) -- (560) Purchase of equipment (25,470) (30,782) (104,233) Purchase of license agreement -- (251,500) -- Advances on note receivable -- (100,000) -- Advance deposits -- (14,605) (4,732) Acquisition costs of good will -- -- (8,628) Net Cost of investment stock and licenses (200,000) -- 395,516 ---------- ----------- ----------- (226,030) (396,887) 277,363 ---------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common capital stock -- 500,000 1,019,225 ---------- ----------- ----------- Net change in Cash 22,198 (301,736) 22,609 Cash at Beginning of Period 411 402,934 -- ---------- ----------- ----------- Cash at End of Period $ 22,609 $ 101,198 $ 22,609 ========== =========== =========== NON CASH FLOWS FROM OPERATING AND INVESTING ACTIVITIES Issuance of 3,028,076 common shares for all outstanding stock of Videolocity Inc. $ 389,446 --------- Issuance of 950,000 preferred shares for members' interests in 5th Digit Technologies LLC 950,000 --------- Issuance of 15,000 common shares for expenses 75,000 --------- Issuance of 25,000 common shares for services 25,000 --------- Issuance of 180,000 common shares for retirement of 600,000 preferred shares - 2002 -- --------- Issuance of 158,500 common shares for interest expense - 2002 136,800 --------- Issuance of 29,733 common shares for services - 2002 23,787 --------- Issuance of 435,470 common shares for services and expenses - 2002 335,470 --------- The accompanying notes are an integral part of these financial statements.
F-18 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 and on March 1, 2002 reduced the authorized common shares to 12,500,000 with the same par value. The terms of the preferred stock will be determined by the board of directors when issued. 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. The Company has not started operations and is considered to be in the development stage. On December 4, 2000 the Company completed a reverse common stock split of .61 shares for each outstanding share and on March 1, 2002 a reverse common stock split of one share for ten outstanding shares. This report has been completed showing after stock split shares from inception. On December 4, 2000 the Company completed a private placement offering of 610,000 common shares for $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, 2002, the Company and its subsidiaries had an accumulated net operating loss available for carryforward of $3,737,093. The tax benefit of approximately $1,121,128 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 2023. Concentration of Credit Risk - ---------------------------- Financial instruments that potentially subject the Company to significant concentration of credit risk consists of a note receivable. (note 3) F-19 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Equipment Office equipment and the digital entertainment system is being depreciated over five years. Office equipment $ 36,253 Digital entertainment system 67,981 Less accumulated depreciation (13,952) --------- $ 90,282 ========= 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, after the stock splits. 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. Principals of Consolidation - --------------------------- The consolidated financial statements shown in this report includes the assets and liabilities of all subsidiaries 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. (Note 6 and 8) All intercompany transactions have been eliminated. Financial Instruments - --------------------- The carrying amounts of financial instruments, including cash, a note receivable, and short term notes 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. F-20 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Recognition of Income - --------------------- The Company is installing the equipment needed to deliver digital information and entertainment content and high speed internet access in selected hotels, condominiums and hospitals. After the equipment is operational, the user will pay for its use with a credit card and the Company will receive approximately 80% of the proceeds. 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. NOTE RECEIVABLE The Company has a note receivable of $600,000 (outlined in note 4) due within 120 days from October 31, 2001, with no interest, secured by 1,000,000 common shares of Merit Studios, Inc., held by the Company. At the report date the note was in default and the Merit Studios, Inc. common stock was trading over the counter with a liquidation value of $.20 per share. For reporting purposes the value of the note receivable is shown at $200,000, the liquidation value of the security. The officers of the Company are planning to file a legal action to foreclose on the security and attempt to collect the note receivable. The note receivable had been used as security on a note payable given by the Company as outlined in Note 6. 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. On May 29, 2001, the Company, through its subsidiary Videolocity Direct, Inc., entered into an additional technology license agreement with Merit Studios, Inc., pertaining to Merit's proprietary compression technology for all aspects and applications in addition to the video application previously licensed. On October 31, 2001, and amended on November 2, 2001, the Company, through its subsidiary Videolocity Direct, Inc., agreed to sell and reassign the above two license agreements to Merit Studios Inc. The terms of the agreement included a note receivable of $600,000 due to Videolocity Direct, Inc. (subsidiary) within 120 days from October 31, 2001 with no interest, the return of 2,500,000 common shares of Videolocity Direct, Inc., which were returned to Videolocity Direct, Inc. and cancelled on November 11, 2001, and the reassignment of the 1,000,000 common shares of Merit Studios Inc. held by Videolocity Inc.(subsidiary). The shares in Merit Studios Inc. will be held as security until the note receivable is paid. (note 3) Videolocity Direct, Inc. changed its name to Healthcare Concierge Inc. on December 31, 2001. F-21 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 5. ACQUISITION OF PATENTS On April 6, 2002 a Provisional Patent Application for the "Videolocity Digital Entertainment System-Linux Version" was filed with the United States Patent and Trademark Office and given an Application No.: 60/370,663 and on May 20, 2002 an Assignment of Provisional Patent Application No. 60/370,663 was filed on behalf of Videolocity Technologies, Inc. See note 6 for security agreement. 6. NOTES PAYABLE The Company has short term financing of $1,441,800 and has issued notes payable, to various individuals and companies, with due dates of September 1, 2002, including $300,000 / 6% and $1,141,800 / 8% interest. On April 30, 2002 the Company filed a UCC-1 financing statement, with the state of Nevada, on the six Provisional Patent applications held in the name of Videolocity Technologies, Inc. (wholly owned subsidiary) in favor of certain promissory note holders, as security, in exchange for an extension of the due dates on promissory notes of $1,050,000 to September 1, 2002 which includes a note payable of $300,000 due to WAJ Enterprises LLC thus releasing the collateral security assignment of the Merit Studios, Inc. note receivable, and a provision for the inclusion of additional future loans of $450,000 under the security agreement of which $270,000 in new loans has been received in June 2002. During November 2001, 108,500 common shares of the Company were issued to selected note holders as bonus interest. During February and April 2002, 55,000 common shares of the company were issued to selected note holders as bonus interest. June 2002 $123,000 of the notes payable, plus interest, due to related parties, was converted to common capital stock at $1.00 per share and $238,124 due to non-related parties was converted to common stock at $1.00 per share (183,124 shares of Videolocity International, Inc. (parent) and 50,000 shares of Healthcare Concierge, Inc. (subsidiary). $573,000 of the notes payable was received from related parties. (123,000 converted) 7. ACQUISITION OF ALL OUTSTANDING STOCK VIDEOLOCITY, INC. On December 4, 2000 Videolocity International, Inc. (parent) completed the acquisition of all of the outstanding stock of Videolocity, Inc. (subsidiary), by a stock for stock exchange in which the stockholders of the subsidiary received 3,028,076 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. F-22 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 8. SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES Officers, directors, employees and their families and affiliates, have acquired 36 % of the common stock issued and have made short term loans to the Company of $573,000. The balance of $450,000 with interest of 6% on $300,000 and 8% on $150,000 is due on September 1, 2002. See Note 6. D.T. Norman, an affiliate, caused the voluntary contribution and cancellation of 50,000 shares as manager of ISOZ, LC. 9. 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, valued at $1.00 per share, in which good will of $950,000 was recognized. Prior to June 30, 2001 the good will was being amortized over ten years, or a shorter period if an impairment in value was determined. On October 31, 2001 the remaining value of the good will was determined to be zero and was expensed. 5th Digit was organized on October 10, 2000. The acquisition was recorded as a purchase and the operating statements of 5th Digit after November 1, 2000 are included in the consolidated operating statements. There is no contingent consideration from the merger agreement remaining. 10. REDEEMABLE 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. During 2001, the company retired 600,000 of the outstanding series A preferred shares by the issuance 1,800,000 common shares of the Company . A legal action was filed against the holder of the remaining 350,000 preferred shares outstanding alleging misrepresentation of the technology acquired as part of the merger with 5th Digit Technologies, LLC as outlined in note 9. On January 24, 2002 the preferred shares were tendered for liquidation at $5.00 per share and were subsequently deposited with the court pending the outcome of the legal action. On April 11, 2002 Judge Wm. Bohling of the Third Judicial District Court, Salt Lake County signed a Default Judgment against the holder of the outstanding 350,000 preferred shares ordering cancellation of the shares. It was further adjudged and decreed that any and all redemption or other rights vested in and related to the shares be voided. The 350,000 preferred shares were cancelled on April 12, 2002. F-23 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 11. 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 reserved 1,000,000 common shares that can be issued under the plan. The Company has issued 34,708 common shares under the plan. On March 26, 2002 the Company filed an additional stock option and stock award plan which had been approved by the shareholders of Pine View Technologies in November 2001 as part of the merger with Videolocity, Inc.(subsidiary). The purpose of the plan is to enable the Company to attract and retain qualified persons to serve as officers, directors, key employees and consultants of the Company, and to align the financial interests of these persons with those of its shareholders by providing those officers, directors, key employees and consultants with a proprietary interest in the Company's performance and progress through the award of stock options, appreciation rights or stock awards from time to time. The plan shall remain in effect for a period of five years or until amended or terminated by action of the Board. The termination of the Plan shall not affect any outstanding awards made under the Plan. The maximum number of shares of Common Stock, which may be issued pursuant to the Plan is 500,000. The Company has issued 400,000 shares under the Plan. 12. CONTINUING AND CONTINGENT LIABILITIES The Company is obligated under office leases for $6,500 per month through December 2002. On December 26, 2001 Gateway Center, LLC filed a complaint in the Third District Court, Summit County against a former company president, Jerry Romney, Jr. and Movies on Line, Inc. (now Videolocity, Inc.) The complaint alleges non-payment of Common Area Maintenance fees for office space leased between August 2000 and December 31, 2000 in the amount of $1,564. On April 8, 2002, the company filed a response which alleges that during the entire term of the Lease, the Gateway Center, LLC never provided written or oral notice of any sums it claimed were due and owning for "additional rent" or any other purpose, never sent a monthly or other statement for any such additional amount, never demanded payment of any such sums and, when the term of the lease had expired, they orally notified the company that it had paid all amounts that Gateway Center, LLC had claimed under the lease. The company received no notice, written oral of any supposed amount due until September 24, 2001. On May 2, 2002 the company filed a complaint in the Third Judicial District Court, Salt Lake County against former employee. The complaint alleges a willful breach of the provisions of the Employment Agreement executed between the parties on March 16, 2001. The complaint also alleges misrepresentation and fraud on the part of the former employee. F-24 VIDEOLOCITY INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- 13. SUBSEQUENT EVENTS On May 28, 2002 Videolocity International, Inc. finalized an Equity Line of Credit Agreement, with Cornell Capital Partners, L.P., a New Jersey-based domestic investment fund. Under the Equity Line, Videolocity has the right, but not the obligation, to require Cornell Capital to purchase shares of Videolocity common stock up to a maximum amount of $20,000,000 over a 24- month period. There is no minimum draw down although Videolocity may make draws, as provided below, during the term of the Equity Line. Pursuant to terms of the Equity Line, Videolocity is required to file with the SEC a registration statement covering the shares to be acquired by Cornell Capital. The 24-month term commences on the effective date of the registration statement. The purchase price of the shares will be 95% of the lowest closing bid price of Videolocity common stock during the five consecutive trading days immediately following receipt of the Company's notice of its intent to make a draw. Videolocity may make up to four draws per month at a maximum $250,000 per draw. In addition to the shares to be issued under the Equity Line, Videolocity will include in its registration statement an additional 300,000 shares being issued to Cornell Capital and the Placement Agent in connection with the execution of the Equity Line. On May 15, 2002 the Company issued a $20,000 sixty day note payable, bearing 8% interest, to a non-related party for the repurchase of 20,000 shares of Healthcare Concierge, Inc. (subsidiary). The accompanying consolidated balance sheets of Videolocity International Inc. and Subsidiaries (development stage company) at April 30, 2002 and December 31, 2001, and the related statement of operations and cash flows for the three months ended April 30, 2002, and 2001 and the period May 26, 2000 April 30, 2002 have been prepared by the Company's management in conformity with generally accepted accounting principles in the United States of America. In the opinion of 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. Operating results for the three months ended April 30, 2002 are not necessarily indicative of the results that can be expected for the year ending October 31, 2002. F-25 We have not authorized any dealer, salesperson or other person to provide to you any information or make any representations about Videolocity International, Inc. except the information or representations contained in this prospectus. You must not rely on any additional information or representations if made.
This prospectus does not constitute an offer to sell, or a solicitation of an VIDEOLOCITY INTERNATIONAL, INC. offer to buy any securities of Videolocity International, Inc.: 21,500,000 Shares of Common Stock * except the common stock offered by this prospectus; * in any jurisdiction in which the offer or PROSPECTUS solicitation is not authorized; * in any jurisdiction where the dealer or other salesperson is not qualified to make the offer or solicitation; * to any person to whom it is unlawful to make the offer or solicitation; or July _, 2002 * to any person who is not a United States resident or who is outside the jurisdiction of the United States.
The delivery of this prospectus or any resulting sale does not imply that: * there have been no changes in the affairs of Videolocity International, Inc. after the date of this prospectus; or * the information contained in this prospectus is correct after the date of this prospectus. Until _______, 2002, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters. VIDEOLOCITY INTERNATIONAL, INC. Part II Item 24. Indemnification of Directors and Officers As permitted by the provisions of the Nevada Revised Statutes (the "NRS"), we have the power to indemnify any person made a party to an action, suit or proceeding by reason of the fact that they are or were a director, officer, employee or agent of our company, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by them in connection with any such action, suit or proceeding if they acted in good faith and in a manner which they reasonably believed to be in, or not opposed to, the best interest of our company and, in any criminal action or proceeding, they had no reasonable cause to believe their conduct was unlawful. Termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which they reasonably believed to be in or not opposed to our best interests, and, in any criminal action or proceeding, they had no reasonable cause to believe their conduct was unlawful. We must indemnify a director, officer, employee or agent of Videolocity who is successful, on the merits or otherwise, in the defense of any action, suit or proceeding, or in defense of any claim, issue, or matter in the proceeding, to which they are a party because they are or were a director, officer employee or agent of Videolocity, against expenses actually and reasonably incurred by them in connection with the defense. We may make provisions to pay the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding as the expenses are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that they are not entitled to be indemnified by us. The NRS also permits a corporation to purchase and maintain liability insurance or make other financial arrangements on behalf of any person who is or was a director, officer, employee or agent of Videolocity, or is or was serving at the request of the corporation as a director, officer, employee or agent, of another corporation, partnership, joint venture, trust or other enterprise for any liability asserted against them and liability and expenses incurred by them in their capacity as a director, officer, employee or agent, or arising out of their status as such, whether or not we have the authority to indemnify them against such liability and expenses. Insofar as indemnification for liabilities arising under the Securities Act, as amended, may be permitted to officers, directors or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in such Act as is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution Filing fee under the Securities Act of 1933........................... $ 7,500 Accountants' fees and expenses........................................ 2,500 Legal fees and related expenses....................................... 20,000 Printing and filing charges........................................... 6,500 Transfer agent and registrar fees and expenses........................ 2,500 Miscellaneous......................................................... 11,000 -------- Total.................................................... $ 50,000 =======
Item 26. Recent Sales of Unregistered Securities The following table sets forth information relating to all previous sales of securities by the Registrant within the past three years that were not registered under the Securities Act of 1933, as amended. S-1
Date of Sale Name of Purchaser Type Number Consideration - ------------ ----------------- ---- --------- ------------- 12-04-2000 Shareholders of Moviesonline, Inc. (a) 3,028,125 In exchange for the acquisition of Moviesonline, Inc., valued at $389,446 12-05-2000 Owners of 5th Digit Technologies, LLC (b) 950,000 In exchange for the acquisition of 5th Digit Technologies, LLC, valued at $950,000 12-07-2000 3 purchasers in private placement (a) 610,000 Cash of $500,000 08-03-2001 To certain debtors (Edwards and Davis) (a) 10,000 Additional interest on loans, valued at $8,000 08-20-2001 Millennium International, LLC (a) 20,000 Consideration for services, valued at $20,000 08-28-2001 To certain debtor (Crown Jewels, LLC) (a) 5,000 Additional interest on loan, valued at $4,000 11-05-2001 To certain debtor (WAJ Enterprises, LLC) (a) 50,000 Additional interest on loan, valued at $40,000 11-09-2001 To certain debtors (Davis, Edwards, (a) 30,000 Additional interest on loans, valued McNeill and Williams) at $24,000 11-09-2001 Larry R. McNeill (a) 13,500 Additional interest on loan, valued at $10,800 11-09-2001 Bennie L. Williams (a) 10,000 Additional interest on loan, valued at $8,000 12-11-2001 Millennium International, LLC (a) 10,000 Consideration for Services, valued at $8,000 02-05-2002 3 holders of Series A Preferred Stock (a) 180,000 Exchange and retirement of Series A Preferred stock valued at $180,000 02-05-2002 Bernard E. Driscoll (a) 5,000 Additional interest on loan, valued at $5,000 04-01-2002 Greenwood Technology Group (a) 50,000 Additional interest on loans, valued at $50,000 04-30-2002 Bernard E. Driscoll (a) 25,495 Conversion of promissory note and interest, valued at $25,495 06-07-2002 Cornell Capital Partners, L.P. (a) 290,000 Additional consideration under equity line of credit agreement, valued at $290,000 (advance fee) 06-07-2002 Westrock Advisors, Inc. (a) 10,000 Consideration under placement agent agreement, valued at $10,000 (advance fee) 06-10-2002 To certain directors (a) 17,000 Consideration for loans, valued at $17,000 06-11-2002 Dan Driscoll (a) 125,122 Conversion of promissory note and interest, valued at $125,122
S-2
Date of Sale Name of Purchaser Type Number Consideration - ------------ ----------------- ---- --------- ------------- 06-14-2002 Greenwood Technology Group (a) 183,124 Conversion of promissory note and interest, valued at $183,124 06-19-2002 Richard H. McCullough (a) 10,000 Consideration for loan, valued at $10,000
- ------------- (a) Common Stock. (b) Preferred Stock With respect to the above issuances for services rendered, cash, acquisitions, consideration for loans and interest, we relied on the exemptions from registration provided by Sections 4(2) and 4(6) of the Securities Act of 1933. For issuances upon the exchange of preferred stock and conversion of notes, we relied on the exemption from registration provided by Section 3(a)(9) of the Securities Act. All securities issued to the aforementioned persons bear restrictive legends preventing their transfer except in accordance with the Securities Act and the regulations promulgated thereunder. In addition, stop transfer instructions pertaining to these shares have been or will be lodged with our transfer agent. Item 27. Exhibits (a) The following exhibits are filed with this Registration Statement: Exhibit No. Exhibit Name - ----------- ------------ 2.1(1) Agreement and Plan of Reorganization With Pine View Technologies, Inc. Dated as of November 15, 2000 2.2(1) Articles of Merger Between Pine View Merger Co. and Videolocity, Inc. Dated December 1, 2000 3.1(1) Amended and Restated Articles of Incorporation 3.2(2) By-Laws 3.3(3) Designation of Rights, Preferences and Privileges for the Series B Voting Preferred Stock of Videolocity International, Inc. 3.4 Amendment to Articles of Incorporation 5.1 Opinion of Leonard E. Neilson, Attorney at Law, regarding legality of securities being registered 10.1(1) License Agreement Between Videolocity, Inc. (formerly Moviesonline, Inc.) and Merit Studios, Inc. dated October 27, 2000 10.1(a)(4) Amended and Restated License Agreement [Video] between Videolocity Direct, Inc. and Merit Studios, Inc. dated effective as of October 27, 2000 10.2(4) Services Agreement between Videolocity International, Inc. and Sinclair-Davis Filing Trading Corp. dated as of April 26, 2001 10.3(5) Additional Technology License Agreement dated May 29, 2001, between Videolocity Direct, Inc. and Merit Studios, Inc. 10.4 Equity Line of Credit Agreement with Cornell Capital Partners, L.P. 10.5 Registration Rights Agreement with Cornell Capital Partners, L.P. related to Equity Line of Credit Agreement 10.6 Escrow Agreement with Cornell Capital Partners, L.P., Butler Gonzalez LLP and First Union National Bank, related to Equity Line of Credit Agreement 10.7 Placement Agent Agreement with Westrock Advisors, Inc., related to Equity Line of Credit Agreement 10.8 Employment Agreement with Robert E. Holt 10.9 Employment Agreement with Martin P. Senn S-3 Exhibit No. Exhibit Name - ----------- ------------ 10.10 Lease of Prospector Square Facility and Extension 10.11 UCC-1 Security Agreement 10.12 Amendment to Agreement of Purchase and Reassignment with Merit Studios, Inc. 21.1 Subsidiaries 23.1 Consent of Andersen Andersen & Strong, L.C., Certified Public Accountants 23.2 Consent of Leonard E. Neilson, Attorney at Law (included as part of Exhibit 5) - ------------------ (1) Incorporated by reference to the Form 10-KSB for the fiscal year ended October 31, 2000. (2) Incorporated by reference to the registration statement on Form S-18 filed with the Commission, SEC file no. 33-2310-D. (3) Incorporated by reference to the Form 10-QSB for the period ended January 31, 2001. (4) Incorporated by reference to the Form 10-QSB for the period ended April 30, 2001. (5) Incorporated by reference to the Form 10-QSB for the period ended July 31, 2001. (b) Financial Statement Schedules for Registrant. Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes therein. Item 28. Undertakings (a) The undersigned small business issuer hereby undertakes: (1) To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together represent a fundamental change in the information in the registration statement; and notwithstanding the forgoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospects filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities as at that time to be the initial bona fide offering. (3) File a post effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. S-4 (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) If the issuer relies on Rule 430A under the Securities Act, the small business issuer will: (1) For determining any liability under the Securities Act treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this registration statement as of the time the Commission declared it effective. (2) For determining any liability under the Securities Act, that each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. S-5 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements of filing on Form SB-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the City of Salt Lake City, State of Utah, on this 5th day of July 2002. VIDEOLOCITY INTERNATIONAL, INC. (REGISTRANT) By: /S/ ROBERT E. HOLT --------------------------------------------- Robert E. Holt Chief Executive Officer In accordance with the requirements of the Securities Act of 1933, this Registration Statement was signed by the following persons in the capacities and on the dates indicated. By: /S/ ROBERT E. HOLT ----------------------------------------------------- Robert E. Holt Chief Executive Officer and Director Date: July 5, 2002 By: /s/ BENNIE L. WILLIAMS ----------------------------------------------------- Bennie L. Williams, Chairman and Director Date: July 5, 2002 By: /s/ LARRY R. MCNEILL ----------------------------------------------------- Larry R. McNeill, Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer) Date: July 5, 2002 By: /s/ D. T. NORMAN ----------------------------------------------------- D. T. Norman, Secretary, Treasurer and Director Date: July 5, 2002 By: /s/ DR. JAMES P. HILL ------------------------------------------------- Dr. James P. Hill, Vice Chairman and Director Date: July 5, 2002 By: /s/ DAN DRISCOLL --------------------------------------------------- Dan Driscoll, Vice President Corporate Development and Director Date: July 5, 2002 S-6 EX-3.4 4 certamend.txt AMENDMENT TO ARTICLES OF INCORPORATION
[STATE SEAL- DEAN HELLER Certificate of Office Use Only: Graphic Omitted] Secretary of State Amendment (PURSUANT TO NRS 78.385 AND 202 North Carson Street 78.390) Carson City, Nevada 89701-4201 (775) 684 5708
Important: Read attached instruction before completing. - ------------------------------------------------------------------------------- Certificate of Amendment to Articles of Incorporation For Nevada Profit Corporations - ------------------------------------------------------------------------------- (Pursuant to NRS 78.385 and 78.390 - After Issuance of Stock) - Remit in Duplicate - 1. Name of Corporation: VIDEOLOCITY INTERNATIONAL, INC. 2. The articles have been amendment as follows (provide article numbers, if available ): The first paragraph of Article IV of the Articles of Incorporation is hereby amended to read as follows: ARTICLE IV AUTHORIZED SHARES "The Corporation shall have authority to issue an aggregate of 51,000,000 shares, of which 1,000,000 shares shall be preferred stock, par value One-Tenth of a Cent ($0.001 per share (the "Preferred Stock"), and 50,000,000 shares shall be common stock, par value One-Tenth of a Cent ($0.001) per share (the "Common Stock"). The powers, preferences and rights, and qualifications, limitations, or restrictions of shares of stock of each class and series which the Corporation shall be authorized to issue, are as follows." The remainder of Article IV shall remain unchanged (See Attached) 3. The vote by which the stockholders holding shares in the corporation entitling them to exercise at least a majority of the voting power, or such greater proportion of the voting power as may be required in the case of a vote by classes or series, or as may be required by the provisions of the articles of incorporation have voted in favor of the amendment is: 51% * 4. Officer Signature (Required): /s/ Larry McNeill - ------------------------ Larry McNeill, CEO * If any proposed amendment would alter or change any prefernce or any relative or other right given to any class or series of outstanding shares, then the amendment must be approved by the vote, in addition to the affirmative vote otherwise required, of the holders of shares representing a majority of the voting power of each class or series affected by the amendment regardless of limitations or restrictions on the voting power thereof. IMPORTANT: Failure to include any of the above information and remit the proper fees may cause this filing to be rejected. EX-5.1 5 ex5no1.txt OPINION RE: LEGALITY Exhibit 5.1 Opinion Leonard E. Neilson Attorney at Law 8160 South Highland Drive Suite 209 Sandy, Utah 84093 Phone: (801) 733-0800 Fax: (801) 733-0808 July 5, 2002 Videolocity International, Inc. 358 South 700 East Suite B604 Salt Lake City, Utah 84102 Re: Form SB-2 Registration Statement of Videolocity International, Inc. To the Board of Directors: I have acted as counsel to Videolocity International, Inc., a Nevada corporation (the "Company"), in connection with its registration statement on Form SB-2 related to the offer by certain selling stockholders of 21,500,000 shares of the Company's common stock, par value $.001 per share, issuable pursuant to that certain Equity Line of Credit Agreement and Placement Agent Agreement. The amount being registered includes shares possibly issued due to fluctuations in per share market price of the Company's shares. The shares are being offered pursuant to fulfillment of the terms and conditions set forth in the Registration Statement filed on Form SB-2 in accordance with the registration provisions of the Securities Act of 1933, as amended. I have examined the Articles of Incorporation and all amendments thereto, By-Laws, minutes of corporate proceedings and other corporate documents with respect to the issuance of the shares by the Company and the offering of shares by the selling stockholders. I have been furnished with originals, or copies certified to my satisfaction, of all such corporate or other records of the Company and I have made such other legal and factual examinations and inquiries as I have considered necessary as a basis for the opinions expressed herein. In the examination of the Company's corporate records, I have presumed the authenticity of all signatures which existed on the records and have presumed the veracity and regularity of all corporate records. As to the question of fact material to this opinion letter, I have relied upon the representations and warranties, certificates of and conversations and correspondences with, officers and representatives of the Company. Based upon the foregoing, I am of the opinion that: 1. The Company is a corporation duly organized and validly existing under the laws of the State of Nevada. 2. The shares subject to the registration statement will be legally and validly authorized under the Articles of Incorporation and Board of Directors of the Company and, when distributed and paid for in accordance with the terms set forth in the registration statement, the shares will be duly and validly issued and outstanding, fully paid and nonassessable. I hereby consent to the reference to myself in the registration statement covering the offering of the shares, the use of my name beneath the caption "Legal Matters" in the prospectus forming a part thereof, and to the filing of a copy of this opinion as Exhibit 5 thereof. Yours truly, /S/ Leonard E. Neilson ------------------------ Leonard E. Neilson :ae EX-10.4 6 ex10no4.txt MATERIAL CONTRACTS EQUITY LINE OF CREDIT AGREEMENT ------------------------------- AGREEMENT dated as of the ___ day of May 2002 (the "Agreement") between CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor"), and VIDEOLOCITY INTERNATIONAL INC., a corporation organized and existing under the laws of the State of Nevada (the "Company"). WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investor, from time to time as provided herein, and the Investor shall purchase from the Company up to Twenty Million ($20,000,000) Dollars of the Company's common stock, par value $.001 per share (the "Common Stock"), for a total purchase price of Twenty Million ($20,000,000) Dollars; and WHEREAS, such investments will be made in reliance upon the provisions of Regulation D ("Regulation D") of the Securities Act of 1933, as amended, and the regulations promulgated there under (the "Securities Act"), and or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the investments to be made hereunder. WHEREAS, the Company has engaged Westrock Advisors, Inc. to act as the Company's exclusive placement agent in connection with the sale of the Company's Common Stock to the Investor hereunder. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I. Certain Definitions Section 1.1. "Advance" shall mean the portion of the Commitment Amount requested by the Company in the Advance Notice. Section 1.2. "Advance Date" shall mean the date Butler Gonzalez LLP/First Union Escrow Account is in receipt of the funds from the Investor and Butler Gonzalez LLP, as the Investor's Counsel, is in possession of free trading shares from the Company and therefore an Advance by the Investor to the Company can be made and Butler Gonzalez LLP can release the free trading shares to the Investor. No Advance Date shall be less than six (6) Trading Days after an Advance Notice Date. Section 1.3. "Advance Notice" shall mean a written notice to the Investor setting forth the Advance amount that the Company requests from the Investor and the Advance Date. Section 1.4. "Advance Notice Date" shall mean each date the Company delivers to the Investor an Advance Notice requiring the Investor to advance funds to the Company, subject to the terms of this Agreement. No Advance Notice Date shall be less than seven (7) Trading Days after the prior Advance Notice Date. 1 Section 1.5. "Bid Price" shall mean, on any date, the closing bid price (as reported by Bloomberg L.P.) of the Common Stock on the Principal Market or if the Common Stock is not traded on a Principal Market, the highest reported bid price for the Common Stock, as furnished by the National Association of Securities Dealers, Inc. Section 1.6. "Closing" shall mean one of the closings of a purchase and sale of Common Stock pursuant to Section 2.3. Section 1.7. "Commitment Amount" shall mean the aggregate amount of up to Twenty Million Dollars ($20,000,000) which the Investor has agreed to provide to the Company in order to purchase the Company's Common Stock pursuant to the terms and conditions of this Agreement. Section 1.8. "Commitment Period" shall mean the period commencing on the earlier to occur of (i) the Effective Date, or (ii) such earlier date as the Company and the Investor may mutually agree in writing, and expiring on the earliest to occur of (x) the date on which the Investor shall have made payment of Advances pursuant to this Agreement in the aggregate amount of Twenty Million Dollars ($20,000,000), (y) the date this Agreement is terminated pursuant to Section 2.4 or Section 10.2, or (z) the date occurring twenty-four (24) months after the Effective Date. Section 1.9. "Common Stock" shall mean the Company's common stock, par value $.001 per share. Section 1.10. "Condition Satisfaction Date" shall have the meaning set forth in Section 7.2. Section 1.11. "Damages" shall mean any loss, claim, damage, liability, costs and expenses (including, without limitation, reasonable attorney's fees and disbursements and costs and expenses of expert witnesses and investigation). Section 1.12. "Effective Date" shall mean the date on which the SEC first declares effective a Registration Statement registering the resale of the Registrable Securities as set forth in Section 7.2(a). Section 1.13. "Escrow Agreement" shall mean the escrow agreement among the Company, the Investor, the Investor's Counsel and First Union National Bank dated the date hereof. Section 1.14. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated there under. Section 1.15. "Material Adverse Effect" shall mean any condition, circumstance, or situation that would prohibit or otherwise materially interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement or the Registration Rights Agreement in any material respect. 2 Section 1.16. "Market Price" shall mean the lowest closing Bid Price of the Common Stock during the Pricing Period. Section 1.17. "Maximum Advance Amount" shall be equal up to One Million Dollars ($1,000,000) , in the aggregate, in any thirty (30) calendar day period and specifically Two Hundred Fifty Thousand Dollars ($250,000) per Advance Notice. Section 1.18 "NASD" shall mean the National Association of Securities Dealers, Inc. Section 1.19 "Person" shall mean an individual, a corporation, a partnership, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. Section 1.20 "Placement Agent" shall mean Westrock Advisors, Inc. a registered broker-dealer. Section 1.21 "Pricing Period" shall mean the five (5) consecutive Trading Days after the Advance Notice Date. Section 1.22 "Principal Market" shall mean the Nasdaq National Market, the Nasdaq SmallCap Market, the American Stock Exchange, the OTC Bulletin Board or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock. Section 1.23 "Purchase Price" shall be set at ninety five percent (95%) of the Market Price during the Pricing Period. Section 1.24 "Registrable Securities" shall mean the shares of Common Stock (i) in respect of which the Registration Statement has not been declared effective by the SEC, (ii) which have not been sold under circumstances meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act ("Rule 144") or (iii) which have not been otherwise transferred to a holder who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend. Section 1.25 "Registration Rights Agreement" shall mean the Registration Rights Agreement dated the date hereof, regarding the filing of the Registration Statement for the resale of the Registrable Securities, entered into between the Company and the Investor. Section 1.26 "Registration Statement" shall mean a registration statement on Form S-1 or SB-2 (if use of such form is then available to the Company pursuant to the rules of the SEC and, if not, on such other form promulgated by the SEC for which the Company then qualifies and which counsel for the Company shall deem appropriate, and which form shall be available for the resale of the Registrable Securities to be registered there under in accordance with the provisions of this Agreement and the Registration Rights Agreement, and in accordance with the intended method of distribution of such securities), for the registration of the resale by the Investor of the Registrable Securities under the Securities Act. 3 Section 1.27 "Regulation D" shall have the meaning set forth in the recitals of this Agreement. Section 1.28 "SEC" shall mean the Securities and Exchange Commission. Section 1.29 "Securities Act" shall have the meaning set forth in the recitals of this Agreement. Section 1.30 "SEC Documents" shall mean Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, Current Reports on Form 8-KSB and Proxy Statements of the Company as supplemented to the date hereof, filed by the Company for a period of at least twelve (12) months immediately preceding the date hereof or the Advance Date, as the case may be, until such time as the Company no longer has an obligation to maintain the effectiveness of a Registration Statement as set forth in the Registration Rights Agreement. Section 1.31 "Trading Day" shall mean any day during which the New York Stock Exchange shall be open for business. ARTICLE II. Advances Section 2.1. Investments. (a) Advances. Upon the terms and conditions set forth herein (including, without limitation, the provisions of Article VII hereof), on any Advance Notice Date the Company may request an Advance by the Investor by the delivery of an Advance Notice. The number of shares of Common Stock that the Investor shall receive for each Advance shall be determined by dividing the amount of the Advance by the Purchase Price. No fractional shares shall be issued. Fractional shares shall be rounded to the next higher whole number of shares. The aggregate maximum amount of all Advances that the Investor shall be obligated to make under this Agreement shall not exceed the Commitment Amount. (b) Notwithstanding the foregoing the Company shall only be entitled to an Advance if the Company's Common Stock has an active bid at all times during the Pricing Period. (c) The Company acknowledges that the Investor may sell the Company's Common Stock purchased pursuant to an Advance Notice during the corresponding Pricing Period. Section 2.2. Mechanics. (a) Advance Notice. At any time during the Commitment Period, the Company may deliver an Advance Notice to the Investor, subject to the conditions set forth in Section 7.2; provided, however, unless waived by the Investor, the amount for each Advance as designated by the Company in the applicable Advance Notice, as well as the aggregate amount of multiple Advances in any thirty (30) calendar day period, shall not be more than the Maximum Advance Amount. The aggregate amount of the Advances pursuant to this Agreement shall not exceed the Commitment Amount, unless otherwise agreed by the Investor in the Investor's sole and absolute discretion. The Company acknowledges that 4 the Investor may sell shares of the Company's Common Stock corresponding with a particular Advance Notice on the day the Advance Notice is received by the Investor. There will be a minimum of seven (7) Trading Days between each Advance Notice Date. (b) Date of Delivery of Advance Notice. An Advance Notice shall be deemed delivered on (i) the Trading Day it is received by facsimile or otherwise by the Investor if such notice is received prior to 12:00 noon Eastern Time, or (ii) the immediately succeeding Trading Day if it is received by facsimile or otherwise after 12:00 noon Eastern Time on a Trading Day or at any time on a day which is not a Trading Day. No Advance Notice may be deemed delivered, on a day that is not a Trading Day. (c) Pre-Closing Share Credit. Within two (2) business days after the Advance Notice Date, the Company shall credit shares of the Company's Common Stock to the Investor's balance account with The Depository Trust Company through its Deposit Withdrawal At Custodian system, in an amount equal to the amount of the requested Advance divided by the closing Bid Price of the Company's Common Stock as of the Advance Notice Date multiplied by one point one (1.1). Any adjustments to the number of shares to be delivered to the Investor at the Closing as a result of fluctuations in the closing Bid Price of the Company's Common Stock shall be made as of the date of the Closing. Any excess shares shall be credited to the next Advance. In no event shall the number of shares issuable to the Investor pursuant to an Advance exceed nine and 9/10 percent (9.9%) of the then outstanding Common Stock of the Company. (d) Hardship. In the event the Investor sells the Company's Common Stock pursuant to subsection (c) above and the Company fails to perform its obligations as mandated in Section 2.5 and 2.2 (c), and specifically fails to provide the Investor with the shares of Common Stock for the applicable Advance, the Company acknowledges that the Investor shall suffer financial hardship and therefore shall be liable for any and all losses, commissions, fees, or financial hardship caused to the Investor. Section 2.3. Closings. On each Advance Date, which shall be six (6) Trading Days after an Advance Notice Date, (i) the Company shall deliver to the Investor's Counsel, as defined pursuant to the Escrow Agreement, shares of the Company's Common Stock, representing the amount of the Advance by the Investor pursuant to Section 2.1 herein, registered in the name of the Investor which shall be delivered to the Investor, or otherwise in accordance with the Escrow Agreement and (ii) the Investor shall deliver to First Union National Bank (the "Escrow Agent") the amount of the Advance specified in the Advance Notice by wire transfer of immediately available funds which shall be delivered to the Company, or otherwise in accordance with the Escrow Agreement. In addition, on or prior to the Advance Date, each of the Company and the Investor shall deliver to the other through the Investor's Counsel all documents, instruments and writings required to be delivered or reasonably requested by either of them pursuant to this Agreement in order to implement and effect the transactions contemplated herein. Payment of funds to the Company and delivery of the Company's Common Stock to the Investor shall occur in accordance with the conditions set forth above and those contained in the Escrow Agreement; provided, however, that to the extent the Company has not paid the fees, expenses, and disbursements of the Investor or its Investor's counsel in accordance with Section 12.4, the amount of such fees, expenses, and disbursements may be deducted by the Investor (and shall be paid to the relevant party) from the amount of the Advance with no reduction in the amount of shares of the Company's Common Stock to be delivered on such Advance Date. 5 Section 2.4. Termination of Investment. The obligation of the Investor to make an Advance to the Company pursuant to this Agreement shall terminate permanently (including with respect to an Advance Date that has not yet occurred) in the event that (i) there shall occur any stop order or suspension of the effectiveness of the Registration Statement for an aggregate of fifty (50) Trading Days, other than due to the acts of the Investor, during the Commitment Period, and (ii) the Company shall at any time fail materially to comply with the requirements of Article VI and such failure is not cured within thirty (30) days after receipt of written notice from the Investor, or any provisions set forth in Section 10.2 occurs, provided, however, that this termination provision shall not apply to any period commencing upon the filing of a post-effective amendment to such Registration Statement and ending upon the date on which such post effective amendment is declared effective by the SEC. Section 2.5. Agreement to Advance Funds. (a) The Investor agrees to advance the amount specified in the Advance Notice to the Company after the completion of each of the following conditions and the other conditions set forth in this Agreement: (i) the execution and delivery by the Company, and the Investor, of this Agreement, and the Exhibits hereto; (ii) Investor's Counsel shall have received the shares of Common Stock applicable to the Advance in accordance with Section 2.2(c) hereof; (iii) the Company's Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement shall have been declared effective by the SEC; (iv) the Company shall have obtained all material permits and qualifications required by any the States of New Jersey and New York for the offer and sale of the Registrable Securities, or shall have the availability of exemptions there from. The sale and issuance of the Registrable Securities shall be legally permitted by all laws and regulations to which the Company is subject; (v) the Company shall have filed with the Commission in a timely manner all reports, notices and other documents required of a "reporting company" under the Exchange Act and applicable Commission regulations; (vi) the fees as set forth in Section 12.4 below shall have been paid or can be withheld as provided in Section 2.3; and (vii) the conditions set forth in Section 7.2 shall have been satisfied. 6 (viii) The Company shall have provided to the Investor an acknowledgement, to the satisfaction of the Investor, from the Company's accountants as to the accountant's ability to provide all consents required in order to file a registration statement in connection with this transaction; (xi) The Company's transfer agent shall be DWAC eligible. Section 2.6. Lock Up Period. (i) During the Commitment Period the Company shall not, without the prior consent of the Investor, issue or sell (i) any Common Stock without consideration or for a consideration per share less than the Bid Price on the date of issuance or (ii) issue or sell any warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a consideration per share less than the Bid Price on the date of issuance, except that this provision shall not apply to (x) the issuance of securities by the Company or the vesting of any securities pursuant to an existing employee stock plan, stock incentive plan or other similar plan established by the Company and filed with the SEC or, (y) the issuance, with ten (10) days prior notice to the Investor, of securities by the Company pursuant to the conversion of an outstanding instrument and which is set forth in Schedule 2.6 annexed hereto and by this reference made a part hereof, or (z) in the event the Common Stock is deemed "restricted securities" the shares are issued or the right to acquire the shares is at a price not less than ninety percent (90%) of the average closing bid price of the Common Stock for the five (5) consecutive Trading Days immediately prior to the issuance of the shares.. (ii) On the date hereof, the Company shall obtain from each officer and director a lock-up agreement, as defined below, in the form annexed hereto as Schedule 2.6(b) agreeing to only sell in compliance with the volume limitation of Rule 144 during such time as the person serves as an officer or director of the Company. ARTICLE III. Representations and Warranties of Investor Investor hereby represents and warrants to, and agrees with, the Company that the following are true and as of the date hereof and as of each Advance Date: Section 3.1. Organization and Authorization. The Investor is duly incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority to purchase and hold the securities issuable hereunder. The decision to invest and the execution and delivery of this Agreement by such Investor, the performance by such Investor of its obligations hereunder and the consummation by such Investor of the transactions contemplated hereby have been duly authorized and requires no other proceedings on the part of the Investor. The undersigned has the right, power and authority to execute and deliver this Agreement and all other instruments (including, without limitations, the Registration Rights Agreement), on behalf of the Investor. This Agreement has been duly executed and delivered by the Investor and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligations of the Investor, enforceable against the Investor in accordance with its terms. 7 Section 3.2. Evaluation of Risks. The Investor has such knowledge and experience in financial tax and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. It recognizes that its investment in the Company involves a high degree of risk. Section 3.3. No Legal Advice From the Company. The Investor acknowledges that it had the opportunity to review this Agreement and the transactions contemplated by this Agreement with his or its own legal counsel and investment and tax advisors. The Investor is relying solely on such counsel and advisors and not on any statements or representations of the Company or any of its representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by this Agreement or the securities laws of any jurisdiction. Section 3.4. Investment Purpose. The securities are being purchased by the Investor for its own account and for no other person or assign. The Investor agrees not to assign or in any way transfer the Investor's rights to the securities or any interest therein and acknowledges that the Company will not recognize any purported assignment or transfer except in accordance with applicable Federal and state securities laws. No other person has or will have a direct or indirect beneficial interest in the securities. The Investor agrees not to sell, hypothecate or otherwise transfer the Investor's securities unless the securities are registered under Federal and applicable state securities laws or unless, in the opinion of counsel satisfactory to the Company, an exemption from such laws is available. Section 3.5. Accredited Investor. Investor is an "Accredited Investor" as that term is defined in Rule 501(a)(3) of Regulation D of the Securities Act. Section 3.6. Information. The Investor and its advisors (and its counsel), if any, have been furnished with all materials relating to the business, finances and operations of the Company and information it deemed material to making an informed investment decision. The Investor and its advisors, if any, have been afforded the opportunity to ask questions of the Company and its management. Neither such inquiries nor any other due diligence investigations conducted by such Investor or its advisors, if any, or its representatives shall modify, amend or affect the Investor's right to rely on the Company's representations and warranties contained in this Agreement. The Investor understands that its investment involves a high degree of risk. The Investor is in a position regarding the Company, which, based upon employment, family relationship or economic bargaining power, enabled and enables such Investor to obtain information from the Company in order to evaluate the merits and risks of this investment. The Investor has sought such accounting, legal and tax advice, as it has considered necessary to make an informed investment decision with respect to this transaction. Section 3.7. Receipt of Documents. The Investor and its counsel has received and read in their entirety: (i) this Agreement and the Exhibits annexed hereto; (ii) all due diligence and other information necessary to verify the accuracy and completeness of such representations, warranties and covenants; 8 (iii) the Company's Form 10-KSB for the year ended year ended October 31, 2001 and Form 10-QSB for the period ended January 31, 2002; and (iv) answers to all questions the Investor submitted in writing to the Company regarding an investment in the Company. Section 3.8. Registration Rights Agreement and Escrow Agreement. The parties have entered into the Registration Rights Agreement and the Escrow Agreement, each dated the date hereof. Section 3.9. No General Solicitation. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the shares of Common Stock offered hereby. Section 3.10. Not an Affiliate. The Investor is not an officer, director or a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with the Company or any "Affiliate" of the Company (as that term is defined in Rule 405 of the Securities Act). Neither the Investor nor its Affiliates has an open short position in the Common Stock of the Company, and the Investor agrees that it will not cause its Affiliates or any other person or entity, either directly or indirectly to to, engage in any short sales of or hedging transactions with respect to the Common Stock, provided that the Company acknowledges and agrees that upon receipt of an Advance Notice the Investor will sell the Shares to be issued to the Investor pursuant to the Advance Notice, even if the Shares have not been delivered to the Investor. ARTICLE IV. Representations and Warranties of the Company Except as stated below, on the disclosure schedules attached hereto or in the SEC Documents (as defined herein), the Company hereby represents and warrants to, and covenants with, the Investor that the following are true and correct as of the date hereof: Section 4.1. Organization and Qualification. The Company is duly incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority corporate power to own its properties and to carry on its business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and within ten (10) days of the date hereof will be in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect on the Company and its subsidiaries taken as a whole. Section 4.2. Authorization, Enforcement, Compliance with Other Instruments. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement and any related agreements, in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Registration Rights Agreement, the Escrow Agreement and any related agreements by the Company and the consummation by it of the transactions contemplated hereby and thereby, have been duly 9 authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its stockholders, (iii) this Agreement, the Registration Rights Agreement, the Escrow Agreement and any related agreements have been duly executed and delivered by the Company, (iv) this Agreement, the Registration Rights Agreement, the Escrow Agreement and assuming the execution and delivery thereof and acceptance by the Investor and any related agreements constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies. Section 4.3. Capitalization. As of the date hereof, the authorized capital stock of the Company consists of 12,500,000 shares of Common Stock, par value $.001 per share and 1,000,000 shares of Preferred Stock of which _________ shares of Common Stock and no shares of Preferred Stock are issued and outstanding. All of such outstanding shares have been validly issued and are fully paid and nonassessable. Except as disclosed in the SEC Documents (as defined in Section 4.5 hereof), no shares of Common Stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company. Except as disclosed in the SEC Documents, as of the date hereof, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt securities and (iii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of their securities under the Securities Act (except pursuant to the Registration Rights Agreement). There are no securities or instruments containing anti-dilution or similar provisions that will be triggered by this Agreement or any related agreement or the consummation of the transactions described herein or therein.. The Company has furnished to the Investor true and correct copies of the Company's Certificate of Incorporation, as amended and as in effect on the date hereof (the "Certificate of Incorporation"), and the Company's By-laws, as in effect on the date hereof (the "By-laws"), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto. Section 4.4. No Conflict. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Certificate of Incorporation, any certificate of designations of any outstanding series of preferred stock of the Company or By-laws or (ii) conflict with or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the Principal Market on which the Common Stock is quoted) applicable to the Company or any of its subsidiaries or by which any material 10 property or asset of the Company or any of its subsidiaries is bound or affected and which would cause a Material Adverse Effect. Except as disclosed in the SEC Documents, neither the Company nor its subsidiaries is in violation of any term of or in default under its Certificate of Incorporation or By-laws or their organizational charter or by-laws, respectively, or any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its subsidiaries. The business of the Company and its subsidiaries is not being conducted in violation of any material law, ordinance, regulation of any governmental entity. Except as specifically contemplated by this Agreement and as required under the Securities Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement or the Registration Rights Agreement in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company and its subsidiaries are unaware of any fact or circumstance which might give rise to any of the foregoing. Section 4.5. SEC Documents; Financial Statements. Since 1999, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC under of the Exchange Act. The Company has delivered to the Investor or its representatives, or made available through the SEC's website at http://www.sec.gov, true and complete copies of the SEC Documents. As of their respective dates, the financial statements of the Company disclosed in the SEC Documents (the "Financial Statements") complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Investor which is not included in the SEC Documents contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Section 4.6. 10b-5. The SEC Documents do not include any untrue statements of material fact, nor do they omit to state any material fact required to be stated therein necessary to make the statements made, in light of the circumstances under which they were made, not misleading. Section 4.7. No Default. Except as disclosed in Section 4.4 or the SEC Documents, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound and neither the execution, nor the delivery by the Company, nor the performance by the Company 11 of its obligations under this Agreement or any of the exhibits or attachments hereto will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under its Certificate of Incorporation, By-Laws, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound, or any statute, or any decree, judgment, order, rules or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, in each case which default, lien or charge is likely to cause a Material Adverse Effect on the Company's business or financial condition. Section 4.8. Absence of Events of Default. Except for matters described in the SEC Documents and/or this Agreement, no Event of Default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become an Event of Default (as so defined), has occurred and is continuing, which would have a Material Adverse Effect on the Company's business, properties, prospects, financial condition or results of operations. Section 4.9. Intellectual Property Rights. The Company and its subsidiaries own or possess adequate rights or licenses to use all material trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. The Company and its subsidiaries do not have any knowledge of any infringement by the Company or its subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, and, to the knowledge of the Company, there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. Section 4.10. Employee Relations. Neither the Company nor any of its subsidiaries is involved in any labor dispute nor, to the knowledge of the Company or any of its subsidiaries, is any such dispute threatened. None of the Company's or its subsidiaries' employees is a member of a union and the Company and its subsidiaries believe that their relations with their employees are good. Section 4.11. Environmental Laws. The Company and its subsidiaries are (i) in compliance with any and all applicable material foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval. 12 Section 4.12. Title. Except as set forth in the SEC Documents , the Company has good and marketable title to its properties and material assets owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. Any real property and facilities held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries. Section 4.13. Insurance. The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its subsidiaries are engaged. Neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole. Section 4.14. Regulatory Permits. The Company and its subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit. Section 4.15. Internal Accounting Controls. The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Section 4.16. No Material Adverse Breaches, etc. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is in breach of any contract or agreement which breach, in the judgment of the Company's officers, has or is expected to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Section 4.17. Absence of Litigation. Except as set forth in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before 13 or by any court, public board, government agency, self-regulatory organization or body pending against or affecting the Company, the Common Stock or any of the Company's subsidiaries, wherein an unfavorable decision, ruling or finding would (i) have a Material Adverse Effect on the transactions contemplated hereby (ii) adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein, or (iii) except as expressly disclosed in the SEC Documents, have a Material Adverse Effect on the business, operations, properties, financial condition or results of operation of the Company and its subsidiaries taken as a whole. Section 4.18. Subsidiaries. Except as disclosed in the SEC Documents, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. Section 4.19. Tax Status. The Company and each of its subsidiaries has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject and (unless and only to the extent that the Company and each of its subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. Section 4.20. Certain Transactions. Except as set forth in the SEC Documents none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. Section 4.21. Fees and Rights of First Refusal. Except as set forth in the SEC Documents, the Company is not obligated to offer the securities offered hereunder on a right of first refusal basis or otherwise to any third parties including, but not limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties. Section 4.22. Use of Proceeds. The Company represents that the net proceeds from this offering will be used for general corporate purposes. However, in no event shall the net proceeds from this offering be used by the Company for the payment (or loaned to any such person for the payment) of any judgment, or other liability, incurred by any executive officer, officer, director or employee of the Company, except for any liability owed to such person for services rendered, or if any judgment or other liability is incurred by such person originating from services rendered to the Company, or the Company has indemnified such person from liability. 14 Section 4.23. Further Representation and Warranties of the Company. For so long as any securities issuable hereunder held by the Investor remain outstanding, the Company acknowledges, represents, warrants and agrees that it will maintain the listing of its Common Stock on the Principal Market Section 4.24. Opinion of Counsel. Investor shall receive an opinion letter from Leonard E. Neilson, Esq., counsel to the Company (updated where applicable) on the date hereof. Section 4.25. Opinion of Counsel. The Company will obtain for the Investor, at the Company's expense, any and all opinions of counsel which may be reasonably required in order to sell the securities issuable hereunder without restriction. Section 4.26. Dilution. The Company is aware and acknowledges that issuance of shares of the Company's Common Stock could cause dilution to existing shareholders and could significantly increase the outstanding number of shares of Common Stock. ARTICLE V. Indemnification The Investor and the Company represent to the other the following with respect to itself: Section 5.1. Indemnification. (a) In consideration of the Investor's execution and delivery of this Agreement, and in addition to all of the Company's other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless the Investor, and all of its officers, directors, partners, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Investor Indemnitees") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Investor Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by the Investor Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, or (c) any cause of action, suit or claim brought or made against such Investor Indemnitee not arising out of any action or inaction of an Investor Indemnitee, and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Investor Indemnitees. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. 15 (b) In consideration of the Company's execution and delivery of this Agreement, and in addition to all of the Investor's other obligations under this Agreement, the Investor shall defend, protect, indemnify and hold harmless the Company and all of its officers, directors, shareholders, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Company Indemnitees") from and against any and all Indemnified Liabilities incurred by the Company Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Investor in this Agreement, the Registration Rights Agreement, or any instrument or document contemplated hereby or thereby executed by the Investor, (b) any breach of any covenant, agreement or obligation of the Investor(s) contained in this Agreement, the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby executed by the Investor, or (c) any cause of action, suit or claim brought or made against such Company Indemnitee based on misrepresentations or due to a breach by the Investor and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Company Indemnitees. To the extent that the foregoing undertaking by the Investor may be unenforceable for any reason, the Investor shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. ARTICLE VI. Covenants of the Company Section 6.1. Registration Rights. The Company shall cause the Registration Rights Agreement to remain in full force and effect and the Company shall comply in all material respects with the terms thereof. Section 6.2. Listing of Common Stock. The Company shall maintain the Common Stock's authorization for quotation on the National Association of Securities Dealers Over the Counter Bulletin Board or other principal market. Section 6.3. Securities Act Registration. The Company will continue to file in a timely manner all reports and other documents required to be filed under the provisions Section 15(d) of the Securities Act and will not take any action or file any document to terminate or suspend its duty to file such reports and documents. Section 6.4. Transfer Agent Instructions. Not later than two days after each Advance Notice Date and prior to each Closing and the effectiveness of the Registration Statement and resale of the Common Stock by the Investor, the Company will deliver instructions to its transfer agent to issue shares of Common Stock free of restrictive legends. Section 6.5. Corporate Existence. The Company will take all steps necessary to preserve and continue the corporate existence of the Company. Section 6.6. Notice of Certain Events Affecting Registration; Suspension of Right to Make an Advance. The Company will immediately notify the Investor upon its becoming aware of the occurrence of any of the following events in respect of a registration statement or related prospectus relating to 16 an offering of Registrable Securities: (i) receipt of any request for additional information by the SEC or any other Federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the registration statement or related prospectus; (ii) the issuance by the SEC or any other Federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in the Registration Statement or related prospectus of any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate; and the Company will promptly make available to the Investor any such supplement or amendment to the related prospectus. The Company shall not deliver to the Investor any Advance Notice during the continuation of any of the foregoing events. Section 6.7. Expectations Regarding Advance Notices. Within ten (10) days after the commencement of each calendar quarter occurring subsequent to the commencement of the Commitment Period, the Company must notify the Investor, in writing, as to its reasonable expectations as to the dollar amount it intends to raise during such calendar quarter, if any, through the issuance of Advance Notices. Such notification shall constitute only the Company's good faith estimate and shall in no way obligate the Company to raise such amount, or any amount, or otherwise limit its ability to deliver Advance Notices. The failure by the Company to comply with this provision can be cured by the Company's notifying the Investor, in writing, at any time as to its reasonable expectations with respect to the current calendar quarter. Section 6.8 Consent of Investor to Sell Common Stock. During the Commitment Period, the Company shall not without the prior written consent of the Investor, issue or sell (i) any Common Stock without consideration or for a consideration per share less than its Bid Price determined immediately prior to its issuance, (ii) issue or sell any warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a consideration per share less than such Common Stock's Bid Price determined immediately prior to its issuance, except that this provision shall not apply to (x) the issuance of securities by the Company or the vesting of any securities pursuant to an existing employee stock plan, stock incentive plan or other similar plan established by the Company and filed with the SEC, (y) the issuance, with ten (10) days prior notice to the Investor, of securities by the Company pursuant to the conversion of an outstanding instrument and which is set forth in Schedule 2.6 annexed hereto and by this reference made a part hereof, or (z) in the event the Common Stock is deemed "restricted securities" the shares are issued or the right to acquire the shares is at a price not less than ninety percent (90%) of the average closing bid price of the Common Stock for the five (5) consecutive Trading Days immediately prior to the issuance of the shares.. 17 Section 6.9 Consolidation; Merger. The Company shall not, at any time after the date hereof, effect any merger or consolidation of the Company with or into, or a transfer of all or substantially all the assets of the Company to another entity (a "Consolidation Event") unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Investor such shares of stock and/or securities as the Investor is entitled to receive pursuant to this Agreement. Section 6.10 Issuance of the Company's Common Stock. The sale of the shares of Common Stock shall be made in accordance with the provisions and requirements of Regulation D and any applicable state securities law. ARTICLE VII. Conditions for Advance and Conditions to Closing Section 7.1. Conditions Precedent to the Obligations of the Company. The obligation hereunder of the Company to issue and sell the shares of Common Stock to the Investor incident to each Closing is subject to the satisfaction, or waiver by the Company, at or before each such Closing, of each of the conditions set forth below. (a) Accuracy of the Investor's Representations and Warranties. The representations and warranties of the Investor shall be true and correct in all material respects. (b) Performance by the Investor. The Investor shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement and the Registration Rights Agreement to be performed, satisfied or complied with by the Investor at or prior to such Closing. Section 7.2. Conditions Precedent to the Right of the Company to Deliver an Advance Notice and the Obligation of the Investor to Purchase Shares of Common Stock. The right of the Company to deliver an Advance Notice and the obligation of the Investor hereunder to acquire and pay for shares of the Company's Common Stock incident to a Closing is subject to the satisfaction or waiver by the Investor, on (i) the date of delivery of such Advance Notice and (ii) the applicable Advance Date (each a "Condition Satisfaction Date"), of each of the following conditions: (a) Registration of the Common Stock with the SEC. The Company shall have filed with the SEC a Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement. As set forth in the Registration Rights Agreement, the Registration Statement shall have previously become effective and shall remain effective on each Condition Satisfaction Date and (i) neither the Company nor the Investor shall have received notice that the SEC has issued or intends to issue a stop order with respect to the Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, or intends or has 18 threatened to do so (unless the SEC's concerns have been addressed and the Investor is reasonably satisfied that the SEC no longer is considering or intends to take such action), and (ii) no other suspension of the use or withdrawal of the effectiveness of the Registration Statement or related prospectus shall exist. The Registration Statement must have been declared effective by the SEC prior to the first Advance Notice Date. (b) Authority. The Company shall have obtained all permits and qualifications required by any applicable state in accordance with the Registration Rights Agreement for the offer and sale of the shares of Common Stock, or shall have the availability of exemptions there from. The sale and issuance of the shares of Common Stock shall be legally permitted by all laws and regulations to which the Company is subject. (c) Fundamental Changes. There shall not exist any fundamental changes to the information set forth in the Registration Statement which would require the Company to file a post-effective amendment to the Registration Statement. (d) Performance by the Company. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement (including, without limitation, the conditions specified in Section 2.5 hereof) and the Registration Rights Agreement to be performed, satisfied or complied with by the Company at or prior to each Condition Satisfaction Date. (e) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits or directly and adversely affects any of the transactions contemplated by this Agreement, and no proceeding shall have been commenced that may have the effect of prohibiting or adversely affecting any of the transactions contemplated by this Agreement. (f) No Suspension of Trading in or Delisting of Common Stock. The trading of the Common Stock is not suspended by the SEC or the Principal Market (if the Common Stock is traded on a Principal Market). The issuance of shares of Common Stock with respect to the applicable Closing, if any, shall not violate the shareholder approval requirements of the Principal Market (if the Common Stock is traded on a Principal market). The Company shall not have received any notice threatening the continued listing of the Common Stock on the Principal Market (if the Common Stock is traded on a Principal Market). (g) Maximum Advance Amount. The amount of the individual Advance, as well as the aggregate amount of Advances in any thirty (30) calendar day period, requested by the Company does not exceed the Maximum Advance Amount unless waived by the Investor. In addition, in no event shall the number of shares issuable to the Investor pursuant to an Advance cause the Investor to own in excess of nine and 9/10 percent (9.9%) of the then outstanding Common Stock of the Company. (h) No Knowledge. The Company has no knowledge of any event more likely than not to have the effect of causing such Registration Statement to be suspended or otherwise ineffective. 19 (i) Other. On each Condition Satisfaction Date, the Investor shall have received and been reasonably satisfied with such other certificates and documents as shall have been reasonably requested by the Investor in order for the Investor to confirm the Company's satisfaction of the conditions set forth in this Section 7.2, including, without limitation, a certificate executed by an executive officer of the Company and to the effect that all the conditions to such Closing shall have been satisfied as at the date of each such certificate substantially in the form annexed hereto on Exhibit A. ARTICLE VIII. Due Diligence Review; Non-Disclosure of Non-Public Information Section 8.1. Due Diligence Review. Prior to the filing of the Registration Statement the Company shall make available for inspection and review by the Investor, advisors to and representatives of the Investor, any underwriter participating in any disposition of the Registrable Securities on behalf of the Investor pursuant to the Registration Statement, any such registration statement or amendment or supplement thereto or any blue sky, NASD or other filing, all financial and other records, all SEC Documents and other filings with the SEC, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such information reasonably requested by the Investor or any such representative, advisor or underwriter in connection with such Registration Statement (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement for the sole purpose of enabling the Investor and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of the Registration Statement. Section 8.2. Non-Disclosure of Non-Public Information. (a) The Company shall not disclose non-public information to the Investor, advisors to or representatives of the Investor unless prior to disclosure of such information the Company identifies such information as being non-public information and provides the Investor, such advisors and representatives with the opportunity to accept or refuse to accept such non-public information for review. The Company may, as a condition to disclosing any non-public information hereunder, require the Investor's advisors and representatives to enter into a confidentiality agreement in form reasonably satisfactory to the Company and the Investor. (b) Nothing herein shall require the Company to disclose non-public information to the Investor or its advisors or representatives, and the Company represents that it does not disseminate non-public information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts, provided, however, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided, immediately notify the advisors and representatives of the Investor and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the Registration Statement would cause such prospectus to include a material 20 misstatement or to omit a material fact required to be stated therein in order to make the statements, therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 8.2 shall be construed to mean that such persons or entities other than the Investor (without the written consent of the Investor prior to disclosure of such information) may not obtain non-public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. ARTICLE IX. Choice of Law Section 9.1. Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New Jersey without regard to the principles of conflict of laws. ARTICLE X. Assignment; Termination Section 10.1. Assignment. Neither this Agreement nor any rights of the Company or the Investor hereunder may be assigned to any other Person. Section 10.2. Termination. The obligations of the Investor to make Advances under Article II hereof shall terminate twenty-four (24) months after the Effective Date. This Agreement may be terminated by the Company by giving written prior notice to the Investor at least sixty (60) days prior to the date it desires to terminate the Agreement. ARTICLE XI. Notices Section 11.1. Notices. Any notices, consents, waivers, or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days after being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: 21 If to the Company, to: Videolocity International Inc. 1762 - A Prospector Drive Park City, Utah 84060 Attention: Robert E. Holt Telephone: (619) 890-8186 or (801) 521-2807 Facsimile: (801) 521-2844 With a copy to: Leonard E. Neilson, Esq. 8160 South Highland Drive - Suite 209 Sandy, Utah 84093 Telephone: (801) 733-0800 Facsimile: (801) 733-0808 If to the Investor(s): Cornell Capital Partners, LP 101 Hudson Street -Suite 3606 Jersey City, NJ 07302 Attention: Mark Angelo Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266 With a Copy to: Butler Gonzalez LLP 1000 Stuyvesant Avenue - Suite 6 Union, NJ 07083 Attention: David Gonzalez, Esq. Telephone: (908) 810-8588 Facsimile: (908) 810-0973 Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. ARTICLE XII. Miscellaneous Section 12.1. Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery shall cause four (4) additional original executed signature pages to be physically delivered to the other party within five (5) days of the execution and delivery hereof. Section 12.2. Entire Agreement; Amendments. This Agreement supersedes all other prior oral or written agreements between the Investor, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein 22 contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. Section 12.3. Reporting Entity for the Common Stock. The reporting entity relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of the Investor and the Company shall be required to employ any other reporting entity. Section 12.4. Fees and Expenses. The Company hereby agrees to pay the following fees: (a) Legal Fees. Each of the parties shall pay its own fees and expenses (including the fees of any attorneys, accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby, except that the Company will pay the fees and expenses in the sum of Ten Thousand Dollars ($10,000), to Butler Gonzalez LLP for legal, administrative, and escrow fees of which Five Thousand Dollars ($5,000) shall be paid upon the execution of this Agreement and Five Thousand Dollars ($5,000) upon the earlier to occur of: i) first Advance pursuant to this Agreement or ii) one hundred twenty (120) days from the date hereof. Subsequently on each advance date, the Company will pay Butler Gonzalez LLP, the sum of Five Hundred Dollars ($500) for legal, administrative and escrow fees. (b) Commitment Fees. (i) On each Advance Date the Company shall pay to the Investor, directly from the gross proceeds held in escrow, an amount equal to five percent (5%) of the amount of each Advance. The Company hereby agrees that if such payment, as is described above, is not made by the Company on the Advance Date, such payment will be made at the direction of the Investor as outlined and mandated by Section 2.3 of this Agreement. (ii) Upon the execution of this Agreement the Company shall issue to the Investor two hundred ninety thousand (290,000) shares of the Company's Common Stock (the "Investor's Shares"). Furthermore the Investor's Shares are to be held in escrow by Butler Gonzalez LLP for sixty (60) days following the Effective Date (as that term is defined in the Registration Rights Agreement dated the date hereof). However in the event the Registration Statement (as that term is defined in the Registration Rights Agreement dated the date hereof) is not declared effective the Investor shall be entitled to sell the Investor's Shares pursuant to Rule 144 one (1) year from the date hereof. (iii) Fully Earned. The Investor's Shares issued to the Investor shall be deemed fully earned upon delivery to Butler Gonzalez LLP. 23 (iv) Registration Rights. The Investor's Shares will have demand and "piggy-back" registration rights and will be included in the Registration Statement filed by the Company. Section 12.5. Brokerage. Each of the parties hereto represents that it has had no dealings in connection with this transaction with any finder or broker who will demand payment of any fee or commission from the other party. The Company on the one hand, and the Investor, on the other hand, agree to indemnify the other against and hold the other harmless from any and all liabilities to any person claiming brokerage commissions or finder's fees on account of services purported to have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby. Section 12.6. Confidentiality. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party (except information publicly available or in such party's domain prior to the date hereof, and except as required by court order) and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herein. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 24 IN WITNESS WHEREOF, the parties hereto have caused this Line of Credit Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. COMPANY: VIDEOLOCITY INTERNATIONAL INC. By: --------------------------- Name: Robert E. Holt Title: President and C.E.O INVESTOR: CORNELL CAPITAL PARTNERS, LP By: Yorkville Advisors, LLC Its: General Partner By: --------------------------- Name: Mark Angelo Title: Portfolio Manager 25 EXHIBIT A --------- ADVANCE NOTICE/COMPLIANCE CERTIFICATE ------------------------------------- VIDEOLOCITY INTERNATIONAL INC. ------------------------------ The undersigned, ________________________________ hereby certifies, with respect to the sale of shares of Common Stock of Videolocity International Inc (the "Company"), issuable in connection with this Advance Notice and Compliance Certificate dated ___________________ (the "Notice"), delivered pursuant to the Equity Line of Credit Agreement (the "Agreement"), as follows: 1. The undersigned is the duly elected Chief Executive Officer of the Company. 2. There are no fundamental changes to the information set forth in the Registration Statement which would require the Company to file a post effective amendment to the Registration Statement. 3. The Company has performed in all material respects all covenants and agreements to be performed by the Company on or prior to the Advance Date related to the Notice and has complied in all material respects with all obligations and conditions contained in the Agreement. 4. The Advance requested is _____________________. The undersigned has executed this Certificate this ____ day of _______. VIDEOLOCITY INTERNATIONAL INC. By: ---------------------- Name: Robert E. Holt Title: President & C.E.O. 26 SCHEDULED 2.6(b) ---------------- VIDEOLOCITY INTERNATIONAL INC. ------------------------------ The undersigned hereby agrees that for a period commencing on the date hereof and expiring on the termination of the Agreement dated ________________ between Videolocity International Inc., (the "Company"), and Cornell Capital Partners, LP, (the "Investor") or when the undersigned ceases to be an officer and/or director of the Company (the "Lock-up Period"), he, she or it will not, directly or indirectly, without the prior written consent of the Investor, issue, offer, agree or offer to sell, sell, grant an option for the purchase or sale of, transfer, pledge, assign, hypothecate, distribute or otherwise encumber or dispose of except pursuant to Rule 144 of the General Rules and Regulations under the Securities Act of 1933, any securities of the Company, including common stock or options, rights, warrants or other securities underlying, convertible into, exchangeable or exercisable for or evidencing any right to purchase or subscribe for any common stock (whether or not beneficially owned by the undersigned), or any beneficial interest therein (collectively, the "Securities"). Dated: _______________, 2002 Signature ____________________________________________ Address:____________________________________ City, State, Zip Code:______________________ ____________________________________________ Print Social Security Number or Taxpayer I.D. Number 27 EX-10.5 7 ex10no5.txt MATERIAL CONTRACTS - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT ----------------------------- REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May ___, 2002 by and between VIDEOLOCITY INTERNATIONAL INC., a Nevada corporation, with its principal office located at 1762 - A Prospector Drive, Park City, Utah 84060 (the "Company"), and CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor"). WHEREAS: A. In connection with the Equity Line of Credit Agreement by and between the parties hereto of even date herewith (the "Equity Line of Credit Agreement"), the Company has agreed, upon the terms and subject to the conditions of the Equity Line of Credit Agreement, to issue and sell to the Investor that number of shares of the Company's common stock, par value $.001 per share (the "Common Stock"), which can be purchased pursuant to the terms of the Equity Line Credit Agreement for an aggregate purchase price of up to Twenty Million Dollars ($20,000,000) . Capitalized terms not defined herein shall have the meaning ascribed to them in the Equity Line of Credit Agreement. B. To induce the Investor to execute and deliver the Equity Line of Credit Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations there under, or any similar successor statute (collectively, the "1933 Act"), and applicable state securities laws. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor hereby agree as follows: 1. DEFINITIONS. ------------ All capitalized terms used herein and not otherwise defined herein, shall have the same meaning ascribed to them as in the Equity Line of Credit Agreement. In addition as used in this Agreement, the following terms shall have the following meanings: a. "Person" means a corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency. b. "Register," "registered," and "registration" refer to a registration effected by preparing and filing one or more Registration Statements (as defined below) in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous or delayed basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement(s) by the United States Securities and Exchange Commission (the "SEC"). 1 c. "Registrable Securities" means the shares of Common Stock issuable to Investors pursuant to the Equity Line of Credit Agreement. d. "Registration Statement" means a registration statement under the 1933 Act which covers the Registrable Securities. 2. REGISTRATION. ------------- a. Mandatory Registration. The Company shall prepare and file with the SEC a Registration Statement on Form S-1, SB-2 or on such other form as is available. The Company shall cause such Registration Statement to be declared effective by the SEC prior to the first sale to Investor of the Company's Common Stock pursuant to the Equity Line of Credit Agreement. b. Sufficient Number of Shares Registered. In the event the number of shares available under a Registration Statement filed pursuant to Section 2(a) is insufficient to cover all of the Registrable Securities which the Investor has purchased pursuant to the Equity Line of Credit Agreement, the Company shall amend the Registration Statement, or file a new Registration Statement (on the short form available therefore, if applicable), or both, so as to cover all of such Registrable Securities which the Investor has purchased pursuant to the Equity Line of Credit Agreement as soon as practicable, but in any event not later than fifteen (15) days after the necessity therefore arises. The Company shall use it best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. For purposes of the foregoing provision, the number of shares available under a Registration Statement shall be deemed "insufficient to cover all of the Registrable Securities" if at any time the number of Registrable Securities issuable on an Advance Notice Date is greater than the number of shares available for resale under such Registration Statement. 3. RELATED OBLIGATIONS. -------------------- a. The Company shall keep the Registration Statement effective pursuant to Rule 415 at all times until the date on which the Investor shall have sold all the Registrable Securities covered by such Registration Statement (the "Registration Period"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or 2 sellers thereof as set forth in such Registration Statement. In the case of amendments and supplements to a Registration Statement which are required to be filed pursuant to this Agreement (including pursuant to this Section 3(b)) by reason of the Company's filing a report on Form 10-KSB, Form 10-QSB or Form 8-K or any analogous report under the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Company shall have incorporated such report by reference into the Registration Statement, if applicable, or shall file such amendments or supplements with the SEC on the same day on which the 1934 Act report is filed which created the requirement for the Company to amend or supplement the Registration Statement. c. The Company shall furnish to the Investor without charge, (i) at least one copy of such Registration Statement as declared effective by the SEC and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference, all exhibits and each preliminary prospectus, (ii) ten (10) copies of the final prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as such Investor may reasonably request) and (iii) such other documents as such Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by such Investor. d. The Company shall use its best efforts to (i) register and qualify the Registrable Securities covered by a Registration Statement under the "blue sky" laws of the State of New Jersey and New York, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (w) make any change to its certificate of incorporation or by-laws, (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify the Investor of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or "blue sky" laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. e. As promptly as practicable after becoming aware of such event or development, the Company shall notify the Investor in writing of the happening of any event as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (provided that in no event shall such notice contain any material, nonpublic information), and promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to each Investor. The Company shall also promptly notify the Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and 3 when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to the Investor by facsimile on the same day of such effectiveness), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, and (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate. f. The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction within the United States of America and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify the Investor of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. g. At the reasonable request of the Investor, the Company shall furnish to the Investor, on the date of the effectiveness of the Registration Statement and thereafter from time to time on such dates as the Investor may reasonably request (i) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the Investor. h. The Company shall make available for inspection by (i) the Investor and (ii) one firm of accountants or other agents retained by the Investor (collectively, the "Inspectors") all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably deemed necessary by each Inspector, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request; provided, however, that each Inspector shall agree, and the Investor hereby agrees, to hold in strict confidence and shall not make any disclosure (except to an Investor) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement of which the Inspector and the Investor has knowledge. The Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. i. The Company shall hold in confidence and not make any disclosure of information concerning the Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state 4 securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning the Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to the Investor and allow the Investor, at the Investor's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. j. The Company shall use its best efforts either to cause all the Registrable Securities covered by a Registration Statement (i) to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange or to secure the inclusion for quotation on the National Association of Securities Dealers, Inc. OTC Bulletin Board for such Registrable Securities. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(j). k. The Company shall cooperate with the Investor to the extent applicable, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Investor may reasonably request and registered in such names as the Investor may request. l. The Company shall use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities. m. The Company shall make generally available to its security holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement. n. The Company shall otherwise use its best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder. o. Within two (2) business days after a Registration Statement which covers Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Investor) confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as Exhibit A. 5 p. The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investors of Registrable Securities pursuant to a Registration Statement. 4. OBLIGATIONS OF THE INVESTOR. ---------------------------- The Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e), the Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until the Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(e) or receipt of notice that no supplement or amendment is required. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended certificates for shares of Common Stock to a transferee of the Investor in accordance with the terms of the Equity Line of Credit Agreement in connection with any sale of Registrable Securities with respect to which the Investor has entered into a contract for sale prior to the Investor's receipt of a notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e) and for which the Investor has not yet settled. 5. EXPENSES OF REGISTRATION. ------------------------- All expenses incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers, legal and accounting fees shall be paid by the Company. All other expenses in connection with the Equity Line of Credit Agreement and those other agreements referenced therein shall be paid in accordance with the terms of those respective agreements. 6. INDEMNIFICATION. ---------------- With respect to Registrable Securities which are included in a Registration Statement under this Agreement: a. To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend the Investor, the directors, officers, partners, employees, agents, representatives of, and each Person, if any, who controls the Investor within the meaning of the 1933 Act or the 1934 Act (each, an "Indemnified Person"), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts paid in settlement or expenses, joint or several (collectively, "Claims") incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto ("Indemnified Damages"), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered ("Blue Sky Filing"), or the omission or alleged omission to state a 6 material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading; or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation there under relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). The Company shall reimburse the Investor and each such controlling person promptly as such expenses are incurred and are due and payable, for any legal fees or disbursements or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (x) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto; (y) shall not be available to the extent such Claim is based on a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company, if such prospectus was timely made available by the Company pursuant to Section 3(e); and (z) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person. b. In connection with a Registration Statement, the Investor agrees to indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement and each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (each an "Indemnified Party"), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or is based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by the Investor expressly for use in connection with such Registration Statement; and, subject to Section 6(d), the Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to the Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any prospectus shall not inure to the benefit of any Indemnified 7 Party if the untrue statement or omission of material fact contained in the prospectus was corrected and such new prospectus was delivered to the Investor prior to the Investor's use of the prospectus to which the Claim relates. c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses of not more than one counsel for such Indemnified Person or Indemnified Party to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its prior written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the prior written consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such claim or litigation. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. d. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred. 8 e. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law. 7. CONTRIBUTION. ------------- To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (ii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. REPORTS UNDER THE 1934 ACT. --------------------------- With a view to making available to the Investor the benefits of Rule 144 promulgated under the 1933 Act or any similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144") the Company agrees to: a. make and keep public information available, as those terms are understood and defined in Rule 144; b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 6.3 of the Equity Line of Credit Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and c. furnish to the Investor so long as the Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration. 9. AMENDMENT OF REGISTRATION RIGHTS. --------------------------------- Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Investor. Any amendment or waiver effected in accordance with this Section 9 shall be binding upon the Investor and the Company. No consideration shall be offered or paid to any Person to amend or consent to a waiver or 9 modification of any provision of any of this Agreement unless the same consideration also is offered to all of the parties to this Agreement. 10. MISCELLANEOUS. -------------- a. A Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to own of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. b. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one business day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company, to: Videolocity International Inc.. 1762 - A Prospector Drive Park City, Utah 84060 Attention: Robert E. Holt President and C.E.O. Telephone: (619) 890-8186 or (801) 521-2807 Facsimile: (801) 521-2844 With a copy to: Leonard E. Neilson, Esq. 8160 South Highland Drive - Suite 209 Sandy, Utah 84093 Telephone: (801) 733-0800 Facsimile: (801) 733-0808 If to the Investor, to: Cornell Capital Partners, LP 101 Hudson Street - Suite 3606 Jersey City, NJ 07302 Attention: Mark Angelo Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266 With copy to: Butler Gonzalez LLP 1000 Stuyvesant Avenue - Suite 6 Union, NJ 07083 Attention: David Gonzalez, Esq. Telephone: (908) 810-8588 Facsimile: (908) 810-0973 10 Any party may change its address by providing written notice to the other parties hereto at least five days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. d. The corporate laws of the State of Nevada shall govern all issues concerning the relative rights of the Company and the Investor. e. This Agreement, the Equity Line of Credit Agreement and the Escrow Agreement constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, the Equity Line of Credit Agreement and the Escrow Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. f. This Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto. g. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. h. This Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. i. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. j. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party. 11 k. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 12 IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of day and year first above written. COMPANY: VIDEOLOCITY INTERNATIONAL INC. By: ----------------------- Name: Robert E. Holt Title: President and C.E.O. INVESTOR: CORNELL CAPITAL PARTNERS, LP By: Yorkville Advisors, LLC Its: General Partner By: ----------------------- Name: Mark Angelo Title: Portfolio Manager 13 EXHIBIT A FORM OF NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT [TRANSFER AGENT] Attn:____________________________ Re: VIDEOLOCITY INTERNATIONAL INC. ------------------------------ Ladies and Gentlemen: We are counsel to Videolocity International Inc., a Nevada corporation (the "Company"), and have represented the Company in connection with that certain Equity Line of Credit Agreement (the "Equity Line of Credit Agreement") entered into by and between the Company and Cornell Capital Partners, LP (the "Investor") pursuant to which the Company issued to the Investor shares of its Common Stock, par value $.001 per share (the "Common Stock"). Pursuant to the Equity Line of Credit Agreement, the Company also has entered into a Registration Rights Agreement with the Investor (the "Registration Rights Agreement") pursuant to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights Agreement) under the Securities Act of 1933, as amended (the "1933 Act"). In connection with the Company's obligations under the Registration Rights Agreement, on ____________ ____, the Company filed a Registration Statement on Form ________ (File No. 333-_____________) (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") relating to the Registrable Securities which names the Investor as a selling stockholder thereunder. In connection with the foregoing, we advise you that a member of the SEC's staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after telephonic inquiry of a member of the SEC's staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for resale under the 1933 Act pursuant to the Registration Statement. Very truly yours, [ISSUER'S COUNSEL] By: _______________________________ cc: Cornell Capital Partners, LP 14 EX-10.6 8 ex10no6.txt MATERIAL CONTRACTS ESCROW AGREEMENT ---------------- THIS ESCROW AGREEMENT (this "Agreement") is made and entered into as of May ___, 2002, by VIDEOLOCITY INTERNATIONAL INC., a Nevada corporation (the "Company"); CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor"); BUTLER GONZALEZ LLP (the "Investor's Counsel"); and FIRST UNION NATIONAL BANK, a national banking association, as Escrow Agent hereunder (the "Escrow Agent"). BACKGROUND ---------- WHEREAS, the Company and the Investor have entered into an Equity Line of Credit Agreement (the "Equity Line of Credit Agreement") dated as of the date hereof, pursuant to which the Investor will purchase the Company's Common Stock, par value $.001 per share (the "Common Stock"), at a price per share equal to the Purchase Price, as that term is defined in the Equity Line of Credit Agreement, for an aggregate price of up to Twenty Million Dollars ($20,000,000). The Equity Line of Credit Agreement provides that on each Advance Date the Investor, as that term is defined in the Equity Line of Credit Agreement, shall deposit the Advance pursuant to the Advance Notice in a segregated escrow account to be held by Escrow Agent and the Company shall deposit shares of the Company's Common Stock, which shall be purchased by the Investor as set forth in the Equity Line of Credit Agreement, with the Investor's Counsel, in order to effectuate a disbursement to the Company of the Advance by the Escrow Agent and a disbursement to the Investor of the shares of the Company's Common Stock by Investor's Counsel at a closing to be held as set forth in the Equity Line of Credit Agreement (the "Closing"). WHEREAS, Escrow Agent has agreed to accept, hold, and disburse the funds deposited with it in accordance with the terms of this Agreement. WHEREAS, Investor's Counsel has agreed to accept, hold, and disburse the shares of the Company's Common Stock which have been deposited with it in accordance with the terms of this Agreement. WHEREAS, in order to establish the escrow of funds and shares to effect the provisions of the Equity Line of Credit Agreement, the parties hereto have entered into this Agreement. NOW THEREFORE, in consideration of the foregoing, it is hereby agreed as follows: 1. Definitions. All capitalized terms used herein and not otherwise defined herein, shall have the same meaning ascribed to them as in the Equity Line of Credit Agreement. In addition the following terms shall have the following meanings when used herein: a. "Escrow Funds" shall mean the Advance funds deposited with the Escrow Agent pursuant to this Agreement. 1 b. "Joint Written Direction" shall mean a written direction executed by the Investor and the Company directing Escrow Agent to disburse all or a portion of the Escrow Funds or to take or refrain from taking any action pursuant to this Agreement. c. "Common Stock Joint Written Direction" shall mean a written direction executed by the Investor and the Company directing Investor's Counsel to disburse all or a portion of the shares of the Company's Common Stock or to refrain from taking any action pursuant to this Agreement. 2. Appointment of and Acceptance by Escrow Agent and Investor's Counsel. --------------------------------------------------------------------- a. The Investor and the Company hereby appoint Escrow Agent to serve as Escrow Agent hereunder. Escrow Agent hereby accepts such appointment and, upon receipt by wire transfer of the Escrow Funds in accordance with Section 3 below, agrees to hold, invest and disburse the Escrow Funds in accordance with this Agreement. b. The Investor and the Company hereby appoint Investor's Counsel to serve as the holder of the shares of the Company's Common Stock which shall be purchased by the Investor. Investor's Counsel hereby accepts such appointment and, upon receipt via D.W.A.C or the certificates representing of the shares of the Company's Common Stock in accordance with Section 3 below, agrees to hold and disburse the shares of the Company's Common Stock in accordance with this Agreement. 3. Creation of Escrow Account/Common Stock Account. ------------------------------------------------ a. On or prior to the date of this Agreement the Escrow Agent shall establish an escrow account for the deposit of the Escrow Funds entitled as follows: Videolocity International Inc./Cornell Capital Partners, LP The Investor will wire funds to the account of the Escrow Agent as follows: Bank: First Union National Bank of New Jersey Routing #: 031201467 Account #: 2020000659170 Name on Account: Butler Gonzalez LLP/First Union as Escrow Agent Name on Sub-Account: Videolocity International Inc./ Cornell Capital Partners, LP Escrow account Reference Sub-Account #: 1806-02 Attn: Robert Mercado (732) 452-3005 Carmela Agugliaro (732) 452-3005 Note: Only wire transfers shall be accepted. 2 b. On or prior to the date of this Agreement Investor's Counsel shall establish an account for the D.W.A.C. of the shares of Common Stock. The Company will D.W.A.C. shares of the Company's Common Stock to the account of Investor's Counsel as follows: Brokerage Firm: Investec Ernst & Co. Account #: 400-07595 DTC #: 0233 Name on Account: Butler Gonzalez LLP Escrow Account 4. Deposits into the Escrow Account. ----------------------------------- The Investor agrees that it shall promptly deliver all monies for the payment of the Common Stock to the Escrow Agent for deposit in the Escrow Account. 5. Disbursements from the Escrow Account. -------------------------------------- a. At such time as Escrow Agent has collected and deposited instruments of payment in the total amount of the Advance and the Investor's Counsel has received such Common Stock via D.W.A.C from the Company which are to be issued to the Investor pursuant to the Equity Line of Credit Agreement, Investor's Counsel shall notify the Company and the Investor. The Escrow Agent will continue to hold such funds until the Investor and Company execute and deliver a Joint Written Direction directing the Escrow Agent to disburse the Escrow Funds pursuant to Joint Written Direction at which time the Escrow Agent shall wire the Escrow Funds to the Company. In disbursing such funds, Escrow Agent is authorized to rely upon such Joint Written Direction from Company and may accept any signatory from the Company listed on the signature page to this Agreement and any signature from the Investor that Escrow Agent already has on file. Simultaneous with delivery of the executed Joint Written Direction to the Escrow Agent the Investor and Company shall execute and deliver a Common Stock Joint Written Direction to Investor's Counsel directing Investor's Counsel to release via D.W.A.C to the Investor the shares of the Company's Common Stock. In releasing such shares of Common Stock Investor's Counsel is authorized to rely upon such Common Stock Joint Written Direction from Company and may accept any signatory from the Company listed on the signature page to this Agreement and any signature from the Investor Investor's Counsel has on file. Each of the Company and the Investor agree that within six (6) days from the date the Advance Notice is delivered to the Investor and/or the Investor's Counsel the Company and the Investor will each execute and deliver to the Escrow Agent the Joint Written Direction to the Escrow Agent and the Common Stock Joint Written Direction to the Investor's Counsel. In the event the Escrow Agent does not receive the amount of the Advance from the Investor, the Escrow Agent shall notify the Company and the Investor. In the event Investor's Counsel does not receive the shares of Common Stock to be purchased by the Investor Investor's Counsel shall notify the Company and the Investor. 3 In the event that the Escrow Agent is advised by the Investor's Counsel that the Common Stock has not been received from the Company, in no event will the Escrow Funds be released to the Company until such shares are received by the Investor's Counsel. For purposes of this Agreement, the term "Common Stock certificates" shall mean Common Stock certificates to be purchased pursuant to the respective Advance Notice pursuant to the Equity Line of Credit Agreement. 6. Collection Procedure. --------------------- The Escrow Agent is hereby authorized to forward each wire for collection and, upon collection of the proceeds of each wire deposit the collected proceeds in the Escrow Account. Any wires returned unpaid to the Escrow Agent shall be returned to the Investor. In such cases, the Escrow Agent will promptly notify the Company of such return. 7. Suspension of Performance: Disbursement Into Court. --------------------------------------------------- a. Escrow Agent. If at any time, there shall exist any dispute between the Company and the Investor with respect to holding or disposition of any portion of the Escrow Funds or any other obligations of Escrow Agent hereunder, or if at any time Escrow Agent is unable to determine, to Escrow Agent's sole satisfaction, the proper disposition of any portion of the Escrow Funds or Escrow Agent's proper actions with respect to its obligations hereunder, or if the parties have not within thirty (30) days of the furnishing by Escrow Agent of a notice of resignation pursuant to Section 9 hereof, appointed a successor Escrow Agent to act hereunder, then Escrow Agent may, in its sole discretion, take either or both of the following actions: i. Suspend the performance of any of its obligations (including without limitation any disbursement obligations) under this Escrow Agreement until such dispute or uncertainty shall be resolved to the sole satisfaction of Escrow Agent or until a successor Escrow Agent shall be appointed (as the case may be); provided however, Escrow Agent shall continue to invest the Escrow Funds in accordance with Section 8 hereof; and/or ii. petition (by means of an interpleader action or any other appropriate method) any court of competent jurisdiction in any venue convenient to Escrow Agent, for instructions with respect to such dispute or uncertainty, and to the extent required by law, pay into such court, for holding and disposition in accordance with the instructions of such court, all funds held by it in the Escrow Funds, after deduction and payment to Escrow Agent of all fees and expenses (including court costs and attorneys' fees) payable to, incurred by, or expected to be incurred by Escrow Agent in connection with performance of its duties and the exercise of its rights hereunder. iii. Escrow Agent shall have no liability to the Company, the Investor, or any person with respect to any such suspension of performance or disbursement into court, specifically including any liability or claimed liability that may arise, or be alleged to have arisen, out of or as a result of any delay in the disbursement of funds held in the Escrow Funds or any delay in with respect to any other action required or requested of Escrow Agent. b. Investor's Counsel. If at any time, there shall exist any dispute between the Company and the Investor with respect to holding or disposition of any portion of the shares of Common Stock or any other obligations of Investor's 4 Counsel hereunder, or if at any time Investor's Counsel is unable to determine, to Investor's Counsel's sole satisfaction, the proper disposition of any portion of the shares of Common Stock or Investor's Counsel's proper actions with respect to its obligations hereunder, then Investor's Counsel may, in its sole discretion, take either or both of the following actions: i. suspend the performance of any of its obligations (including without limitation any disbursement obligations) under this Escrow Agreement until such dispute or uncertainty shall be resolved to the sole satisfaction of Investor's Counsel or until a successor shall be appointed (as the case may be); and/or ii. petition (by means of an interpleader action or any other appropriate method) any court of competent jurisdiction in any venue convenient to Investor's Counsel, for instructions with respect to such dispute or uncertainty, and to the extent required by law, pay into such court, for holding and disposition in accordance with the instructions of such court, all shares of the Company's Common Stock funds held by it, after deduction and payment to Investor's Counsel of all fees and expenses (including court costs and attorneys' fees) payable to, incurred by, or expected to be incurred by Investor's Counsel in connection with performance of its duties and the exercise of its rights hereunder. iii. Investor's Counsel shall have no liability to the Company, the Investor, or any person with respect to any such suspension of performance or disbursement into court, specifically including any liability or claimed liability that may arise, or be alleged to have arisen, out of or as a result of any delay in the release of shares of the Company's Common Stock or any delay in with respect to any other action required or requested of Investor's Counsel. 8. Investment of Escrow Funds. --------------------------- The Escrow Agent shall deposit the Escrow Funds in a non-interest bearing money market account. If Escrow Agent has not received a Joint Written Direction at any time that an investment decision must be made, Escrow Agent shall invest the Escrow Fund, or such portion thereof, as to which no Joint Written Direction has been received, in investments described above. The foregoing investments shall be made by the Escrow Agent. Notwithstanding anything to the contrary contained, Escrow Agent may, without notice to the parties, sell or liquidate any of the foregoing investments at any time if the proceeds thereof are required for any release of funds permitted or required hereunder, and Escrow Agent shall not be liable or responsible for any loss, cost or penalty resulting from any such sale or liquidation. 9. Resignation and Removal of Escrow Agent. ---------------------------------------- Escrow Agent may resign from the performance of its duties hereunder at any time by giving thirty (30) days' prior written notice to the parties or may be removed, with or without cause, by the parties, acting jointly, by furnishing a Joint Written Direction to Escrow Agent, at any time by the giving of ten (10) days' prior written notice to Escrow Agent as provided herein below. Upon any such notice of resignation or removal, the representatives of the Investor and the Company identified in Sections 15a.(iv) and 15b.(iv), below, jointly shall appoint a successor Escrow Agent hereunder, which shall be a commercial bank, trust company or other financial institution with a combined capital and surplus 5 in excess of $10,000,000.00. Upon the acceptance in writing of any appointment of Escrow Agent hereunder by a successor Escrow Agent, such successor Escrow Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Escrow Agent, and the retiring Escrow Agent shall be discharged from its duties and obligations under this Escrow Agreement, but shall not be discharged from any liability for actions taken as Escrow Agent hereunder prior to such succession. After any retiring Escrow Agent's resignation or removal, the provisions of this Escrow Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Escrow Agent under this Escrow Agreement. The retiring Escrow Agent shall transmit all records pertaining to the Escrow Funds and shall pay all funds held by it in the Escrow Funds to the successor Escrow Agent, after making copies of such records as the retiring Escrow Agent deems advisable and after deduction and payment to the retiring Escrow Agent of all fees and expenses (including court costs and attorneys' fees) payable to, incurred by, or expected to be incurred by the retiring Escrow Agent in connection with the performance of its duties and the exercise of its rights hereunder. 10. Liability of Escrow Agent. -------------------------- a. Escrow Agent shall have no liability or obligation with respect to the Escrow Funds except for Escrow Agent's willful misconduct or gross negligence. Escrow Agent's sole responsibility shall be for the safekeeping, investment, and disbursement of the Escrow Funds in accordance with the terms of this Agreement. Escrow Agent shall have no implied duties or obligations and shall not be charged with knowledge or notice or any fact or circumstance not specifically set forth herein. Escrow Agent may rely upon any instrument, not only as to its due execution, validity and effectiveness, but also as to the truth and accuracy of any information contained therein, which Escrow Agent shall in good faith believe to be genuine, to have been signed or presented by the person or parties purporting to sign the same and conform to the provisions of this Agreement. In no event shall Escrow Agent be liable for incidental, indirect, special, and consequential or punitive damages. Escrow Agent shall not be obligated to take any legal action or commence any proceeding in connection with the Escrow Funds, any account in which Escrow Funds are deposited, this Agreement or the Equity Line of Credit Agreement, or to appear in, prosecute or defend any such legal action or proceeding. Escrow Agent may consult legal counsel selected by it in any event of any dispute or question as to construction of any of the provisions hereof or of any other agreement or its duties hereunder, or relating to any dispute involving any party hereto, and shall incur no liability and shall be fully indemnified from any liability whatsoever in acting in accordance with the opinion or instructions of such counsel. The Company and the Investor jointly and severally shall promptly pay, upon demand, the reasonable fees and expenses of any such counsel. b. The Escrow Agent is hereby authorized, in its sole discretion, to comply with orders issued or process entered by any court with respect to the Escrow Funds, without determination by the Escrow Agent of such court's jurisdiction in the matter. If any portion of the Escrow Funds is at any time attached, garnished or levied upon under any court order, or in case the payment, assignment, transfer, conveyance or delivery of any such property shall be stayed or enjoined by any court order, or in any case any order judgment or decree shall be made or entered by any court affecting such property or any part thereof, then and in any such event, the Escrow Agent is authorized, in its sole discretion, to rely upon and comply with any such order, writ judgment or decree 6 which it is advised by legal counsel selected by it, binding upon it, without the need for appeal or other action; and if the Escrow Agent complies with any such order, writ, judgment or decree, it shall not be liable to any of the parties hereto or to any other person or entity by reason of such compliance even though such order, writ judgment or decree may be subsequently reversed, modified, annulled, set aside or vacated. 11. Liability of Investor's Counsel. -------------------------------- a. Notwithstanding any liability attributable to Investor's Counsel as counsel to the Investor, Investor's Counsel shall have no liability or obligation with respect to the shares of the Company's Common Stock except for Investor's Counsel's willful misconduct or gross negligence. Investor's Counsel's sole responsibility shall be for the safekeeping and release of the shares of the Company's Common Stock in accordance with the terms of this Agreement. Investor's Counsel shall have no implied duties or obligations and shall not be charged with knowledge or notice or any fact or circumstance not specifically set forth herein. Investor's Counsel may rely upon any instrument, not only as to its due execution, validity and effectiveness, but also as to the truth and accuracy of any information contained therein, which Investor's Counsel shall in good faith believe to be genuine, to have been signed or presented by the person or parties purporting to sign the same and conform to the provisions of this Agreement. In no event shall Investor's Counsel be liable for incidental, indirect, special, and consequential or punitive damages. Investor's Counsel shall not be obligated to take any legal action or commence any proceeding in connection with the shares of the Company's Common Stock, any account in which shares of Common Stock are deposited and this Agreement, or to appear in, prosecute or defend any such legal action or proceeding. Investor's Counsel may consult legal counsel selected by it in any event of any dispute or question as to construction of any of the provisions hereof or of any other agreement or its duties hereunder, or relating to any dispute involving any party hereto, and shall incur no liability and shall be fully indemnified from any liability whatsoever in acting in accordance with the opinion or instructions of such counsel. The Company and the Investor jointly and severally shall promptly pay, upon demand, the reasonable fees and expenses of any such counsel. b. Investor's Counsel is hereby authorized, in its sole discretion, to comply with orders issued or process entered by any court with respect to the shares of the Company's Common Stock, without determination by Butler Gonzalez of such court's jurisdiction in the matter. If any portion of the shares of the Company's Common Stock are at any time attached, garnished or levied upon under any court order, or in case the payment, assignment, transfer, conveyance or delivery of any such property shall be stayed or enjoined by any court order, or in any case any order judgment or decree shall be made or entered by any court affecting such property or any part thereof, then and in any such event, the Investor's Counsel is authorized, in its sole discretion, to rely upon and comply with any such order, writ judgment or decree which it is advised by legal counsel selected by it, binding upon it, without the need for appeal or other action; and if Investor's Counsel complies with any such order, writ, judgment or decree, it shall not be liable to any of the parties hereto or to any other person or entity by reason of such compliance even though such order, writ judgment or decree may be subsequently reversed, modified, annulled, set aside or vacated. 7 12. Indemnification of Escrow Agent. -------------------------------- From and at all times after the date of this Agreement, the parties jointly and severally, shall, to the fullest extent permitted by law and to the extent provided herein, indemnify and hold harmless Escrow Agent and each director, officer, employee, attorney, agent and affiliate of Escrow Agent (collectively, the "Indemnified Parties") against any and all actions, claims (whether or not valid), losses, damages, liabilities, costs and expenses of any kind or nature whatsoever (including without limitation reasonable attorney's fees, costs and expenses) incurred by or asserted against any of the Indemnified Parties from and after the date hereof, whether direct, indirect or consequential, as a result of or arising from or in any way relating to any claim, demand, suit, action, or proceeding (including any inquiry or investigation) by any person, including without limitation the parties to this Agreement, whether threatened or initiated, asserting a claim for any legal or equitable remedy against any person under any statute or regulation, including, but not limited to, any federal or state securities laws, or under any common law or equitable cause or otherwise, arising from or in connection with the negotiation, preparation, execution, performance or failure of performance of this Agreement or any transaction contemplated herein, whether or not any such Indemnified Party is a party to any such action or proceeding, suit or the target of any such inquiry or investigation; provided, however, that no Indemnified Party shall have the right to be indemnified hereunder for liability finally determined by a court of competent jurisdiction, subject to no further appeal, to have resulted solely from the gross negligence or willful misconduct of such Indemnified Party. If any such action or claim shall be brought or asserted against any Indemnified Party, such Indemnified Party shall promptly notify the Company and the Investor hereunder in writing, and the and the Company shall assume the defense thereof, including the employment of counsel and the payment of all expenses. Such Indemnified Party shall, in its sole discretion, have the right to employ separate counsel (who may be selected by such Indemnified Party in its sole discretion) in any such action and to participate and to participate in the defense thereof, and the fees and expenses of such counsel shall be paid by such Indemnified Party, except that the Investor and/or the Company shall be required to pay such fees and expense if (a) the Investor or the Company agree to pay such fees and expenses, or (b) the Investor and/or the Company shall fail to assume the defense of such action or proceeding or shall fail, in the sole discretion of such Indemnified Party, to employ counsel reasonably satisfactory to the Indemnified Party in any such action or proceeding, (c) the Investor and the Company are the plaintiff in any such action or proceeding or (d) the named or potential parties to any such action or proceeding (including any potentially impleaded parties) include both Indemnified Party the Company and/or the Investor and Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company or the Investor. The Investor and the Company shall be jointly and severally liable to pay fees and expenses of counsel pursuant to the preceding sentence, except that any obligation to pay under clause (a) shall apply only to the party so agreeing. All such fees and expenses payable by the Company and/or the Investor pursuant to the foregoing sentence shall be paid from time to time as incurred, both in advance of and after the final disposition of such action or claim. The obligations of the parties under this section shall survive any termination of this Agreement, and resignation or removal of the Escrow Agent shall be independent of any obligation of Escrow Agent. 13. Indemnification of Investor's Counsel. -------------------------------------- From and at all times after the date of this Agreement, the parties jointly and severally, shall, to the fullest extent permitted by law and to the extent provided herein, indemnify and hold harmless Investor's Counsel and each partner, director, officer, employee, attorney, agent and affiliate of 8 Investor's Counsel (collectively, the "Indemnified Parties") against any and all actions, claims (whether or not valid), losses, damages, liabilities, costs and expenses of any kind or nature whatsoever (including without limitation reasonable attorney's fees, costs and expenses) incurred by or asserted against any of the Indemnified Parties from and after the date hereof, whether direct, indirect or consequential, as a result of or arising from or in any way relating to any claim, demand, suit, action, or proceeding (including any inquiry or investigation) by any person, including without limitation the parties to this Agreement, whether threatened or initiated, asserting a claim for any legal or equitable remedy against any person under any statute or regulation, including, but not limited to, any federal or state securities laws, or under any common law or equitable cause or otherwise, arising from or in connection with the negotiation, preparation, execution, performance or failure of performance of this Agreement or any transaction contemplated herein, whether or not any such Indemnified Party is a party to any such action or proceeding, suit or the target of any such inquiry or investigation; provided, however, that no Indemnified Party shall have the right to be indemnified hereunder for liability finally determined by a court of competent jurisdiction, subject to no further appeal, to have resulted solely from the gross negligence or willful misconduct of such Indemnified Party. If any such action or claim shall be brought or asserted against any Indemnified Party, such Indemnified Party shall promptly notify the Company and the Investor hereunder in writing, and the Investor and the Company shall assume the defense thereof, including the employment of counsel and the payment of all expenses. Such Indemnified Party shall, in its sole discretion, have the right to employ separate counsel (who may be selected by such Indemnified Party in its sole discretion) in any such action and to participate and to participate in the defense thereof, and the fees and expenses of such counsel shall be paid by such Indemnified Party, except that the Investor and/or the Company shall be required to pay such fees and expense if (a) the Investor or the Company agree to pay such fees and expenses, or (b) the Investor and/or the Company shall fail to assume the defense of such action or proceeding or shall fail, in the sole discretion of such Indemnified Party, to employ counsel reasonably satisfactory to the Indemnified Party in any such action or proceeding, (c) the Investor and the Company are the plaintiff in any such action or proceeding or (d) the named or potential parties to any such action or proceeding (including any potentially impleaded parties) include both Indemnified Party the Company and/or the Investor and the Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company or the Investor. The Investor and the Company shall be jointly and severally liable to pay fees and expenses of counsel pursuant to the preceding sentence, except that any obligation to pay under clause (a) shall apply only to the party so agreeing. All such fees and expenses payable by the Company and/or the Investor pursuant to the foregoing sentence shall be paid from time to time as incurred, both in advance of and after the final disposition of such action or claim. The obligations of the parties under this section shall survive any termination of this Agreement. 14. Expenses of Escrow Agent and/or Investor's Counsel. --------------------------------------------------- Except as set forth in Section 12 and 13 the Company shall pay the Investor's Counsel on each Advance Date pursuant to the Equity Line of Credit the sum of Five Hundred Dollars ($500) to cover all legal, administrative and escrow fees related to such Advance. 9 15. Warranties. ----------- a. The Investor makes the following representations and warranties to the Escrow Agent and Investor's Counsel: i. The Investor has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. ii. This Agreement has been duly approved by all necessary action of the Investor, including any necessary approval of the limited partner of the Investor, has been executed by duly authorized officers of the Investor's general partner, enforceable in accordance with its terms. iii. The execution, delivery, and performance of the Investor of this Agreement will not violate, conflict with, or cause a default under the agreement of limited partnership of the Investor, any applicable law or regulation, any court order or administrative ruling or degree to which the Investor is a party or any of its property is subject, or any agreement, contract, indenture, or other binding arrangement. iv. Mark A. Angelo has been duly appointed to act as the representative of Investor hereunder and has full power and authority to execute, deliver, and perform this Agreement, to execute and deliver any Joint Written Direction, to amend, modify, or waive any provision of this Agreement, and to take any and all other actions as the Investor's representative under this Agreement, all without further consent or direction form, or notice to, the Investor or any other party. v. No party other than the parties hereto have, or shall have, any lien, claim or security interest in the Escrow Funds or any part thereof. No financing statement under the Uniform Commercial Code is on file in any jurisdiction claiming a security interest in or describing (whether specifically or generally) the Escrow Funds or any part thereof. vi. All of the representations and warranties of the Investor contained herein are true and complete as of the date hereof and will be true and complete at the time of any disbursement from the Escrow Funds. b. The Company makes the following representations and warranties to Escrow Agent, the Investor and Investor's Counsel: i. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Nevada, and has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. ii. This Agreement has been duly approved by all necessary corporate action of the Company, including any necessary shareholder approval, has been executed by duly authorized officers of the Company, enforceable in accordance with its terms. iii. The execution, delivery, and performance by the Company of this Escrow Agreement is in accordance with the Equity Line of Credit Agreement and will not violate, conflict with, or cause a default under the certificate of 10 incorporation or bylaws of the Company, any applicable law or regulation, any court order or administrative ruling or decree to which the Company is a party or any of its property is subject, or any agreement, contract, indenture, or other binding arrangement. iv. Robert E. Holt, President of the Company or, in his absence Larry McNeil, C.F.O. of the Company have been duly appointed to act as the representative of the Company hereunder and has full power and authority to execute, deliver, and perform this Agreement, to execute and deliver any Joint Written Direction, to amend, modify or waive any provision of this Agreement and to take all other actions as the Company's Representative under this Agreement, all without further consent or direction from, or notice to, the Company or any other party. v. No party other than the parties hereto shall have, any lien, claim or security interest in the Escrow Funds or any part thereof. No financing statement under the Uniform Commercial Code is on file in any jurisdiction claiming a security interest in or describing (whether specifically or generally) the Escrow Funds or any part thereof. vi. All of the representations and warranties of the Company contained herein are true and complete as of the date hereof and will be true and complete at the time of any disbursement from the Escrow Funds. 16. Consent to Jurisdiction and Venue. ------------------------------------- In the event that any party hereto commences a lawsuit or other proceeding relating to or arising from this Agreement, the parties hereto agree that the United States District Court for the District of New Jersey shall have the sole and exclusive jurisdiction over any such proceeding. If all such courts lack federal subject matter jurisdiction, the parties agree that the Superior Court Division of New Jersey, Chancery Division of Essex County shall have sole and exclusive jurisdiction. Any of these courts shall be proper venue for any such lawsuit or judicial proceeding and the parties hereto waive any objection to such venue. The parties hereto consent to and agree to submit to the jurisdiction of any of the courts specified herein and agree to accept the service of process to vest personal jurisdiction over them in any of these courts. 17. Notice. ------- All notices and other communications hereunder shall be in writing and shall be deemed to have been validly served, given or delivered five (5) days after deposit in the United States mails, by certified mail with return receipt requested and postage prepaid, when delivered personally, one (1) day delivered to any overnight courier, or when transmitted by facsimile transmission and addressed to the party to be notified as follows: If to Investor, to: Cornell Capital Partners, LP 101 Hudson Street - Suite 3606 Jersey City, New Jersey 07302 Attention: Mark Angelo Facsimile: (201) 985-8266 11 With copy to: Butler Gonzalez LLP 1000 Stuyvesant Avenue - Suite 6 Union, New Jersey 07083 Attention: David Gonzalez, Esq. Facsimile: (908) 810-0973 If to Company, to: Videolocity International Inc. 1762 - A Prospector Drive Park City, Utah 84060 Attention: Robert E. Holt Facsimile: (801) 521-2844 With a copy to: Leonard E. Neilson, Esq. 8160 South Highlands Drive - Suite 209 Sandy, Utah 84093 Telephone: (801) 733-0800 Facsimile: (801) 733-0808 If to the Escrow Agent, to: First Union National Bank, 407 Main Street Metuchen, New Jersey 08840 Attention: Robert Mercado Carmela Agugliaro Facsimile: (732) 548-5973 Or to such other address as each party may designate for itself by like notice. 18. Amendments or Waiver. --------------------- This Agreement may be changed, waived, discharged or terminated only by a writing signed by the parties of the Escrow Agent. No delay or omission by any party in exercising any right with respect hereto shall operate as waiver. A waiver on any one occasion shall not be construed as a bar to, or waiver of, any right or remedy on any future occasion. 19. Severability. ------------- To the extent any provision of this Agreement is prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition, or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 20. Governing Law. -------------- This Agreement shall be construed and interpreted in accordance with the internal laws of the State of New Jersey without giving effect to the conflict of laws principles thereof. 21. Entire Agreement. ----------------- This Agreement constitutes the entire Agreement between the parties relating to the holding, investment, and disbursement of the Escrow Funds and sets forth in their entirety the obligations and duties of the Escrow Agent with respect to the Escrow Funds. 12 22. Binding Effect. --------------- All of the terms of this Agreement, as amended from time to time, shall be binding upon, inure to the benefit of and be enforceable by the respective heirs, successors and assigns of the Investor, the Company, or the Escrow Agent. 23. Execution of Counterparts. -------------------------- This Agreement and any Joint Written Direction may be executed in counter parts, which when so executed shall constitute one and same agreement or direction. 24. Termination. ------------ Upon the first to occur of the disbursement of all amounts in the Escrow Funds pursuant to Joint Written Directions or the disbursement of all amounts in the Escrow Funds into court pursuant to Section 7 hereof, or upon any of the termination provisions set forth in the Equity Line of Credit Agreement, this Agreement shall terminate and Escrow Agent shall have no further obligation or liability whatsoever with respect to this Agreement or the Escrow Funds. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 13 IN WITNESS WHEREOF the parties have hereunto set their hands and seals the day and year above set forth. VIDEOLOCITY INTERNATIONAL INC. By: /s/ Robert E. Holt --------------------------- Name: Robert E. Holt Title: President and C.E.O. FIRST UNION NATIONAL BANK By: /s/ Robert Mercado --------------------------- Name: Robert Mercado Title: As the Escrow Agent CORNELL CAPITAL PARTNERS, LP By: Yorkville Advisors, LLC Its: General Partner By: /s/ Mark A. Angelo --------------------------- Name: Mark A. Angelo Title: Portfolio Manager BUTLER GONZALEZ LLP By: /s/ David Gonzalez, Esq. --------------------------- Name: David Gonzalez, Esq. Title: Partner 14 EX-10.7 9 ex10no7.txt MATERIAL CONTRACTS VIDEOLOCITY INTERNATIONAL INC. PLACEMENT AGENT AGREEMENT Dated as of: May __, 2002 Westrock Advisors, Inc. 230 Park Avenue, Floor 9 New York, New York 10169 Ladies and Gentlemen: The undersigned, Videolocity International Inc. , a Nevada corporation (the "Company"), hereby agrees with Westrock Advisors Inc., a New York Corporation (the "Placement Agent") and Cornell Capital Partners, LP, A Delaware Limited Partnership (the "Investor") as follows: 1. Offering. --------- The Company hereby engages the Placement Agent to act as its exclusive placement agent in connection with the Equity Line of Credit Agreement dated the date hereof, (the "Equity Line of Credit Agreement") pursuant to which the Company shall issue and sell to the Investor, from time to time, and the Investor shall purchase from the Company (the "Offering") up to Twenty Million Dollars ($20,000,000) of the Company's common stock (the "Commitment Amount"), par value $.001 per share (the "Common Stock"), at price per share equal to the Purchase Price, as that term is defined in the Equity Line of Credit Agreement. Pursuant to the terms hereof, the Placement Agent shall render consulting services to the Company with respect to the Equity Line of Credit Agreement and shall be available for consultation in connection with the advances to be requested by the Company pursuant to the Equity Line of Credit Agreement All capitalized terms used herein and not otherwise defined herein shall have the same meaning ascribed to them as in the Equity Line of Credit Agreement. The Investor will be granted certain registration rights with respect to the Common Stock as more fully set forth in the Registration Rights Agreement between the Company and the Investor dated the date hereof (the "Registration Rights Agreement"). The documents to be executed and delivered in connection with the Offering, including, but not limited, to this Agreement, the Equity Line of Credit Agreement, the Registration Rights Agreement, and the Escrow Agreement with First Union National Bank (the "Escrow Agreement"), are referred to sometimes hereinafter collectively as the "Offering Materials", which shall also include the SEC Documents. The Company's Common Stock is sometimes referred to hereinafter as the "Securities." The Placement Agent shall not be obligated to sell any Securities and this Offering by the Placement Agent shall be solely on a "best efforts basis." 1 2. Compensation. ------------- A. Upon the execution of this Agreement the Company shall issue to the Placement Agent or its designee an amount equal to ten thousand shares (10,000) shares of the Company's Common Stock (collectively, the "Placement Agent's Shares "). Furthermore the Placement Agent's Shares are to be held in escrow by Butler Gonzalez LLP for sixty (60) days following the Effective Date (as that term is defined in the Registration Rights Agreement dated the date hereof). However in the event the Registration Statement (as that term is defined in the Registration Rights Agreement dated the date hereof) is not declared effective the Placement Agent shall be entitled to sell the Placement Agent's Shares pursuant to Rule 144 one (1) year from the date hereof. The Placement Agent shall be entitled to "piggy-back" registration rights triggered upon registration of any shares of Common Stock by the Investor with respect to the Placement Agent's Shares pursuant to the Registration Rights Agreement dated the date hereof. 3. Representations, Warranties and Covenants of the Placement Agent. ------------------------------------------------------------------- A. The Placement Agent represents, warrants and covenants as follows: (i) The Placement Agent has the necessary power to enter into this Agreement and to consummate the transactions contemplated hereby. (ii) The execution and delivery by the Placement Agent of this Agreement and the consummation of the transactions contemplated herein will not result in any violation of, or be in conflict with, or constitute a default under, any agreement or instrument to which the Placement Agent is a party or by which the Placement Agent or its properties are bound, or any judgment, decree, order or, to the Placement Agent's knowledge, any statute, rule or regulation applicable to the Placement Agent. This Agreement when executed and delivered by the Placement Agent, will constitute the legal, valid and binding obligations of the Placement Agent, enforceable in accordance with their respective terms, except to the extent that (a) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, (b) the enforceability hereof or thereof is subject to general principles of equity, or (c) the indemnification provisions hereof or thereof may be held to be in violation of public policy. (iii) Upon receipt and execution of this Agreement the Placement Agent will promptly forward copies of this Agreement to the Company or its counsel and the Investor or its counsel. (iv) The Placement Agent will not intentionally take any action that it reasonably believes would cause the Offering to violate the provisions of the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934 (the "1934 Act"), the respective rules and regulations promulgated there under (the "Rules and Regulations") or applicable "Blue Sky" laws of any state or jurisdiction. (v) The Placement Agent will use all reasonable efforts to determine (a) whether the Investor is an Accredited Investor and (b) that any information furnished by the Investor is true and accurate. The Placement Agent shall have no obligation to insure that (x) any check, note, draft or other means of payment for the Common Stock will be honored, paid or enforceable against the Investor in accordance with its terms, or (y) subject to the performance of the Placement Agent's obligations and the 2 accuracy of the Placement Agent's representations and warranties hereunder, (1) the Offering is exempt from the registration requirements of the 1933 Act or any applicable state "Blue Sky" law or (2) the Investor is an Accredited Investor. (vi) The Placement Agent is a member of the National Association of Securities Dealers, Inc., and is a broker-dealer registered as such under the 1934 Act and under the securities laws of the states in which the Securities will be offered or sold by the Placement Agent unless an exemption for such state registration is available to the Placement Agent. The Placement Agent is in compliance with all material rules and regulations applicable to the Placement Agent generally and applicable to the Placement Agent's participation in the Offering. 4. Representations and Warranties of the Company. ---------------------------------------------- A. The Company represents and warrants as follows: (i) The execution, delivery and performance of each of this Agreement, the Equity Line of Credit Agreement, the Escrow Agreement, and the Registration Rights Agreement has been or will be duly and validly authorized by the Company and is, or with respect to this Agreement, the Equity Line of Credit Agreement, the Escrow Agreement, and the Registration Rights Agreement will be, a valid and binding agreement of the Company, enforceable in accordance with its respective terms, except to the extent that (a) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, (b) the enforceability hereof or thereof is subject to general principles of equity or (c) the indemnification provisions hereof or thereof may be held to be in violation of public policy. The Securities to be issued pursuant to the transactions contemplated by this Agreement and the Equity Line of Credit Agreement have been duly authorized and, when issued and paid for in accordance with (x) this Agreement, the Equity Line of Agreement and the certificates/instruments representing such Securities, (y) will be valid and binding obligations of the Company, enforceable in accordance with their respective terms, except to the extent that (1) the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, and (2) the enforceability thereof is subject to general principles of equity. All corporate action required to be taken for the authorization, issuance and sale of the Securities has been duly and validly taken by the Company. (ii) The Company has a duly authorized, issued and outstanding capitalization as set forth herein and in the Equity Line of Credit Agreement. The Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the agreements described herein and as described in the Equity Line of Credit Agreement, dated the date hereof and the agreements described therein. All issued and outstanding securities of the Company, have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission or preemptive rights with respect thereto and are not subject to personal liability solely by reason of being security holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company. As of the date hereof, the authorized capital stock of the Company consists of 12,5000,000 shares of Common Stock, par value $.001 per share of which ___________ shares of Common Stock are issued and outstanding and 1,000,000 shares of Preferred Stock, none of which are outstanding. 3 (iii) The Common Stock to be issued in accordance with this Agreement and the Equity Line of Credit Agreement has been duly authorized and when issued and paid for in accordance with this Agreement, the Equity Line of Credit Agreement and the certificates/instruments representing such Common Stock, will be validly issued, fully-paid and non-assessable; the holders thereof will not be subject to personal liability solely by reason of being such holders; such Securities are not and will not be subject to the preemptive rights of any holder of any security of the Company. (iv) Except as may be set forth in the SEC Documents or Attachment 4.12 to the Equity Line of Credit Agreement, the Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property necessary to conduct its business (including, without limitation, any real or personal property stated in the Offering Materials to be owned or leased by the Company), free and clear of all liens, encumbrances, claims, security interests and defects of any material nature whatsoever, other than those set forth in the Offering Materials and liens for taxes not yet due and payable. (v) There is no litigation or governmental proceeding pending or, to the best of the Company's knowledge, threatened against, or involving the properties or business of the Company, except as set forth in the Offering Materials. (vi) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Nevada. Except as set forth in the Offering Materials, the Company does not own or control, directly or indirectly, an interest in any other corporation, partnership, trust, joint venture or other business entity. The Company is duly qualified or licensed and in good standing as a foreign corporation in each jurisdiction in which the character of its operations requires such qualification or licensing and where failure to so qualify would have a material adverse effect on the Company. The Company has all requisite corporate power and authority, and all material and necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies (domestic and foreign) to conduct its businesses (and proposed business) as described in the Offering Materials. Any disclosures in the Offering Materials concerning the effects of foreign, federal, state and local regulation on the Company's businesses as currently conducted and as contemplated are correct in all material respects and do not omit to state a material fact. The Company has all corporate power and authority to enter into this Agreement, the Equity Line of Credit Agreement, the Registration Rights Agreement, and the Escrow Agreement, to carry out the provisions and conditions hereof and thereof, and all consents, authorizations, approvals and orders required in connection herewith and therewith have been obtained. No consent, authorization or order of, and no filing with, any court, government agency or other body is required by the Company for the issuance of the Securities or execution and delivery of the Offering Materials except for applicable federal and state securities laws. The Company, since its inception, has not incurred any liability arising under or as a result of the application of any of the provisions of the 1933 Act, the 1934 Act or the Rules and Regulations. (vii) There has been no material adverse change in the condition or prospects of the Company, financial or otherwise, from the latest dates as of which such condition or prospects, respectively, are set forth in the Offering Materials, and the outstanding debt, the property and the business of the Company conform in all material respects to the descriptions thereof contained in the Offering Materials. 4 (viii) Except as set forth in the Offering Materials, the Company is not in breach of, or in default under, any term or provision of any material indenture, mortgage, deed of trust, lease, note, loan or Equity Line of Credit Agreement or any other material agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which it is a party or by which it or any of its properties may be bound or affected. The Company is not in violation of any provision of its charter or by-laws or in violation of any franchise, license, permit, judgment, decree or order, or in violation of any material statute, rule or regulation. Neither the execution and delivery of the Offering Materials nor the issuance and sale or delivery of the Securities, nor the consummation of any of the transactions contemplated in the Offering Materials nor the compliance by the Company with the terms and provisions hereof or thereof, has conflicted with or will conflict with, or has resulted in or will result in a breach of, any of the terms and provisions of, or has constituted or will constitute a default under, or has resulted in or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or pursuant to the terms of any indenture, mortgage, deed of trust, note, loan or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company may be bound or to which any of the property or assets of the Company is subject except (a) where such default, lien, charge or encumbrance would not have a material adverse effect on the Company and (b) as described in the Offering Materials; nor will such action result in any violation of the provisions of the charter or the by-laws of the Company or, assuming the due performance by the Placement Agent of its obligations hereunder, any material statute or any material order, rule or regulation applicable to the Company of any court or of any foreign, federal, state or other regulatory authority or other government body having jurisdiction over the Company. (ix) Subsequent to the dates as of which information is given in the Offering Materials, and except as may otherwise be indicated or contemplated herein or therein and the securities offered pursuant to the Securities Purchase Agreement dated the date hereof, the Company has not (a) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, or (b) entered into any transaction other than in the ordinary course of business, or (c) declared or paid any dividend or made any other distribution on or in respect of its capital stock. Except as described in the Offering Materials, the Company has no outstanding obligations to any officer or director of the Company. (x) There are no claims for services in the nature of a finder's or origination fee with respect to the sale of the Common Stock or any other arrangements, agreements or understandings that may affect the Placement Agent's compensation, as determined by the National Association of Securities Dealers, Inc. (xi) Except as may be set forth in the SEC Documents or an attachment to the Equity Line of Credit Agreement, the Company owns or possesses, free and clear of all liens or encumbrances and rights thereto or therein by third parties, the requisite licenses or other rights to use all trademarks, service marks, copyrights, service names, trade names, patents, patent applications and licenses necessary to conduct its business (including, without limitation, any such licenses or rights described in the Offering Materials as being owned or possessed by the Company) and, except as set forth in the Offering Materials, there is no claim or action by any person pertaining to, or proceeding, pending or threatened, which challenges the exclusive rights of the Company with respect to any trademarks, service marks, copyrights, service names, trade names, patents, patent applications and licenses used in the conduct of the Company's businesses (including, without limitation, any such 5 licenses or rights described in the Offering Materials as being owned or possessed by the Company) except any claim or action that would not have a material adverse effect on the Company; the Company's current products, services or processes do not infringe or will not infringe on the patents currently held by any third party. (xii) Except as described in the Offering Materials, the Company is not under any obligation to pay royalties or fees of any kind whatsoever to any third party with respect to any trademarks, service marks, copyrights, service names, trade names, patents, patent applications, licenses or technology it has developed, uses, employs or intends to use or employ, other than to their respective licensors. (xiii) Subject to the performance by the Placement Agent of its obligations hereunder and the offer and sale of the Securities comply, and will continue to comply in all material respects with the requirements of Rule 506 of Regulation D promulgated by the SEC pursuant to the 1933 Act and any other applicable federal and state laws, rules, regulations and executive orders. Neither the Offering Materials nor any amendment or supplement thereto nor any documents prepared by the Company in connection with the Offering will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. All statements of material facts in the Offering Materials are true and correct as of the date of the Offering Materials. (xiv) All material taxes which are due and payable from the Company have been paid in full or adequate provision has been made for such taxes on the books of the Company except for those taxes disputed in good faith the Company does not have any tax deficiency or claim outstanding assessed or proposed against it. (xv) None of the Company nor any of its officers, directors, employees or agents, nor any other person acting on behalf of the Company, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who is or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) which (A) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, or (B) if not given in the past, might have had a materially adverse effect on the assets, business or operations of the Company as reflected in any of the financial statements contained in the Offering Materials, or (C) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company in the future. 5. Representations, Warranties and Covenants of the Investor. ---------------------------------------------------------- A. The Investor represents, warrants and covenants as follows: (i) The Investor has the necessary power to enter into this Agreement and to consummate the transactions contemplated hereby. (ii) The execution and delivery by the Investor of this Agreement and the consummation of the transactions contemplated herein will not result in any violation of, or be in conflict with, or constitute a default under, any agreement or instrument to which the Investor is a party or by which the Investor or its properties are bound, or any judgment, decree, order or, to 6 the Investor's knowledge, any statute, rule or regulation applicable to the Investor. This Agreement when executed and delivered by the Investor, will constitute the legal, valid and binding obligations of the Investor, enforceable in accordance with their respective terms, except to the extent that (a) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, (b) the enforceability hereof or thereof is subject to general principles of equity, or (c) the indemnification provisions hereof or thereof may be held to be in violation of public policy. (iii) The Investor will promptly forward copies of any and all due diligence questionnaires compiled by the Investor to the Placement Agent. 6. Certain Covenants and Agreements of the Company. ------------------------------------------------ The Company covenants and agrees at its expense and without any expense to the Placement Agent as follows: A. To advise the Placement Agent of any material adverse change in the Company's financial condition, prospects or business or of any development materially affecting the Company or rendering untrue or misleading any material statement in the Offering Materials occurring at any time as soon as the Company is either informed or becomes aware thereof. B. To use its commercially reasonable efforts to cause the Common Stock issuable in connection with the Equity Line of Credit to be qualified or registered for sale on terms consistent with those stated in the Registration Rights Agreement and under the securities laws of such jurisdictions as the Placement Agent and the Investor shall reasonably request. Qualification, registration and exemption charges and fees shall be at the sole cost and expense of the Company. C. Upon written request, to provide and continue to provide the Placement Agent and the Investor copies of all quarterly financial statements and audited annual financial statements prepared by or on behalf of the Company, other reports prepared by or on behalf of the Company for public disclosure and all documents delivered to the Company's stockholders. D. To deliver, during the registration period of the Equity Line Credit Agreement, to the Placement Agent upon the Placement Agent's request, within forty five (45) days, a statement of its income for each such quarterly period, and its balance sheet and a statement of changes in stockholders' equity as of the end of such quarterly period, all in reasonable detail, certified by its principal financial or accounting officer; (ii) within ninety (90) days after the close of each fiscal year, its balance sheet as of the close of such fiscal year, together with a statement of income, a statement of changes in stockholders' equity and a statement of cash flow for such fiscal year, such balance sheet, statement of income, statement of changes in stockholders' equity and statement of cash flow to be in reasonable detail and accompanied by a copy of the certificate or report thereon of independent auditors if audited financial statements are prepared; and (iii) a copy of all documents, reports and information furnished to its stockholders at the time that such documents, reports and information are furnished to its stockholders. E. To comply with the terms of the Offering Materials. 7 F. To ensure that any transactions between or among the Company, or any of its officers, directors and affiliates be on terms and conditions that are no less favorable to the Company, than the terms and conditions that would be available in an "arm's length" transaction with an independent third party. 7. Indemnification. ---------------- A. The Company hereby agrees that it will indemnify and hold the Placement Agent and each officer, director, shareholder, employee or representative of the Placement Agent and each person controlling, controlled by or under common control with the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the SEC's Rules and Regulations promulgated there under (the "Rules and Regulations"), harmless from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Placement Agent or such indemnified person of the Placement Agent may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in (a) Section 4 of this Agreement, (b) the Offering Materials (except those written statements relating to the Placement Agent given by an indemnified person for inclusion therein), (c) any application or other document or written communication executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Common Stock under the securities laws thereof, or any state securities commission or agency; (ii) the omission or alleged omission from documents described in clauses (a), (b) or (c) above of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iii) the breach of any representation, warranty, covenant or agreement made by the Company in this Agreement. The Company further agrees that upon demand by an indemnified person, at any time or from time to time, it will promptly reimburse such indemnified person for any loss, claim, damage, liability, cost or expense actually and reasonably paid by the indemnified person as to which the Company has indemnified such person pursuant hereto. Notwithstanding the foregoing provisions of this Paragraph 6(A), any such payment or reimbursement by the Company of fees, expenses or disbursements incurred by an indemnified person in any proceeding in which a final judgment by a court of competent jurisdiction (after all appeals or the expiration of time to appeal) is entered against the Placement Agent or such indemnified person based upon specific finding of fact that the Placement Agent or such indemnified person's gross negligence or willful misfeasance will be promptly repaid to the Company. B. The Placement Agent hereby agrees that it will indemnify and hold the Company and each officer, director, shareholder, employee or representative of the Company, and each person controlling, controlled by or under common control with the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations, harmless from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing 8 or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Company or such indemnified person of the Company may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon (i) the conduct of the Placement Agent or its officers, employees or representatives in its acting as Placement Agent for the Offering or (ii) the material breach of any representation, warranty, covenant or agreement made by the Placement Agent in this Agreement (iii) any false or misleading information provided to the Company by one of the Placement Agent's indemnified persons. C. The Investor hereby agrees that it will indemnify and hold the Placement Agent and each officer, director, shareholder, employee or representative of the Placement Agent, and each person controlling, controlled by or under common control with the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations, harmless from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Placement Agent or such indemnified person of the Placement Agent may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon (i) the conduct of the Investor or its officers, employees or representatives in its acting as the Investor for the Offering or (ii) the material breach of any representation, warranty, covenant or agreement made by the Investor in the Offering Materials (iii) any false or misleading information provided to the Placement Agent by one of the Investor's indemnified persons. D. The Placement Agent hereby agrees that it will indemnify and hold the Investor and each officer, director, shareholder, employee or representative of the Investor, and each person controlling, controlled by or under common control with the Investor within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations, harmless from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Investor or such indemnified person of the Investor may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon (i) the conduct of the Placement Agent or its officers, employees or representatives in its acting as the Placement Agent for the Offering or (ii) the material breach of any representation, warranty, covenant or agreement made by the Placement Agent in this Agreement (iii) any false or misleading information provided to the Investor by one of the Placement Agent's indemnified persons. 9 E. Promptly after receipt by an indemnified party of notice of commencement of any action covered by Section 6(A), (B), (C) or (D), the party to be indemnified shall, within five (5) business days, notify the indemnifying party of the commencement thereof; the omission by one (1) indemnified party to so notify the indemnifying party shall not relieve the indemnifying party of its obligation to indemnify any other indemnified party that has given such notice and shall not relieve the indemnifying party of any liability outside of this indemnification if not materially prejudiced thereby. In the event that any action is brought against the indemnified party, the indemnifying party will be entitled to participate therein and, to the extent it may desire, to assume and control the defense thereof with counsel chosen by it which is reasonably acceptable to the indemnified party. After notice from the indemnifying party to such indemnified party of its election to so assume the defense thereof, the indemnifying party will not be liable to such indemnified party under such Section 6(A), (B), (C), or (D) for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, but the indemnified party may, at its own expense, participate in such defense by counsel chosen by it, without, however, impairing the indemnifying party's control of the defense. Subject to the proviso of this sentence and notwithstanding any other statement to the contrary contained herein, the indemnified party or parties shall have the right to choose its or their own counsel and control the defense of any action, all at the expense of the indemnifying party if, (i) the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action at the expense of the indemnifying party, or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to such indemnified party to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses of one additional counsel shall be borne by the indemnifying party; provided, however, that the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstance, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for all such indemnified parties. No settlement of any action or proceeding against an indemnified party shall be made without the consent of the indemnifying party. F. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 6(A) or 6(B) is due in accordance with its terms but is for any reason held by a court to be unavailable on grounds of policy or otherwise, the Company and the Placement Agent shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with the investigation or defense of same) which the other may incur in such proportion so that the Placement Agent shall be responsible for such percent of the aggregate of such losses, claims, damages and liabilities as shall equal the percentage of the gross proceeds paid to the Placement Agent and the Company shall be responsible for the balance; provided, however, that no person guilty of fraudulent misrepresentation within the meaning of Section 11(f) of the 1933 Act shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 6(F), any person 10 controlling, controlled by or under common control with the Placement Agent, or any partner, director, officer, employee, representative or any agent of any thereof, shall have the same rights to contribution as the Placement Agent and each person controlling, controlled by or under common control with the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and each officer of the Company and each director of the Company shall have the same rights to contribution as the Company. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against the other party under this Section 6(D), notify such party from whom contribution may be sought, but the omission to so notify such party shall not relieve the party from whom contribution may be sought from any obligation they may have hereunder or otherwise if the party from whom contribution may be sought is not materially prejudiced thereby. The indemnity and contribution agreements contained in this Section 6 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified person or any termination of this Agreement. 8. Payment of Expenses. -------------------- The Company hereby agrees to bear all of the expenses in connection with the Offering, including, but not limited to the following: filing fees, printing and duplicating costs, advertisements, postage and mailing expenses with respect to the transmission of Offering Materials, registrar and transfer agent fees, escrow agent fees as set forth in the Escrow Agreement, fees of the Company's counsel and accountants, issue and transfer taxes, if any. 9. Conditions of Closing. ---------------------- The Closing shall be held at the offices of the Investor or its counsel. The obligations of the Placement Agent hereunder shall be subject to the continuing accuracy of the representations and warranties of the Company herein as of the date hereof and as of the Date of Closing (the "Closing Date") with respect to the Company as if it had been made on and as of such Closing Date; the accuracy on and as of the Closing Date of the statements of the officers of the Company made pursuant to the provisions hereof; and the performance by the Company on and as of the Closing Date of its covenants and obligations hereunder and to the following further conditions: A. Upon the effectiveness of a registration statement covering the Equity Line of Credit Agreement, the Placement Agent shall receive the opinion of Counsel to the Company, dated as of the date thereof, which opinion shall be in form and substance reasonably satisfactory to the Investor, their counsel and the Placement Agent. B. At or prior to the Closing, the Placement Agent shall have been furnished such documents, certificates and opinions as it may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this Agreement and the Offering Materials, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions herein contained. C. At and prior to the Closing, (i) there shall have been no material adverse change nor development involving a prospective change in the condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Offering Materials; (ii) there shall have been no transaction, not in the ordinary course of business except the transactions pursuant to the Securities Purchase Agreement entered into by the Company which has not been disclosed in the Offering Materials or to the Placement Agent in writing; (iii) except as set forth in the Offering Materials, the Company shall not be in default under any provision of any instrument relating to any outstanding indebtedness for which a waiver or extension has not been otherwise received; (iv) except as set forth in the Offering Materials, the Company shall not have issued any securities (other than those to be issued as provided in the Offering Materials) or declared or paid any dividend or made any distribution of its capital stock of any class and there shall not have been any change in the indebtedness (long or short term) or liabilities or obligations of the Company (contingent or otherwise) and trade payable debt; (v) no material amount of the assets of the Company shall have been pledged or mortgaged, except as indicated in the Offering Materials; and (v) no action, suit or proceeding, at law or in equity, against the Company or affecting any of its properties or businesses shall be pending or threatened before or by any court or federal or state commission, board or other administrative agency, domestic or foreign, wherein an unfavorable decision, ruling or finding could materially adversely affect the businesses, prospects or financial condition or income of the Company, except as set forth in the Offering Materials. 11 D. At Closing, the Placement Agent shall receive a certificate of the Company signed by an executive officer and chief financial officer, dated as of the applicable Closing, to the effect that the conditions set forth in subparagraph (C) above have been satisfied and that, as of the applicable closing, the representations and warranties of the Company set forth herein are true and correct. 10. Termination. ------------ This Agreement shall be co-terminus with, and terminate upon the same terms and conditions as those set forth in, the Equity Line of Credit Agreement. The rights of the Investor and the obligations of the Company under the Registration Rights Agreement, and the rights of the Placement Agent and the obligations of the Company shall survive the termination of this Agreement unabridged. 11. Miscellaneous. -------------- A. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all which shall be deemed to be one and the same instrument. B. Any notice required or permitted to be given hereunder shall be given in writing and shall be deemed effective when deposited in the United States mail, postage prepaid, or when received if personally delivered or faxed (upon confirmation of receipt received by the sending party), addressed as follows: 12 If to Placement Agent, to: Westrock Advisors, Inc. 230 Park Avenue, Floor 9 New York, New York 10169 If to the Company, to: Videolocity International Inc. 1762 - A Propsector Drive Park City, Utah 84060 Attention: Robert E. Holt President and C.E.O. Telephone: (619) 890-8186 or (801) 521-2807 Facsimile: (801) 521-2844 With a copy to: Kirkpatrick & Lockhart, LLP Miami Center - 20th Floor 201 South Biscayne Boulevard Miami, FL 33131-2399 Attention: Clayton E. Parker, Esq. Telephone: (305) 539-3306 Facsimile: (305) 358-7095 If to the Investor: Cornell Capital Partners, LP 101 Hudson Street - Suite 3606 Jersey City, NJ 07302 Attention: Mark A. Angelo Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266 With Copies to: Butler Gonzalez LLP 1000 Stuyvesat Aveneue _ Suite No.: 6 Union, NJ 07083 Attention: David Gonzalez, Esq. Telephone: (908) 810-8588 Facsimile: (908) 810-0973 or to such other address of which written notice is given to the others. C. This Agreement shall be governed by and construed in all respects under the laws of the State of New York, without reference to its conflict of laws rules or principles. . D. This Agreement and the other agreements referenced herein contain the entire understanding between the parties hereto and may not be modified or amended except by a writing duly signed by the party against whom enforcement of the modification or amendment is sought. 13 E. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 14 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. COMPANY: VIDEOLOCITY INTERNATIONAL INC. By:____________________________ Name: Robert E. Holt Title: President and C.E.O. PLACEMENT AGENT: WESTROCK ADVISORS, INC. By:____________________________ Name: Title: INVESTOR: CORNELL CAPITAL PARTNERS, LP By: Yorkville Advisors, LLC Its: General Partner By:____________________________ Name: Mark A. Angelo Title: Portfolio Manager EX-10.8 10 employ.txt ROBERT HOLT EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into effective as of the 16th day of January 2002, by and between Videolocity, Inc., a Nevada corporation (the "Company"), and Robert E. Holt (the "Executive"). PREMISES -------- A. The Company desires to employ Executive as its Chief Executive Officer and the Executive desires to accept employment in such position, further, it is the desire of Company to cause Executive to be appointed and or elected to the Board of Directors throughout the term of this Agreement. B. The parties desire to enter into this Employment Agreement to specify each party's rights and obligations under the employment relationship. AGREEMENT --------- NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants contained herein and the mutual benefits to be derived hereunder, the parties agree as follows: 1. Employment. ----------- Company hereby employs Executive as Chief Executive Officer of the Company to perform those duties customarily associated with such position and such other duties as may be assigned to Executive by the Company's Board of Directors (the "Board") from time to time. Executive accepts and agrees to such employment on the terms and conditions set forth in this Agreement. 2. Term. ----- The term of this Agreement shall be for three (3) years and commence effective as of January 16, 2002, and expire at midnight on January 15, 2005, unless earlier terminated in accordance with the provisions of this Agreement. 3. Duties. ------- Executive shall be employed by Company as its Chief Executive Officer and in such other senior executive positions of comparable status, dignity and responsibility as requested by the Board from time to time. Executive shall also serve in similar positions with such subsidiaries of Company as shall, from time to time, be requested by Company's board of directors. Executive shall not receive any additional compensation for service as a member of the Board or as an officer of any subsidiaries of the Company unless otherwise directed by the Board. Executive shall devote substantially all of his working time and efforts to the business of Company and its subsidiaries and shall not during the term of this Agreement be engaged in any other substantial business activities which will significantly interfere or conflict with the reasonable performance of his duties hereunder, except where approved by the Board. Executive may serve or continue to serve as a member of the board of directors of any companies or organizations which, in the Board's reasonable judgment, will not present any conflict of interest with the Company or any of its subsidiaries or materially adversely affect the performance of Executive's duties under this Agreement. 1 4. Compensation. ------------- The benefits as set forth hereunder in subparagraphs (a), (d) and (d) (i) become effective, only after and immediately, upon the receipt by the Company of a minimum of $1,000,000 in capital funding. In the event said funding received is of a debt structure said funds must have a minimum use of 180 days to maturity to activate the aforementioned benefits being held subject to the specific performance set forth herein above. (a) Bonus. Coincidental with the execution of this Agreement Company will caused to be issued to Executive 1,000,000 shares of its common voting stock fully paid and non-assessable bearing a restrictive 144 legend from the authorized but unissued shares of Company. (b) Base Salary. For all services rendered by Executive, Company shall pay to Executive a base salary of $240,000 per year throughout the term of this Agreement, payable in arrears in equal monthly installments on the first and sixteenth day of each calendar month. All salary payments shall be subject to withholding and other applicable taxes. Executive's salary for any partial month at the beginning or end of this Agreement shall be prorated. The rate of salary may be increased at any time after the first year as the Board may determine, based on earnings, increased activities of the Company, or such other factors as the Board may deem appropriate. (c) Executive Participation in Stock Incentive Program. The Company shall grant Executive 900,000 plan units under the Videolocity, Inc. 2000 Stock Incentive Program (the "Stock Incentive Program") pursuant to which Executive will be awarded one share of the Company's common stock for each fully vested plan unit, as more particularly described in the Stock Incentive Program, and as specifically set forth in Exhibit "A" attached hereto. (d) Executive Stock Incentive Program. Simultaneous with the execution of this Agreement, the Company grants Executive the opportunity to purchase the following warrants within ten days of the execution date of this Agreement, each warrant is redeemable for one share of the common voting stock of Company, as follows; to wit (i) 9,000,000 Non-transferable warrants @ .001 per share, exercisable @ $.10 per share for 9,000,000 shares of the common voting stock of Company, as follows: between the first anniversary date of this Agreement and continuing thereafter for two consecutive years. (e) Executive Benefits. The Company shall provide such health and medical insurance for Executive in the form and program chosen by the Company for its full-time Executives commencing not later than thirty (30) days after the execution of this Agreement. Executive shall be entitled to participate in any other health, medical, retirement, pension, profit-sharing, disability, death and dismemberment, life insurance, stock option, vacation and other benefit plans and programs as in effect from time to time on the same basis as other members of senior management. (f) Vacation. Executive shall be entitled to paid vacation after one year of service in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies with respect to members of senior management, however not to exceed two weeks paid vacation in any given one year period. 2 5. Reimbursement of Expenses. -------------------------- Company will promptly reimburse Executive for expenses reasonably incurred in connection with Company's business in accordance with the Company's policies, including expenses for travel, lodging, meals, and other items on Executive's periodic presentation of an expense report in the form approved by the Company. 6. Nondisclosure of Confidential Information. --------------------------------------------- For purposes of this Agreement, the term "Confidential Information" means information (i) disclosed to or known by Executive as a consequence of or through his/her employment with the Company, (ii) not generally known outside the Company, and (iii) which relates to the Company's business. Confidential Information includes, but is not limited to, information of a technical nature, such as methods and materials, trade secrets, inventions, processes, formulas, systems, computer programs and studies, and information of a business nature such as project plans, market information, costs, customer lists, and so forth. Confidential Information does not include information that (i) is or becomes generally available to the public other than as a result of a disclosure by Executive in violation of this Agreement, or (ii) was in Executive's possession prior to his introduction to the Company. Recognizing that the Company is presently engaged, and may hereafter continue to be engaged, in the research and development of processes and the performance of services which involve experimental and inventive work, and that the success of the Company's business may depend upon the protection of its processes, products and services by patent, copyright or secrecy, and that Executive has had, or during the course of his engagement may have, access to Confidential Information, as herein defined, Executive agrees and acknowledges that: (a) The Company has exclusive right and title to all Confidential Information and Executive hereby assigns all rights he might otherwise possess in any Confidential Information to the Company. Except as required in the performance of his duties to the Company, Executive will not at any time during or after the term of his employment or engagement by the Company, which term shall include any time in which Executive may be retained by the Company as a consultant, directly or indirectly use, communicate, disclose or disseminate any Confidential Information. (b) All documents, records, notebooks, notes, memoranda and similar repositories of, or containing Confidential Information or any other information of a secret, proprietary, confidential or generally undisclosed nature relating to the Company or its operations and activities made or compiled by Executive at any time or made available to him during the term of his employment or engagement by the Company, including any and all copies thereof, shall be the property of the Company, shall be held by him in trust solely for the benefit of the Company, and shall be delivered to the Company by him on the termination of his engagement or at any other time on the request of the Company. (c) Executive will not assert any rights under any inventions, trademarks, copyrights, discoveries, concepts or ideas, or improvements thereof, or know-how related thereto, as having been made or acquired by him during the term of his employment or engagement if based on or otherwise related to Confidential Information. 8. Assignment Of Inventions. ------------------------- (a) All discoveries, concepts, and ideas, whether or not patentable or subject to copyright protection, including but not limited to improvements, know-how, data, processes, methods, formulae, and techniques, as well as improvements thereof, or know-how related thereto, concerning any past, present or prospective activities of the Company which Executive makes, discovers or conceives (whether or not during the hours of his engagement or with the use of the Company's facilities, materials or personnel), either solely or jointly with others during his engagement by the Company or any affiliate and, if 3 based on or related to Confidential Information, at any time after termination of such engagement (collectively, the "Inventions"), shall be the sole property of the Company, and Executive agrees to perform the provisions of this Section 8 with respect thereto without the payment by the Company of any royalty or any consideration therefore other than the regular compensation paid to Executive in his capacity as an executive or consultant. (b) Any written notebooks maintained by Executive with respect to Inventions and studies or research projects undertaken on the Company's behalf shall at all times be the property of the Company and shall be surrendered to the Company upon termination of Executive's engagement or, upon the request of the Company, at any time prior thereto. (c) Executive hereby assigns to the Company all of his rights to Inventions. (d) Executive shall sign, acknowledge and deliver promptly to the Company, without charge to the Company, but at its expense, such written instruments (including applications and assignments) and take such other acts, such as giving testimony in support of Executive's inventorship, as may be necessary in the reasonable opinion of the Company to obtain, maintain, extend, reissue and enforce United States and/or foreign letters patent and copyrights relating to Inventions invented by Executive and to vest the entire right and title thereto in the Company or its nominee. Executive acknowledges and agrees that any copyright developed or conceived of by Executive during the term of his employment, which is related to the business of the Company, shall be a "work for hire" under the copyright law of the United States and other applicable jurisdictions. (e) Executive represents that his performance of all the terms of this Agreement and as an Executive of or consultant to the Company does not and will not breach any trust or contract entered into prior to his employment by the Company. Executive agrees not to enter into any agreement either written or oral in conflict herewith and represents and agrees that he has not brought and will not bring with him to the Company or use in the performance of his responsibilities at the Company any materials or documents of a former employer which are not generally available to the public, unless he has obtained written authorization from the former employer for their possession and use and provided a copy of such authorization to the Company. (f) No provisions of this Paragraph shall be deemed to limit the restrictions applicable to Executive under Sections 9 and 10. 9. Shop Rights. ------------ The Company shall also have the royalty-free right to use in its business, and to make, use and sell products, processes and/or services derived from any inventions, discoveries, concepts and ideas, whether or not patentable, including but not limited to processes, methods, formulas and techniques, as well as improvements thereof or know-how related thereto, which are not within the scope of Inventions as defined above but which are conceived of or made by Executive during the period he is employed or engaged by the Company or with the use or assistance of the Company's facilities, materials, or personnel. 10. Non-Compete. ------------ Executive hereby agrees that during the term of this Agreement and for a period of three years from the expiration or earlier termination thereof, Executive will not: (a) Own, manage, operate, or control any business that is directly competitive with any business conducted or proposed to be conducted by the Company or any subsidiary thereof during the term of this Agreement in any geographic market in which the Company or any subsidiary thereof conducts business or proposes to conduct business during the term of this Agreement. For purposes of this paragraph, ownership of securities of not in excess of five percent (5%) of any class of securities of a public company listed on the OTC Bulletin Board, a national securities exchange or on the National Association of Securities Dealers Automated Quotation System (NASDAQ) shall not be considered to be competition with the Company or any subsidiary thereof; 4 (b) Act as, or become employed as, an officer, director, executive, consultant or agent of any business within the "video-on-demand" or "wireless broadband" industry which is directly competitive with the Company or any subsidiary thereof during the term of this Agreement in any geographic market within the "video-on-demand" wireless broadband" industry in which the Company or any subsidiary thereof conducts business during the term of this Agreement. The "video-on-demand industry" shall mean the industry that provides video, audio and other content to end users on demand over telephone, cable or other similar lines, or by wireless transmission. (c) Solicit any business similar to that of the Company's from, or sell any products or services that are in direct competition with the Company's products and services to, any company which was within one year prior to the date of termination of Executive's employment, a customer or client of the Company or any of its subsidiaries; or (d) Solicit the employment of any full time Executive employed by the Company or its subsidiaries as of the date of termination of this Agreement. Provided, however, that this Section 10 shall be void and of no further force or effect in the event this Agreement is terminated by the Company without Cause or by Executive for Good Reason, as defined in Section 11 of this Agreement. 11. Termination. ------------ (a) Death. The Executive's employment shall terminate automatically upon the Executive's death during the term of this Agreement. (b) Disability. If Executive is absent from his full-time duties with the Company as a result of incapacity due to mental or physical illness ("Disability") and such absence continues uninterrupted for a period of one (1) month, the base salary payable to Executive under this Agreement shall be reduced by 50% until such time as Executive resumes the performance of his full-time duties with the Company or this Agreement is terminated. If Executive's Disability continues for two (2) consecutive months, the Company may terminate Executive's employment effective on the 30th day after receipt by Executive of a notice to that effect (the "Disability Termination Date"), unless Executive returns to the full-time performance of his duties prior to the Disability Termination Date. (c) Cause. The Company may terminate Executive's employment during the term of this Agreement for Cause. For purposes of this Agreement, "Cause" shall mean: (i) Executive being convicted of a felony; (ii) a willful act of personal dishonesty taken by Executive in connection with his responsibilities as an Executive and intended to result in substantial personal enrichment of Executive; (iii) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or its affiliates (other than any such failure resulting from Disability), after a written demand for substantial performance is delivered to the Executive by the Board which specifically identifies the manner in which the Board believes Executive has not substantially performed Executive's duties and Executive has not performed such duties within 30 days of such notice, or (iv) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given by the Chief Executive Officer and or Board of Directors of the Company or pursuant to a resolution duly adopted by the Board shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. 5 (d) Good Reason. The Executive's employment may be voluntarily terminated by Executive at any time within sixty (60) days after the occurrence of an event constituting Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the failure by the Company to comply with any of the material terms of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) the relocation of Executive to any office or location more than 35 miles from the location of the Company's offices at the commencement of this Agreement; or (iii) the occurrence of a Change in Control as defined in Section 13 of this Agreement. (e) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto in accordance with Section 17 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (f) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, or by the Executive other than for Good Reason, the Date of Termination shall be thirty (30) days after the date on which the Company notifies the Executive, or the Executive notifies the Company, of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Termination Date, as applicable. 12. Obligations of the Company upon Termination. -------------------------------------------- (a) Termination for Good Reason; Termination other Than for Cause, Death or Disability. If, during the term of this Agreement, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) The Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. The sum of (aa) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (bb) reimbursement for any and all monies advanced in connection with Executive's employment through the Date of Termination, and (cc) all other payments and benefits to which Executive may be entitled under the terms of any benefit plan of the Company through the Date of Termination (collectively, the "Accrued Obligations"). Where applicable, such payments shall be prorated based on a 360-day year and the number of days elapsed during the year in question. 6 B. For six (6) months after the Executive's Date of Termination, the Company shall at its expense provide health and medical insurance to Executive and his family of the same type and scope as was provided during the term of this Agreement. C. To the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies through the Date of Termination (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (ii) All unvested plan units of Executive under the Stock Incentive Program shall vest and the Company shall, within ten (10) days following the Date of Termination deliver to Executive the shares of the Company's common stock issuable upon the conversion of such plan units. (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination and Other Benefits shall be paid as soon as practicable in accordance with the most favorable practices, policies and procedures followed by the Company with respect to members of senior management. In addition, all unvested plan units of Executive under the Stock Incentive Program shall vest and the Company shall, within ten (10) days following the Date of Termination deliver to Executive the shares of the Company's common stock issuable upon the conversion of such plan units. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the term of this Agreement, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination and Other Benefits shall be paid as soon as practicable in accordance with the most favorable practices, policies and procedures followed by the Company with respect to members of senior management. In addition, all unvested plan units of Executive under the Stock Incentive Program shall vest and the Company shall, within ten (10) days following the Date of Termination deliver to Executive the shares of the Company's common stock issuable upon the conversion of such plan units. (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the term of this Agreement, this Agreement shall terminate without further obligations to the Executive other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In either event, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination and all unvested plan units of Executive under the Stock Incentive Program shall be forfeited. 7 13. Change of Control. ------------------ A Change of Control (as defined below) shall constitute Good Reason as defined in Section 11(d) of this Agreement and shall entitle Executive to voluntarily terminate this Agreement in the manner described in Section 11(d) above and to receive the benefits provided in Section 12(a) above. For purposes of this Agreement, "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (aa) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (bb) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this Agreement, the following acquisitions shall not constitute a Change of Control: (aa) any acquisition directly from the Company, (bb) any acquisition by the Company, (cc) any acquisition by any Executive benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (dd) any acquisition by any corporation pursuant to a transaction which complies with clauses (aa), (bb) and (cc) of subsection (iii) below; or (ii) (aa) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board or (bb) a majority of the members of the Board ceases to be comprised of Directors whose most recent election to the Board was approved by at least a majority of the Incumbent Board prior to such election; or (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (aa) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (bb) no Person (excluding any corporation resulting from such Business Combination or any Executive benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to 8 the extent that such ownership existed prior to the Business Combination and (cc) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 14. Nontransferability. ------------------- Neither Executive, Executive's spouse, Executive's designated contingent beneficiary, nor their estates shall have any right to anticipate, encumber, or dispose of any payment due under this Agreement. Such payments and other rights are expressly declared nonassignable and nontransferable except as specifically provided herein. 15. Indemnification. ---------------- Company shall indemnify Executive and hold Executive harmless from liability for acts or decisions made by Executive while performing services for Company to the greatest extent permitted by the Nevada Revised Statutes and shall advance funds to Executive for the defense of any action, suit or proceeding prior to the conclusion thereof to the maximum extent permitted by the Nevada Revised Statutes. 16. Assignment. ----------- This Agreement may not be assigned by either party without the prior written consent of the other party. 17. Notice. ------- Any notices or other communications required or permitted hereunder shall be sufficiently given if personally delivered, if sent by facsimile or telecopy transmission or other electronic communication confirmed by registered or certified mail, postage prepaid, or if sent by prepaid overnight courier addressed as follows: If to Executive, to: Robert E. Holt 1691 Sagewood Way San Marcos, CA. 92078 If to the Company, to: Videolocity International, Inc. Attn: Chief Financial Officer 358 S. 700 E. Suite B604 Salt Lake City, Utah 84102 18. Entire Agreement. ------------------ This Agreement is and shall be considered to be the only agreement or understanding between the parties hereto with respect to the employment of Executive by Company. All negotiations, commitments, and understandings acceptable to both parties have been incorporated herein. No letter, telegram, or communication passing between the parties hereto covering any matter during this contract period, or any plans or periods thereafter, shall be deemed a part of this Agreement; nor shall it have the effect of modifying or adding to this Agreement unless it is distinctly stated in such letter, telegram, or communication that it is to constitute a part of this Agreement and is attached as an amendment to this Agreement and is signed by the parties to this Agreement. 19. Enforcement. ------------ Each of the parties to this Agreement shall be entitled to any remedies available in equity or by statute with respect to the breach of the terms of this Agreement by the other party. Executive hereby specifically acknowledges and agrees that a breach of the agreements, covenants and conditions contained in Sections 7, 8, 9 and 10 of this Agreement may cause irreparable harm and damage to the Company, that the remedy at law, for the breach or threatened breach of such provisions of this Agreement may be inadequate, and that, in addition to all other remedies available to the Company for such breach or 9 threatened breach (including, without limitation, the right to recover damages), the Company shall be entitled to injunctive relief for any breach or threatened breach of such sections of this Agreement. 20. Governing Law. -------------- This Agreement shall be governed by and interpreted in accordance with the laws of the State of Utah. 21. Severability. ------------- If and to the extent that any court of competent jurisdiction holds any provision or any part thereof of this Agreement to be invalid or unenforceable, such holding shall in no way affect the validity of the remainder of this Agreement. Upon a determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the maximum extent possible. 22. Waiver. ------- No failure by any party to insist upon the strict performance of any covenant, duty, agreement, or condition of this Agreement or to exercise any right or remedy consequent upon a breach hereof shall constitute a waiver of any such breach or of any covenant, agreement, term, or condition. 23. Litigation Expenses. --------------------- In the event that it shall be necessary or desirable for the Executive or Company to retain legal counsel and/or incur other costs and expenses in connection with the enforcement of any or all of the provisions of this Agreement, the prevailing party shall be entitled to recover from the other party reasonable attorneys' fees, costs, and expenses incurred by the prevailing party in connection with the enforcement of this Agreement. Notwithstanding the foregoing, in the event that following a Change of Control Executive engages legal counsel to enforce Executive's rights or seek a determination under this Agreement, the Company shall pay the expenses of such legal counsel regardless of the outcome of any legal proceeding resulting there from. 24. Survivability. -------------- The provisions of sections 7, 8, 9, 10, 12, and 13 shall survive termination of this Agreement. AGREED AND ENTERED INTO effective as of the date first above written. Company: Videolocity International, Inc. By______________________________ Duly Authorized Officer Executive: Robert E. Holt ______________________________ (Signature) 10 EX-10.9 11 ex10no9.txt MATERIAL CONTRACTS EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into effective as of the 16th day of November, 2000 by and between Moviesonline, Inc., a Nevada corporation (the "Company"), and Martin Senn (the "Employee"). PREMISES -------- A. The Company desires to employ Employee and the Employee desires to accept employment in with the Company. B. The parties desire to enter into this Employment Agreement to specify each party's rights and obligations under the employment relationship. AGREEMENT --------- NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants contained herein and the mutual benefits to be derived hereunder, the parties agree as follows: 1. Employment. ----------- The Company hereby employs Employee, and Employee accepts and agrees to such employment, on the terms and conditions set forth in this Agreement. 2. Term. ----- The term of this Agreement shall be for three (3) years and commence effective as of November 16, 2000, and expire at midnight on November 16, 2003, unless earlier terminated in accordance with the provisions of this Agreement. 3. Duties. ------- Employee shall perform the duties assigned to Employee by the Company's Chief Executive Officer or its Board of Directors (the "Board") from time to time. Employee shall hold such offices and serve in such positions with the Company and its subsidiaries as shall from time to time be requested by Company's Chief Executive Officer or the Board. Employee shall not receive any additional compensation for service as an officer of any subsidiaries of the Company unless otherwise directed by the Board. Employee shall devote substantially all of his working time and efforts to the business of Company and its subsidiaries and shall not during the term of this Agreement be engaged in any other substantial business activities which will significantly interfere or conflict with the reasonable performance of his duties hereunder, except where approved by the Company's Chief Executive Officer or the Board. Employee may serve or continue to serve as a member of the board of directors of any companies or organizations which, in the reasonable judgment of the Company's Chief Executive Officer or the Board, will not present any conflict of interest with the Company or any of its subsidiaries or materially adversely affect the performance of Employee's duties under this Agreement. 4. Compensation. ------------- (a) Base Salary. For all services rendered by Employee, Company shall pay to Employee a base salary of $125,000 per year throughout the term of this Agreement, payable in arrears in two equal monthly installments on or about the first and fifteenth day of each calendar month. All salary payments shall be subject to withholding and other applicable taxes. Employee's salary for any partial month at the beginning or end of this Agreement shall be prorated. The rate of salary may be increased (but not decreased) at any time as the Board may determine, based on earnings, increased activities of the Company, or such other factors as the Board may deem appropriate. The Board shall review Employee's base salary on not less than an annual basis. 1 (b) Participation in Stock Incentive Program. The Company shall grant Employee 37,500 plan units under the Moviesonline, Inc. 2000 Stock Incentive Program (the "Stock Incentive Program") pursuant to which Employee will be awarded one share of the Company's common stock for each fully vested plan unit, as more particularly described in the Stock Incentive Program, a copy of which has been delivered to Employee. (c) Employee Benefits. The Company shall provide such health and medical insurance for Employee in the form and program chosen by the Company for its full-time employees commencing not later than December 1, 2000. Employee shall be entitled to participate in any other health, medical, retirement, pension, profit-sharing, disability, death and dismemberment, life insurance, stock option, vacation and other benefit plans and programs as in effect from time to time on the same basis as other similarly situated employees of the Company. (d) Vacation. Employee shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies with respect to similarly situated employees of the Company. Employee shall initially be entitled to two (2) weeks paid vacation per calendar year, after one year of employment. 5. Reimbursement of Expenses. -------------------------- Company will promptly reimburse Employee for expenses reasonably incurred in connection with Company's business in accordance with the Company's policies, including expenses for travel, lodging, meals, and other items on Employee's periodic presentation of an expense report in the form approved by the Company. 6. Working Facilities. ------------------- Company shall provide to Employee offices and facilities appropriate to Employee's position and suitable for the performance of Employee's duties. 7. Nondisclosure of Confidential Information. ------------------------------------------ For purposes of this Agreement, the term "Confidential Information" means information (i) disclosed to or known by Employee as a consequence of or through his/her employment with the Company, (ii) not generally known outside the Company, and (iii) which relates to the Company's business. Confidential Information includes, but is not limited to, information of a technical nature, such as methods and materials, trade secrets, inventions, processes, formulas, systems, computer programs and studies, and information of a business nature such as project plans, market information, costs, customer lists, and so forth. Confidential Information does not include information that (i) is or becomes generally available to the public other than as a result of a disclosure by Employee in violation of this Agreement, or (ii) was in Employee's possession prior to his introduction to the Company. Recognizing that the Company is presently engaged, and may hereafter continue to be engaged, in the research and development of processes and the performance of services which involve experimental and inventive work, and that the success of the Company's business may depend upon the protection of its processes, products and services by patent, copyright or secrecy, and that Employee has had, or during the course of his engagement may have, access to Confidential Information, as herein defined, Employee agrees and acknowledges that: (a) The Company has exclusive right and title to all Confidential Information and Employee hereby assigns all rights he might otherwise possess in any Confidential Information to the Company. Except as required in the performance of his duties to the Company, Employee will not at any time during or after the term of his employment or engagement by the Company, which term shall include any time in which Employee may be retained by the Company as a consultant, directly or indirectly use, communicate, disclose or disseminate any Confidential Information. 2 (b) All documents, records, notebooks, notes, memoranda and similar repositories of, or containing Confidential Information or any other information of a secret, proprietary, confidential or generally undisclosed nature relating to the Company or its operations and activities made or compiled by Employee at any time or made available to him during the term of his employment or engagement by the Company, including any and all copies thereof, shall be the property of the Company, shall be held by him in trust solely for the benefit of the Company, and shall be delivered to the Company by him on the termination of his engagement or at any other time on the request of the Company. (c) Employee will not assert any rights under any inventions, trademarks, copyrights, discoveries, concepts or ideas, or improvements thereof, or know-how related thereto, as having been made or acquired by him during the term of his employment or engagement if based on or otherwise related to Confidential Information. 8. Assignment Of Inventions. ------------------------- (a) All discoveries, concepts, and ideas, whether or not patentable or subject to copyright protection, including but not limited to improvements, know-how, data, processes, methods, formulae, and techniques, as well as improvements thereof, or know-how related thereto, concerning any past, present or prospective activities of the Company which Employee makes, discovers or conceives (whether or not during the hours of his engagement or with the use of the Company's facilities, materials or personnel), either solely or jointly with others during his engagement by the Company or any affiliate and, if based on or related to Confidential Information, at any time after termination of such engagement (collectively, the "Inventions"), shall be the sole property of the Company, and Employee agrees to perform the provisions of this Section 8 with respect thereto without the payment by the Company of any royalty or any consideration therefor other than the regular compensation paid to Employee in his capacity as an employee or consultant. (b) Any written notebooks maintained by Employee with respect to Inventions and studies or research projects undertaken on the Company's behalf shall at all times be the property of the Company and shall be surrendered to the Company upon termination of Employee's engagement or, upon the request of the Company, at any time prior thereto. (c) Employee hereby assigns to the Company all of his rights to Inventions. (d) Employee shall sign, acknowledge and deliver promptly to the Company, without charge to the Company, but at its expense, such written instruments (including applications and assignments) and take such other acts, such as giving testimony in support of Employee's inventorship, as may be necessary in the reasonable opinion of the Company to obtain, maintain, extend, reissue and enforce United States and/or foreign letters patent and copyrights relating to Inventions invented by Employee and to vest the entire right and title thereto in the Company or its nominee. Employee acknowledges and agrees that any copyright developed or conceived of by Employee during the term of his employment, which is related to the business of the Company, shall be a "work for hire" under the copyright law of the United States and other applicable jurisdictions. (e) Employee represents that his performance of all the terms of this Agreement and as an employee of or consultant to the Company does not and will not breach any trust or contract entered into prior to his employment by the Company. Employee agrees not to enter into any agreement either written or oral in conflict herewith and represents and agrees that he has not brought and will not bring with him to the Company or use in the performance of his responsibilities at the Company any materials or documents of a former employer which are not generally available to the public, unless he has obtained written authorization from the former employer for their possession and use and provided a copy of such authorization to the Company. 3 (f) No provisions of this Paragraph shall be deemed to limit the restrictions applicable to Employee under Sections 9 and 10. 9. Shop Rights. ------------ The Company shall also have the royalty-free right to use in its business, and to make, use and sell products, processes and/or services derived from any inventions, discoveries, concepts and ideas, whether or not patentable, including but not limited to processes, methods, formulas and techniques, as well as improvements thereof or know-how related thereto, which are not within the scope of Inventions as defined above but which are conceived of or made by Employee during the period he is employed or engaged by the Company or with the use or assistance of the Company's facilities, materials, or personnel. 10. Non-Compete. ------------ Employee hereby agrees that during the term of this Agreement and for a period of two years from the expiration or earlier termination thereof, Employee will not: (a) Own, manage, operate, or control any business that provides video, audio, or other content to end users over telephone, cable or similar lines, or by wireless transmission ("video-on-demand"), in any geographic market in which the Company or any subsidiary thereof is then providing video-on-demand services, or in any geographic market in which the Company has established plans to provide video-on-demand services within six months from the date the determination is being made. For purposes of this paragraph, ownership of securities of not in excess of five percent (5%) of any class of securities of a public company listed on the OTC Bulletin Board, a national securities exchange, or on the National Association of Securities Dealers Automated Quotation System (NASDAQ) shall not be considered to be competition with the Company or any subsidiary thereof; (b) Provide services in the video-on-demand industry, directly or indirectly, as an officer, director, executive, consultant, employee, or agent of any company in any geographic market in which the Company or any of its subsidiaries is then providing video-on-demand services, or in any geographic market in which the Company has established plans to provide video-on-demand services within six months from the date the determination is being made. This paragraph shall not be construed to prevent Employee from being employed by a subsidiary or division of a large corporation which subsidiary or division does not conduct business in the video services industry, even though another subsidiary or division of that corporation may be engaged in the video services industry, as long as proper steps are taken to insure that Employee will have no involvement, input or oversight with respect to the corporation's video-on-demand operations; (c) Solicit any video-on-demand business from, or sell any video-on-demand products or services to, any company that was within one year prior to the date of termination of Employee's employment, a customer, client or associate of the Company or any of its subsidiaries; or (d) Solicit the employment of any full-time employee employed by the Company or its subsidiaries as of the date of termination of this Agreement. Provided, however, that this Section 10 shall be void and of no further force or effect in the event this Agreement is terminated by the Company without Cause or by Employee for Good Reason, as defined in Section 11 of this Agreement. 11. Termination. (a) Death. The Employee's employment shall terminate automatically upon the Employee's death during the term of this Agreement. (b) Disability. If Employee is absent from his full-time duties with the Company as a result of incapacity due to mental or physical illness ("Disability") and such absence continues 4 uninterrupted for a period of one (1) month, the base salary payable to Employee under this Agreement shall be reduced by 50% until such time as Employee resumes the performance of his full-time duties with the Company or this Agreement is terminated. If Employee's Disability continues for two (2) consecutive months, the Company may terminate Employee's employment effective on the 30th day after receipt by Employee of a notice to that effect (the "Disability Termination Date"), unless Employee returns to the full-time performance of his duties prior to the Disability Termination Date. (c) Cause. The Company may terminate Employee's employment during the term of this Agreement for Cause. For purposes of this Agreement, "Cause" shall mean: (i) Employee being convicted of a felony; (ii) a willful act of personal dishonesty taken by Employee in connection with his responsibilities as an employee and intended to result in substantial personal enrichment of Employee; (iii) the willful and continued failure of the Employee to perform substantially the Employee's duties with the Company or its affiliates (other than any such failure resulting from Disability), after a written demand for substantial performance is delivered to the Employee by the Board which specifically identifies the manner in which the Board believes Employee has not substantially performed Employee's duties and Employee has not performed such duties within 30 days of such notice, or (iv) the willful engaging by the Employee in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Employee, shall be considered "willful" unless it is done, or omitted to be done, by the Employee in bad faith or without reasonable belief that the Employee's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given by the Chief Executive Officer and or Board of Directors of the Company or pursuant to a resolution duly adopted by the Board shall be conclusively presumed to be done, or omitted to be done, by the Employee in good faith and in the best interests of the Company. (d) Good Reason. The Employee's employment may be voluntarily terminated by Employee at any time within sixty (60) days after the occurrence of an event constituting Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the failure by the Company to comply with any of the material terms of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee; (ii) the relocation of Employee to any office or location more than 35 miles from the location of the Company's offices at the commencement of this Agreement; or (iii) the occurrence of a Change in Control as defined in Section 13 of this Agreement. (e) Notice of Termination. Any termination by the Company for Cause, or by the Employee for Good Reason, shall be communicated by Notice of Termination to the other party hereto in accordance with Section 17 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Employee or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Employee or the Company, respectively, or preclude the Employee or the Company, respectively, from asserting such fact or circumstance in enforcing the Employee's or the Company's rights hereunder. 5 (f) Date of Termination. "Date of Termination" means (i) if the Employee's employment is terminated by the Company for Cause, or by the Employee for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Employee's employment is terminated by the Company other than for Cause or Disability, or by the Employee other than for Good Reason, the Date of Termination shall be thirty (30) days after the date on which the Company notifies the Employee, or the Employee notifies the Company, of such termination and (iii) if the Employee's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Employee or the Disability Termination Date, as applicable. 12. Obligations of the Company upon Termination. -------------------------------------------- (a) Termination for Good Reason; Termination other Than for Cause, Death or Disability. If, during the term of this Agreement, the Company shall terminate the Employee's employment other than for Cause or Disability or the Employee shall terminate employment for Good Reason: (i) The Company shall pay to the Employee in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. The sum of (aa) the Employee's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (bb) reimbursement for any and all monies advanced in connection with Employee's employment through the Date of Termination, and (cc) all other payments and benefits to which Employee may be entitled under the terms of any benefit plan of the Company through the Date of Termination (collectively, the "Accrued Obligations"). Where applicable, such payments shall be prorated based on a 360 day year and the number of days elapsed during the year in question. B. For six (6) months after the Employee's Date of Termination, the Company shall at its expense provide health and medical insurance to Employee and his family of the same type and scope as was provided during the term of this Agreement. C. To the extent not theretofore paid or provided, the Company shall timely pay or provide to the Employee any other amounts or benefits required to be paid or provided or which the Employee is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies through the Date of Termination (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (ii) All unvested plan units of Employee under the Stock Incentive Program shall vest and the Company shall, within ten (10) days following the Date of Termination deliver to Employee the shares of the Company's common stock issuable upon the conversion of such plan units. (b) Death. If the Employee's employment is terminated by reason of the Employee's death during the Employment Period, this Agreement shall terminate without further obligations to the Employee's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Employee in a lump sum in cash within 30 days of the Date of Termination and Other Benefits shall be paid as soon as practicable in accordance with the most favorable practices, policies and procedures followed by the Company with respect to members of senior management. In addition, all unvested plan units of Employee under the Stock Incentive Program shall vest and the Company shall, within ten (10) days following the Date of Termination deliver to Employee the shares of the Company's common stock issuable upon the conversion of such plan units. 6 (c) Disability. If the Employee's employment is terminated by reason of the Employee's Disability during the term of this Agreement, this Agreement shall terminate without further obligations to the Employee, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Employee in a lump sum in cash within 30 days of the Date of Termination and Other Benefits shall be paid as soon as practicable in accordance with the most favorable practices, policies and procedures followed by the Company with respect to members of senior management. In addition, all unvested plan units of Employee under the Stock Incentive Program shall vest and the Company shall, within ten (10) days following the Date of Termination deliver to Employee the shares of the Company's common stock issuable upon the conversion of such plan units. (d) Cause; Other than for Good Reason. If the Employee's employment shall be terminated for Cause during the term of this Agreement, this Agreement shall terminate without further obligations to the Employee other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. If the Employee voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Employee, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In either event, all Accrued Obligations shall be paid to the Employee in a lump sum in cash within 30 days of the Date of Termination and all unvested plan units of Employee under the Stock Incentive Program shall be forfeited. 13. Change of Control. ------------------ A Change of Control (as defined below), shall constitute Good Reason as defined in Section 11(d) of this Agreement and shall entitle Employee to voluntarily terminate this Agreement in the manner described in Section 11(d) above and to receive the benefits provided in Section 12(a) above. For purposes of this Agreement, "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (aa) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (bb) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this Agreement, the following acquisitions shall not constitute a Change of Control: (aa) any acquisition directly from the Company, (bb) any acquisition by the Company, (cc) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (dd) any acquisition by any corporation pursuant to a transaction which complies with clauses (aa), (bb) and (cc) of subsection (iii) below; or (ii) (aa) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board or (bb) a majority of the members of the Board ceases to be comprised of Directors whose most recent election to the Board was approved by at least a majority of the Incumbent Board prior to such election; or 7 (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (aa) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (bb) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (cc) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 14. Nontransferability. ------------------- Neither Employee, Employee's spouse, Employee's designated contingent beneficiary, nor their estates shall have any right to anticipate, encumber, or dispose of any payment due under this Agreement. Such payments and other rights are expressly declared nonassignable and nontransferable except as specifically provided herein. 15. Indemnification. ---------------- Company shall indemnify Employee and hold Employee harmless from liability for acts or decisions made by Employee while performing services for Company to the greatest extent permitted by the Nevada Revised Statutes and shall advance funds to Employee for the defense of any action, suit or proceeding prior to the conclusion thereof to the maximum extent permitted by the Nevada Revised Statutes. 16. Assignment. ----------- This Agreement may not be assigned by either party without the prior written consent of the other party. 17. Notice. Any notices or other communications required or permitted hereunder shall be sufficiently given if personally delivered, if sent by facsimile or telecopy transmission or other electronic communication confirmed by registered or certified mail, postage prepaid, or if sent by prepaid overnight courier addressed as follows: 8 If to Employee, to: Martin Senn 2666 Cottage Loop Road Park City, UT 84098 Fax: (435) 655-9505 If to the Company, to: Moviesonline, Inc. Attn: Chief Executive Officer 136 Heber Avenue, Suite 209 Park City, Utah 84060 18. Entire Agreement. ------------------ This Agreement is and shall be considered to be the only agreement or understanding between the parties hereto with respect to the employment of Employee by Company. All negotiations, commitments, and understandings acceptable to both parties have been incorporated herein. No letter, telegram, or communication passing between the parties hereto covering any matter during this contract period, or any plans or periods thereafter, shall be deemed a part of this Agreement; nor shall it have the effect of modifying or adding to this Agreement unless it is distinctly stated in such letter, telegram, or communication that it is to constitute a part of this Agreement and is attached as an amendment to this Agreement and is signed by the parties to this Agreement. 19. Enforcement. ------------ Each of the parties to this Agreement shall be entitled to any remedies available in equity or by statute with respect to the breach of the terms of this Agreement by the other party. Employee hereby specifically acknowledges and agrees that a breach of the agreements, covenants and conditions contained in Sections 7, 8, 9 and 10 of this Agreement may cause irreparable harm and damage to the Company, that the remedy at law, for the breach or threatened breach of such provisions of this Agreement may be inadequate, and that, in addition to all other remedies available to the Company for such breach or threatened breach (including, without limitation, the right to recover damages), the Company shall be entitled to injunctive relief for any breach or threatened breach of such sections of this Agreement. 20. Governing Law. -------------- This Agreement shall be governed by and interpreted in accordance with the laws of the State of Utah. 21. Severability. ------------- If and to the extent that any court of competent jurisdiction holds any provision or any part thereof of this Agreement to be invalid or unenforceable, such holding shall in no way affect the validity of the remainder of this Agreement. Upon a determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the maximum extent possible. 22. Waiver. ------- No failure by any party to insist upon the strict performance of any covenant, duty, agreement, or condition of this Agreement or to exercise any right or remedy consequent upon a breach hereof shall constitute a waiver of any such breach or of any covenant, agreement, term, or condition. 23. Litigation Expenses. -------------------- In the event that it shall be necessary or desirable for the Employee or Company to retain legal counsel and/or incur other costs and expenses in connection with the enforcement of any or all of the provisions of this Agreement, the prevailing party shall be entitled to recover from the other party reasonable attorneys' fees, costs, and expenses incurred by the prevailing party in connection with the enforcement of this Agreement. Notwithstanding the foregoing, in the event that following a Change of Control Employee engages legal counsel to enforce Employee's rights or seek a determination under this Agreement, the Company shall pay the expenses of such legal counsel regardless of the outcome of any legal proceeding resulting therefrom. 9 24. Survivability. -------------- The provisions of sections 7, 8, 9, 10, 12, and 13 shall survive termination of this Agreement. AGREED AND ENTERED INTO effective as of the date first above written. Company: Moviesonline, Inc. By_______________________________ Duly Authorized Officer Employee: _________________________________ (Signature) _________________________________ (Print Name) _________________________________ SS# 10 Letter of Amendment This letter will serve as an amendment to that certain document entitled "Employment Agreement" between Moviesonline, Inc., having changed its name to Videolocity, Inc. ("Employer") and Martin P. Senn, ("Employee") dated the 16th day of November, 2000. Wherein it is the desire of the Employer and the Employee to amend Paragraph 4.(a) Compensation of that certain "Employment Agreement", only, as follows: 4. Compensation (a) Base Salary. For all services rendered by Employee, Company shall pay to Employee a base salary of $137,000.00 per year throughout the term of this Agreement, payable in arrears in two equal monthly installments on or about the first and sixteenth day of each calendar month. All salary payments shall be subject to withholding and other applicable taxes. Employee's salary for any partial month at the beginning or end of this Agreement shall be prorated. The rate of salary may be increased (but not decreased) at any time as the Board may determine, based on earnings, increased activities of the Company, or such other factors as the Board may deem appropriate. The Board shall review Employee's base salary on not less than an annual basis. Whereas all other terms and conditions in that certain aforementioned "Employment Agreement" as written and as executed on November 16, 2000 remain unchanged. This Letter of Amendment executed as of the 1st day of October, 2001, the effective date of this Amendment. Employer: Employee: By:____________________________ ___________________________ Videolocity, Inc. Martin P. Senn 11 EX-10.10 12 ex10no10.txt MATERIAL CONTRACTS LEASE AGREEMENT THIS LEASE AGREEMENT ("Lease") is made and entered as of December 26, 2000, by and between, JERRY HONEYWELL AND CAROL HONEYWELL, AS TRUSTEES OF THE JERRY HONEYWELL AND CAROL HONEYWELL TRUST, as Landlord, and VIDEOLOCITY, INC. (formerly named, Moviesonline, Inc.), a Nevada corporation, as Tenant. FOR GOOD AND VALUABLE CONSIDERATION and the mutual observances of the terms and covenants herein, the parties agree, as follows: 1. Premises. Landlord hereby leases to Tenant on a 24-hour, 7-day a week basis, the two-story office building owned by Landlord, located at 1762-A, Prospector Drive, Park City, Utah 84060, consisting of a first floor (the "First Floor") and a second floor (the "Second Floor") (together, the "Premises"). 2. Term. This Lease shall be in effect with respect to the First Floor for an initial term, which shall commence on January 1, 2001, and end on December 31, 2001. This Lease shall be in effect with respect to the Second Floor for an initial term, which shall commence on February 15, 2001, and end on December 31, 2001. In the event Tenant holds over after the expiration of this Lease, Tenant shall become a tenant at will. 3. Option to Renew. Provided that Tenant has not been in default under this Lease at any time, Tenant shall have the option to renew the term of this Lease for an additional term, which shall commence on January 1, 2002, and end on December 31, 2002. All of the terms and conditions of this Lease shall remain the same during the renewal term, except that the rent during the renewal term shall be subject to negotiation between Landlord and Tenant, but in no event less than the rent provided during the initial term. Tenant shall exercise the option to renew by providing Landlord with written notice thereof at least one hundred twenty (120) days prior to the end of the initial term of this Lease. Within ten (10) days after receipt of such written notice by Landlord, Tenant and Landlord shall meet and negotiate in good faith to arrive at the rent for the renewal term. 4. Rent. Tenant agrees to pay rent for the Premises, in advance, as follows: (a) For the First Floor: (i) the sum of $2,000.00 upon the execution of this Lease for the month of January, 2001 and (ii) thereafter, the sum of $2,000.00 on the first day of each and every month during the term of this Lease. (b) For the Second Floor: (i) the sum of $1,000.00, on or before February 1, 2001, for the period February 15, 2001, through February 28, 2001; and (ii) thereafter the sum of $2,000.00 on the first day of each and every month during the term of this Lease. 5. Late Payment Fee. If any monthly installment of rent is not paid within five (5) days of the date it is due, a late payment fee equal to ten percent (10%) of the amount of the late monthly installment shall be added and be due and payable without notice to Tenant. If any two (2) monthly installments of rent are not paid within five (5) days of the date they are due, or if any check from Tenant to Landlord is returned to Landlord for insufficient funds, Landlord may require that all future monthly rent payments be in the form of cashier's checks. 1 6. Security Deposit. Concurrently with the execution of this Lease, Tenant shall pay to Landlord a security deposit in the amount of $12,000.00. Throughout the term of the Lease, Landlord shall be entitled to hold the security deposit, without interest, in Landlord's general funds, and to use the security deposit to pay any defaulted rent or other costs associated with the Premises that are the obligations of Tenant and which have not been paid by Tenant. At any time Landlord expends funds from the security deposit to pay any obligation of Tenant under this Lease, Landlord will notify Tenant, and Tenant shall have five (5) days in which to pay to Landlord the amount required in order to restore the full amount of the security deposit. Failure to so restore the security deposit will be a default under this Lease. Provided that Tenant has not been in default under this Lease at any time, Landlord shall apply the security deposit to pay the last two (2) months rent due during the initial term of this Lease; provided, however, if Tenant has not been in default under this Lease at any time and has exercised timely the option to renew, Landlord shall instead apply the security deposit to pay the last two (2) months rent due during the renewal term of this Lease. Any amount of the security deposit remaining at the expiration of this Lease shall be returned to Tenant by Landlord within ten (10) days, less charges for any damages to the Premises or other obligations to Landlord for which Tenant is responsible. 7. Interest. Any obligation of Tenant to Landlord under this Lease, including any advance made by Landlord for an obligation of Tenant under this Lease which Tenant is required to pay but has not paid, which is in excess of the amount available to Landlord from the security deposit, shall accrue interest at the rate of eighteen percent (18%) per annum from the date such obligation arises until fully paid to Landlord. 8. Utilities; Snow Removal. Landlord shall pay for all gas, electric power, and water services consumed on the Premises by Tenant. Tenant will be responsible for any damages resulting to the Premises as a result of Tenant's failure to maintain adequate temperatures in the Premises to prevent freezing of pipes or other damage to the Premises. Landlord shall be responsible for the removal of snow from the entrance to the Premises. Tenant shall be responsible for its own telephone services. 9. Trash Disposal; Janitorial. Landlord shall pay any charges for the pick-up and disposal of trash from the Premises. Tenant shall pay and be responsible for its own janitorial services and supplies for the Premises, which shall be provided by a reputable, independent janitorial services company. The janitorial services company employed by Tenant shall be subject to the reasonable approval of Landlord. Janitorial services shall be performed no less than once each week and shall include, at a minimum, removal of all trash, vacuuming of all carpets, mopping of all tile floors, and the thorough cleaning of the rest rooms on the Premises. 10. Insurance; Indemnification. (a) Fire and casualty insurance for the full replacement value of the building constituting a part of the Premises will be provided and paid for by Landlord. This insurance will not cover any loss to Tenant's personal property, inventory, or fixtures. Tenant shall insure its personal property at its sole cost and expense. (b) Tenant shall provide and maintain public liability insurance for those claims arising from injuries within or about the Premises or directly attributable to Tenant's negligence or actions related thereto. Tenant shall carry commercial general liability insurance in the aggregate amount of not less than $1,000,000.00, per occurrence and aggregate, with Landlord as an additional named insured thereon. 2 (c) Notwithstanding Tenant's obligation to purchase general liability insurance, Tenant agrees to indemnify and hold Landlord harmless from any and all claims, causes of action, loss, damage or expense, including attorney's fees, for personal injury and property damage arising from or relating to the use of the Premises and the adjacent parking lot and walkways by Tenant, its officers, employees, agents, guests and invitees, except for Landlord's gross negligence or wilful acts. Prior to taking possession of the Premises, Tenant will provide to Landlord a Certificate of Liability Insurance showing that insurance in compliance with this Paragraph 10 has been purchased by Tenant. Such Certificate of Liability Insurance shall provide for no less than thirty (30) days notice of cancellation to Landlord and shall be in form and substance acceptable to Landlord. 11. Property Taxes. Landlord shall be solely responsible to pay any and all real property taxes and assessments against the Premises. Tenant shall be solely responsible to pay any and all personal property taxes assessed against Tenant's personal property located at the Premises. 12. Condition of Premises. Tenant has inspected the Premises and accepts the Premises it their present "as is" condition. Landlord shall have no obligation to make any changes, alternations, or improvements to the Premises. 13. Use of Premises; Alterations and Improvements. Tenant has leased the Premises for general office use and no other use of the Premises is permitted. Any change in such use shall require the advance written consent of Landlord. Unless otherwise agreed to in writing by Landlord, Tenant agrees that its use and occupancy of the Premises will be limited, as follows: (a) Tenant shall not conduct any business from the Premises that is deemed extra-hazardous, or will result in an increase in fire insurance premiums on the Premises, on inability to obtain fire insurance at standard rates. Tenant shall not create unreasonable levels of noise, odor, or vibration that might reasonably be expected to penetrate to adjoining properties and cause annoyance to the owners or occupants of the same. Tenant shall not conduct any activity on the Premises that is prohibited by law. Tenant shall commit no waste on the Premises. (b) Tenant shall not store, use, or dispose of Hazardous Materials or Toxic Wastes on the Premises, (except in such limited quantities as are reasonable and customary in the routine operation of Tenant's business and then only in compliance with all applicable laws, rules and regulations of local, state and federal governmental agencies). For the purposes of this Lease, the term "Hazardous Materials" shall mean any product or substance that is regulated under state or federal environmental laws, including, without limitation, the Utah Hazardous Waste Act (26-14-2 UCA), the Hazardous Materials Transportation Act, Clean Water Act (33 USC 1317), the Resources Conservation and Recovery Act (42 USC 6901), the Comprehensive Environmental Response, Compensation, and Liability Act (42 USC 9601), or any other state or federal statute or regulation now in effect or later adopted. Any violation of these Acts is a violation of this Lease. (c) Tenant shall not make any structural alterations or material changes to the Premises, including construction or removal of partition walls or the penetration of exterior walls or roofs, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. 3 (d) Tenant shall make no exterior modifications to the building or grounds constituting the Premises without the written consent of Landlord, which consent shall not be unreasonably withheld or delayed. (e) In the event that Tenant obtains Landlord's written consent to any alterations or improvements to the Premises, Tenant shall not permit mechanics' or materialmen's liens related to Tenant's construction of such improvements to attach to the Premises. In the event a liens is filed against the Premises, Landlord may give Tenant written notice to either remove such lien, or, in the alternative, to post an amount equal to twice the amount of the lien claim in escrow pending the resolution of the dispute with the lien claimant. If Tenant fails to obtain a lien release or bond for the lien within five (5) days of demand from Landlord, Tenant shall be in monetary default under this Lease, and Landlord shall have all the remedies available under this Lease, including termination of this Lease. Termination of this Lease will not, however, absolve Tenant of the obligation to remove the lien or to indemnify Landlord against the lien. 14. Parking. Tenant shall have the right to use of the surface parking lot adjacent to the Premises in common with other neighboring property owners and their guests and invitees, on a first come/first served basis, without additional charge of any kind, so long as such parking does not violate any law or create a nuisance. 15. Signs. No signs, banners, or advertising material shall be placed on the exterior of the Premises without the written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Any signs, banners, or advertising material shall be paid for by Tenant and shall conform to and comply with any applicable sign ordinance or other laws, rules and regulations of Park City Municipal Corporation. Any required sign permits shall be applied for and paid for by Tenant. 16. Maintenance and Repairs. Tenant shall be solely responsible for the maintenance of the interior of the Premises in a clean, attractive, sanitary and well kept condition. Landlord shall be responsible to maintain, repair or replace, as necessary, the plumbing system and fixtures, heating system and furnace, electrical systems and wiring, and all mechanical systems so that the same shall always be in good working order and repair and in compliance with applicable building codes and safety requirements of all local, state and federal governmental agencies. Landlord shall also maintain, repair and replace, as necessary, the roof, walls, glazing and other structural components of the building constituting the Premises, unless damage is caused by the acts or negligence of Tenant or Tenant's employees, agents, guests or invitees, in which case Tenant shall reimburse Landlord for the cost of all required repairs. Landlord shall supply working light bulbs to all light fixtures in the Premises upon commencement of this Lease; thereafter, Tenant shall be responsible for the replacement of any light bulbs in such light fixtures. 17. Assignment and Subleasing. Tenant shall have no right to sub-let the Premises or assign this Lease, whether in full or in part, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed, and any purported assignment or sublease of the Tenant without Landlord's prior written consent shall be absolutely void and of no effect whatsoever. The sale of Tenant's business, or a controlling interest in Tenant's business, shall be deemed to be an assignment of the Lease, which requires Landlord's prior written consent. In no event shall Landlord be required to release Tenant in connection with any approved assignment of this Lease. In the event Tenant assigns or sub-lets this Lease (including an unapproved transfer of control of Tenant's business to a third party) in violation of this provision, Landlord shall have the option of declaring this Lease in default and/or terminating this Lease on fifteen (15) days' written notice to Tenant. 4 18. Abatement of Rent or Termination Following Casualty Loss. In the event of a fire or other casualty loss which makes the Premises uninhabitable for a period of more than one hundred twenty (120) days, Landlord shall have the option of terminating this Lease or abating the rent during the actual period of repairs and extending the Lease term by a period equal to the period during which the Premises are uninhabitable. If the nature of the damage is such that the Premises cannot reasonably be restored fully to their condition prior to the loss within one hundred twenty (120) days, Tenant may terminate this Lease by written notice to Landlord. Landlord shall not be liable to Tenant for lost profits, rent on temporary locations, or other costs or damages incurred by Tenant as a result of the Premises becoming uninhabitable due to fire or other casualty loss. 19. Landlord's Right to Inspect. Landlord shall have the right to inspect the Premises at reasonable times to insure compliance with this Lease. Inspection during Tenant's normal business hours is permitted with reasonable advance notice to Tenant; provided, however, Landlord shall make every effort not to inconvenience Tenant or to disrupt Tenant's business in connection with any such inspections. In the event of an emergency, Landlord may enter the Premises without notice Tenant in order to secure the Premises and make any emergency repairs. 20. Remedies. (a) In the event of a default by Tenant in the payment of rent under this Lease, Landlord shall have all remedies available at law, including the right to enter and re-take possession of the Premises, or to re-let the Premises on Tenant's account and hold Tenant liable for the balance of the Lease term, and/or to bring an action against Tenant for the amounts owed. Landlord shall have the right, but not the obligation, to allow any approved sub-tenants to remain in possession, and to re-take possession of all or only portions of the Premises. Landlord shall give Tenant a written notice of any default in the payment of rent, stating the nature of the default and the amount owed. Tenant shall have five (5) days from the date of any such notice to pay all sums owing, including any late payment fee, and if not cured within such five (5) days, Landlord may exercise its legal and equitable remedies, including termination of this Lease and eviction of Tenant. Landlord may also sue Tenant for any amounts owed, with or without terminating this Lease. (b) In the event of a default under this Lease other than the payment of rent, or any other monetary sum, Landlord shall give Tenant twenty (20) days' written notice of the default specifying the nature of the default, and if the condition complained of is not cured within said twenty (20) days (or such longer period as may be required when the condition giving rise to the default is such that the default cannot be reasonably cured within 20 days, and Tenant has within the 20-day notice period undertaken the work necessary to effect a cure and is diligently prosecuting the same to completion), Landlord shall have the right to exercise all available legal and equitable remedies against Tenant to enforce the terms of this Lease, including the repossession of the Premises and/or termination of this Lease. Notwithstanding any time periods contained in this Lease, Tenant agrees to take such actions as are reasonable and necessary in the case of an emergency to secure the Premises and prevent further damage to the Premises until permanent repairs can be made. 5 (c) The obligations of Tenant under this Lease shall survive the termination of Tenant's possession until fully paid. In addition to amounts due under this Lease, Tenant shall be liable for Landlord's reasonable attorney's fees and costs incurred in the enforcement of this Lease and the collection of amounts owed. (d) Landlord shall have the right, but not the obligation, to sub-let the Premises on Tenant's account for the remainder of the Lease term, and to hold Tenant liable for the difference in rent, if any, even if Tenant's possession has terminated because of Tenant's default under this Lease. 21. Condemnation. In the event that all of the Premises are taken by a governmental entity for public purposes, this Lease shall terminate on the effective date of such taking. In the event that only a portion of the Premises is taken by a governmental entity for public purposes, there shall be no reduction in rent unless the portion of the Premises taken materially interferes with Tenant's use of the Premises, in which case Tenant shall either have the right, at its option, to accept a reduction in rent offered by Landlord or to terminate this Lease. Any condemnation award in connection with either a total or partial taking of the Premises by a governmental entity for public purposes shall be apportioned between Landlord and Tenant as the parties may agree at the time in conjunction with the taking. Tenant shall have the right to appear on its own behalf in any condemnation suit to defend the value of its leasehold interest at Tenant's expense. If the parties are not able to agree on an apportionment of any award (and apportionment is not made in the condemnation proceeding), the apportionment will be submitted to binding arbitration under the rules of the American Arbitration Association, with each party to bear its own costs. If the taking has resulted in a loss of some of Tenant's space or facilities, but Tenant remains in possession and operation, rent will be adjusted proportionately for the loss of space or facilities. 22. Notices. Notices that may be required from time to time under this Lease shall be in writing and shall be sent or delivered to the parties addressed, as follows: To Landlord: Jerry Honeywell and Carol Honeywell, as Trustees of The Jerry Honeywell and Carol Honeywell Trust Post Office Box 917 Park City, Utah 84060 With a copy to: Mr. Gary W. Nielsen Attorney At Law 4970 North 400 West Park City, Utah 84098 To Tenant: Videolocity, Inc. 1762-A Prospector Drive Park City, Utah 84060 Attention: Mr. Jerry E. Romney, Jr., President Notice shall be effective upon personal delivery, or three (3) days after mailing by registered mail, return receipt requested. Notice may also be given by delivery to Federal Express or another national overnight delivery service, with notice so delivered being effective on the day of actual delivery as shown on the records of such delivery service. Either party may change its address or request that additional notices be sent to others by written notice given in accordance with this Paragraph 22. 6 23. Covenant of Quiet Enjoyment; Subordination. For so long as Tenant is faithfully performing its obligations under this Lease, Landlord promises to provide Tenant with quiet enjoyment of the Premises. Landlord shall pay all mortgages or trust deed loans recorded against the Premises. Tenant agrees that this Lease shall be subordinate to any mortgage or trust deed now recorded or hereafter recorded against the Premises; provided, however, that any mortgage or trust deed hereafter recorded against the Premises shall contain a non-disturbance provision for Tenant's benefit as a condition to the subordination of this Lease by Tenant. 24. Sale of Premises. This Lease shall be binding on the successors and assigns of Landlord in the event of a sale or transfer of the title to the Premises or any part thereof. No sale or transfer of title shall disturb Tenant's possession or quiet enjoyment of the Premises. 25. Surrender of Premises. Upon the expiration or sooner termination of this Lease, Tenant shall surrender the Premises to Landlord in substantially the same condition as existed on the date of commencement of this Lease, normal wear and tear excepted, and broom clean and free of all personal property and debris of Tenant. Tenant may remove all of its trade fixtures and equipment. Landlord may dispose of and discard any personal property or debris left on the Premises by Tenant at the cost and expense of Tenant and may deduct the cost and expense thereof from Tenant's security deposit. 26. Estoppel Certificate. Upon the written request of Landlord, Tenant shall provide a written statement to Landlord to the effect that this Lease is in full force and effect, and that Landlord is not in default on any obligations to Tenant, or if there are claims of default or offset against Landlord, Tenant shall describe those claims. Tenant's failure to provide such a written statement to Landlord within ten (10) days' after written request therefor from Landlord shall constitute a default under this Lease and entitle Landlord to exercise all its remedies under this Lease. 27. Attorney's Fees. If either party is required to bring suit to enforce the terms of this Lease, the prevailing party shall be entitled to recover its reasonable costs of enforcement, including reasonable attorney's fees, from the other party as additional damages and as a part of any judgment entered. 28. Commissions. The parties have negotiated this Lease themselves, without the involvement of real estate brokers or agents. Each party shall indemnify the other from any claims from third party real estate brokers or agents claiming a right to a commission relating to this Lease. 29. Covenant of Cooperation. Landlord agrees to cooperate with Tenant by joining in and executing any application for a building, sign, or similar permit which may be required in order to make any alterations or improvements to the Premises to which Landlord has consented in accordance with the terms of this Lease. 30. Miscellaneous. This Lease will be governed, interpreted and construed according to the laws of the State of Utah. This Lease represents the entire agreement between the parties with respect to the subject matter hereof and supersedes any and all prior or contemporaneous oral or written understandings or agreements with respect to the subject matter hereof. This Lease may not be modified or amended except in a writing signed by the parties. Landlord and 7 Tenant agree to deal with one another fairly and in good faith in all matters arising under this Lease. Each party signing this Lease represents and warrants to the other that such party has obtained all consents and approvals and has all requisite power and authority to execute and deliver this Lease and to perform all its terms and conditions. 31. Counterparts; Facsimile Transmission. This Lease may be executed in counterparts, and all such counterparts taken together shall constitute but a single agreement. The facsimile transmission of a signed original counterpart of this Lease or of an amendment thereto by one party to this Lease to the other shall be deemed the same as delivery of a signed original. IN WITNESS WHEREOF, the parties have executed this Lease as of the date first above written. Landlord: ___________________________________ JERRY HONEYWELL, AS TRUSTEE OF THE JERRY HONEYWELL AND CAROL HONEYWELL TRUST ___________________________________ CAROL HONEYWELL, AS TRUSTEE OF THE JERRY HONEYWELL AND CAROL HONEYWELL TRUST Tenant: VIDEOLOCITY, INC. (formerly named, Moviesonline, Inc.), a Nevada corporation By_________________________________ Jerry E. Romney, Jr., President 8 EXHIBIT "A" INVENTORY 1762 A PROSPECTOR AVE. THE FOLLOWING FURNITURE IS SUPPLIED TO VIDEOLOCITY, INC. AS-IS AND AT NO CHARGE FOR THEIR USE AS LONG AS THE LEASE BETWEEN THEM AND THE JERRY AND CAROL HONEYWELL TRUST IS IN EFFECT. 2 EA. 5' X 3' DESK/COMPUTER MODULES 2 EA. CORNER COMPUTER TABLE MODULES 1 EA. 2' X 3' END TABLE MODULES 1 EA. MOVABLE COMPUTER STANDS 1 EA. 2' X 4' SIDE DESK 2 EA. 3' X 6' DESK AND COMPUTER RETURN TABLES 1 EA. 3' X 5' DESK W/CURVED END 1 EA. 3' X 5' OAK CONFERENCE TABLE 6 EA. OAK/BLUE UPHOLSTERY CONFERENCE TABLE CHAIRS 6 EA. NS5E6(AM25) BURGUNDY UPHOLSTERED DESK CHAIRS 1 EA. NS5E6(AM22) GRAY UPHOLSTERED DESK CHAIR 1 EA. SUPERIOR GRAY UPHOLSTERED DESK CHAIR 1 EA. 4-DRAWER VERTICAL LEGAL FILE CABINET 2 EA. ANDERSON/HICKEY 4-DRAWER VERTICAL FILE CABINET 9 VIDEOLOCITY ................................ 1762 A Prospector Drive Park City, Utah 84060 Tel: 435-615-8338 Fax: 435-615-9979 August 31, 2001 Jerry Honeywell & Carol Honeywell, Trustees of the Jerry Honeywell and Carol Honeywell Trust P.O. Box 917 Park City, UT. 84060 Dear Mr. & Mrs. Honeywell, Pursuant to paragraph 3 of that certain Lease Agreement dated as of December 26, 2000 by and between Videolocity, Inc. and the Jerry Honeywell and Carol Honeywell Trust, Videolocity is exercising its option to extend the term of said lease for the property situated at 1762 A Prospector Drive, Park City, Utah for one year following the expiration of the term, for both the first and second floors of said property. It is our understanding that the term of said Lease, for both floors, expires December 31, 2001. Therefore, the term of said Lease would be extended through December 31, 2002 with the same terms and conditions as set forth in said Lease, including the following request to be incorporated in the extension of the aforementioned Lease pursuant to this notice of extension, with the following conditions, precedent. Videolocity requires that certain fixtures on the second floor be modified. Specifically, Videolocity requires that the reception desk and surrounding shelving on the second floor be removed to open the space up for a conference/reception area. Removing this fixture may necessitate the carpet be replaced in the immediate area where the fixture was located and the adjacent wall repainted where the shelving was attached. Please inform us as to if and when this can be facilitated. This notice is hereby given as of August 31, 2001. Sincerely, Jerry Romney, Jr. President 10 EX-10.11 13 ex10no11.txt MATERIAL CONTRACTS SECURITY AGREEMENT (All Assets of Debtor) Agreement made this 1st day of April, 2002, by and between VIDEOLOCITY INTERNATIONAL, INC. and its wholly owned subsidiary, VIDEOLOCITY TECHNOLOGIES, INC., collectively, herein referred to as Debtor, and that group of holders of promissory notes executed by VIDEOLOCITY INTERNATIONAL, INC., as set forth in Exhibit "B" hereto and incorporated herein by this reference, herein collectively referred to as a "Lender". The security interest in the subject collateral as to each said Lender shall be an undivided percentage interest set forth in Exhibit "B". In consideration of the mutual covenants and promises set forth herein, Debtor and Lender agree: SECTION ONE CREATION OF SECURITY INTEREST Debtor hereby grants to Lender a security interest in the collateral described in Section Two to induce Lender to extend the due date on the subject loans evidenced by the Promissory Notes identified in Exhibit "B" hereto by amount and date, and to secure the performance and payment of all loans or credit between Debtor, and Lender, in such sums and amounts as loans or credit may be extended by Lender, and to be payable as may be directed under any agreement extending credit, and to assure the prompt payment by Debtor, to Lender of all indebtedness owing by Debtor to Lender, whether now existing or hereafter incurred. SECTION TWO DESCRIPTION OF COLLATERAL The collateral of this security agreement, herein referred to as collateral, consists of the following described property: All assets of Debtor however designated or classified as identified on Exhibit "A" attached hereto and incorporated herein by this reference, and the proceeds from disposition or licensing of said patents and or products created or manufactured through the use of said patents by debtor, its agents or contractors. 1 SECTION THREE DEBTOR'S OBLIGATIONS, GENERALLY (a) Payment. Debtor shall pay to Lender all obligations and credit extensions when due under existing agreements or subsequent agreements, including all loans made or credit extended or any renewals or extensions thereof in accordance with the terms of such agreements or notes including the subject Promissory Notes executed by Debtor identified in Exhibit "B" hereto. (b) Warranties and Representations. Debtor warrants and covenants that: (1) Except for the security interest hereby granted, Debtor has, or on acquisition will have, title to the subject collateral free from any lien, security interest, encumbrance or claim, and Debtor will, at Debtor's expense, defend any action that may affect the Lender's security interest in or Debtor's title to collateral. (2) Collateral is used or is to be used primarily for business purposes. (3) Debtor is a corporation and it is duly organized and existing under the laws of the State of Nevada and is duly qualified and in good standing in every state in which it is doing business. (4) The execution, delivery and performance of this agreement are within the Debtor's corporate powers, have been duly authorized, are not in contravention of law or the terms of Debtor's charter, bylaws or other incorporation papers, or of any indenture, agreement or undertaking to which Debtor is a party or by which it is bound. (5) Debtor shall give Lender written notice of each location in which collateral is or will be kept other than for temporary processing, storage or similar purposes. Except as such notice is given, all collateral is and shall be kept at Debtor's address as it appears at the beginning of this agreement. (6) Debtor shall give Lender written notice of each office of Debtor at which records of Debtor pertaining to collateral are kept. Except as such notice is given, all records of Debtor pertaining to the collateral are and shall be kept at Debtor's address as it appears at the beginning of this agreement. (7) Subject to any limitations stated therein or in connection therewith, all balance sheets, earning statements and other financial data which have been or may hereafter be furnished Lender to induce it to enter into this agreement or any other agreement or otherwise in connection herewith, do or shall fairly represent the financial condition of Debtor as of the dates and the results of its operations for the periods for which the same are furnished, and all other information, reports and other papers and data furnished to Lender are, or shall be at the time 2 they are so furnished, accurate and correct in all material respects and complete insofar as completeness may be necessary to give Lender a true and accurate knowledge of the subject matter. (c) Performance of Agreement. Debtor shall perform all covenants and agreements set forth in this security agreement. SECTION FOUR LENDER'S OBLIGATION Lender shall extend the due date of the Notes identified in Exhibit "B" to September 1, 2002 in consideration for Debtor granting this security interest, but Lender shall not be under any obligation to grant additional extensions of credit to Debtor and may terminate grants of credit (other than the subject loan) to Debtor at any time without cause. Debtor shall remain liable and the security agreement shall be in force as long as Debtor has any outstanding obligation to Lender whether arising under the identified Notes or other extension of credit now existing or hereafter incurred. SECTION FIVE PROCEEDS OF COLLATERAL Debtor hereby grants to Lender a security interest in and to all proceeds of collateral as defined by Utah Code Annotated. This provision shall not be construed to mean that Debtor is authorized to sell, lease, or dispose of collateral without the prior consent of Lender, except in the ordinary course of Debtor's business. SECTION SIX DECREASE IN VALUE OF COLLATERAL If in the reasonable judgment of Lender, collateral materially decreases in value, (which shall not be exercised unless there is at least a 20% diminution in value of the collateral), Debtor shall within 10 days after written request either provide additional security reasonably sufficient to satisfy Lender or arrange to reduce the total indebtedness by an amount sufficient to satisfy Lender. SECTION SEVEN FINANCING STATEMENT At the request of Lender, Debtor will join in executing or will execute, as appropriate, all necessary financing statements in all states and provinces as the Lender, in its sole discretion deem appropriate, in a form satisfactory to Lender, and Debtor will pay the cost of filing such statements. Debtor will further execute all other instruments deemed, under prudent business 3 standards, to be necessary by Lender to perfect its security interest as granted herein and pay the cost of filing such instruments. Debtor warrants that no financing statement covering the collateral or any part thereof or any proceeds thereof is presently on file in any public office in conflict with Lender's security interest in the collateral. SECTION EIGHT LOCATION AND IDENTIFICATION OF COLLATERAL As to all collateral that is tangible personal property, Debtor will keep such collateral separate and identifiable and at Debtor's address showing in this agreement, and will not remove collateral from such address without the prior written consent of Lender except in the ordinary course of business of Debtor. SECTION NINE INSURANCE As to all collateral that is tangible personal property, Debtor shall insure collateral with companies acceptable to Lender against casualties and in such amounts as Lender shall require. Such insurance shall be for the benefit of Debtor and Lender as their interests may appear. Lender is hereby authorized to collect sums that may become due that is insuring the collateral under any such insurance policies and apply the sums to the obligations hereby secured. SECTION TEN TAXES AND ASSESSMENTS Debtor shall promptly pay when due all taxes and assessments on collateral or for its use and operation. SECTION ELEVEN PROTECTION OF COLLATERAL Debtor shall keep collateral in good order and repair ordinary wear and tear excepted and shall not waste or destroy collateral or any part thereof. Further, Debtor shall not use collateral in violation of any statute or ordinance. Lender shall have the right, by or through any of its officers, agents, attorneys or accountants, to examine and inspect collateral at any reasonable time, including the right to make extracts from Debtor's books and records and to arrange for verification of depreciation accounts and transfers, under reasonable procedures, directly with account Debtors or by other methods. 4 SECTION TWELVE REIMBURSEMENT OF EXPENSES At the option of Lender and at any time, Lender may discharge taxes, liens, or other encumbrances on collateral which non-discharge would endanger or impair Lender's security interest and, perform or cause to be performed for and on behalf of Debtor any action, condition, obligation, or covenant that Debtor fails or refuses to perform, or pay for the repair, maintenance and preservation of collateral which non-discharge would endanger or impair Lender's security interest. All sums so expended by Lender shall bear interest from the date of payment at the default rate specified in the Notes, whether or not said Notes shall have been discharged, and shall be payable at the place designated in the above-mentioned Notes, and shall be secured by this Security Agreement. SECTION THIRTEEN TIME SHALL BE OF THE ESSENCE In performing any act under this agreement and the obligations and note secured hereby, TIME SHALL BE OF THE ESSENCE. SECTION FOURTEEN WAIVER The failure of Lender to exercise any right or remedy, including acceptance by Lender of partial or delinquent payments, shall not constitute a waiver of any obligation of Debtor or right of Lender or constitute a waiver of any other similar default subsequently occurring. SECTION FIFTEEN DEFAULT If Debtor fails to pay any amount payable on the above mentioned Notes or on any other indebtedness secured hereby, or shall fail to observe or perform any of the provisions of this agreement, or of any other agreements as herein mentioned, Debtor shall be in default. In addition, any or all of the liabilities of Debtor to Lender shall, at the option of Lender but subject to any time allowed by any instrument evidencing a liability, including the notice provisions in the Notes the subject of this security interest, be immediately due and payable without notice or demand on the occurrence of any of the following events: (a) The making by Debtor of any misrepresentation to Lender for the purpose of obtaining credit or an extension of credit; (b) The failure of Debtor after request by Lender to furnish financial information or to permit the inspection of books or records; (c) The issuance of an injunction or attachment against property of Debtor; 5 (d) The insolvency of Debtor or of any endorser, guarantor, or surety on any liability of Debtor to Lender; (e) A change in the condition or affairs, financial or otherwise, of Debtor as in the opinion of Lender impairs Lender's security or increases its risk; (f) Default of Debtor under any loan, credit or other agreement to which Lender is also a party. SECTION SIXTEEN REMEDIES On any such default or election by Lender under Section Fifteen of this Agreement, and at any time thereafter: (a) Lender may declare all obligations secured hereby immediately due and payable and may proceed to enforce payment and exercise any and all other rights and remedies provided by the Utah Commercial Code, as well as any and all other rights and remedies possessed by Lender. (b) Lender shall have the right to remove collateral from Debtor's premises. Lender may require Debtor to assemble collateral and make it available to Lender at any place to be designated by Lender that is reasonably convenient to both parties. For purposes of removal and possession of collateral, Lender or its representatives may enter any premises of Debtor without legal process, and Debtor hereby waives and releases Lender of and from any and all claims in connection therewith or arising therefrom. (c) Unless collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender shall give Debtor reasonable notice of the time and place of any public sale thereof, or of the time after which any private sale or any other intended disposition thereof is to be made. The requirement of reasonable notice shall be met if such notice is mailed, postage prepaid, to the address of Debtor shown herein, or such address as Debtor may hereafter establish for conducting its business and shall notify Lender thereof, in writing, at least ten (10) days before the time of sale or disposition. Expenses of retaking, holding, preparing for sale, selling, or the like shall include reasonable attorney's fees and legal expenses of Lender. SECTION SEVENTEEN GOVERNING LAW The validity of this security agreement and any provision thereof shall be determined under and be construed according to the laws of the State of Utah, and all obligations of the parties created hereunder are to be performed in the State of Utah. 6 IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. Debtor: VIDEOLOCITY INTERNATIONAL, INC. VIDEOLOCITY TECHNOLOGIES, INC. by__________________________________ by________________________________ its C.E.O. its C.E.O. Attest: Attest: ____________________________________ __________________________________ Secretary Secretary Lender: CROWN JEWELS, LLC _______________________________________ by________________________________ David B. Edwards Its Member/Manager _______________________________________ Lynette Edwards ISOZ, L.C. _______________________________________ by________________________________ Bennie L. Williams Its Member/Manager _______________________________________ Larry R. McNeill James C. Davis Trust 12/19/91 TO BE NAMED:___________________________ by________________________________ Its Trustee by_____________________________________ W.A.J. ENTERPRISES, LLC by________________________________ Member/Manager 7 EXHIBIT "A" DESCRIPTION OF COLLATERAL All patents issued or to be issued on those items as identified in the following Provisional Patent Applications made by Videolocity Technologies, Inc. "Videolocity Digital Entertainment Solution" Application No. 60/297,791; "Videolocity Video Encoding & Compression Process" Application No. 60/336,703; "Videolocity Graphical User Interface" Application No. 60/336,701; "Videolocity Embedded Software Image" Application No. 60/336,702; "Videolocity Proprietary PCI Video Card" Application No. 60/338/772. "Videolocity Digital Entertainment System - Linux Version" Application Filed. These patents embrace the proprietary technology and intellectual property presently owned and held by Videolocity Technologies, Inc., a wholly owned subsidiary of Videolocity International, Inc. VIDEOLOCITY INTERNATIONAL, INC Attest: by___________________________ ________________________________ its C.E.O. Secretary VIDEOLOCITY TECHNOLOGIES, INC Attest: by___________________________ ________________________________ its C.E.O. Secretary 8 EXHIBIT "B"
- ------------------------------------------------------------------------------------------------------ PROMISSORY NOTES TO BE COLLATERALIZED BY PATENTED TECHNOLOGY OWNED BY VIDEOLOCITY INTERNATIONAL, INC. - ------------------------------------------------------------------------------------------------------ % Ownership in LENDER NOTE DATE AMOUNT Sec Agreement - ------------------------------------------------------------------------------------------------------ David B. Edwards and Lynette Edwards, JTTEN July 30, 2001 $100,000.00 6.67% - ------------------------------------------------------------------------------------------------------ Crown Jewels, LLC August 24, 2001 $100,000.00 6.67% - ------------------------------------------------------------------------------------------------------ Bennie L. Williams August 24, 2001 $100,000.00 6.67% - ------------------------------------------------------------------------------------------------------ ISOZ, LC. July 31, 2001 $215,000.00 14.32% - ------------------------------------------------------------------------------------------------------ Larry R. McNeill July 31, 2001 $135,000.00 9.00% - ------------------------------------------------------------------------------------------------------ James C. Davis Trust 12/19/91 July 30, 2001 $100,000.00 6.67% - ------------------------------------------------------------------------------------------------------ W.A.J. Enterprises, LLC December 6, 2001 $300,000.00 20.00% - ------------------------------------------------------------------------------------------------------ TO BE NAMED $450,000.00 30.00% - ------------------------------------------------------------------------------------------------------ TOTAL $1,500,000.00 100% - ------------------------------------------------------------------------------------------------------
VIDEOLOCITY INTERNATIONAL, INC Attest: by___________________________ ________________________________ its C.E.O. Secretary VIDEOLOCITY TECHNOLOGIES, INC Attest: by___________________________ ________________________________ 9 EX-10.12 14 ex10no12.txt MATERIAL CONTRACTS AMENDMENT TO AGREEMENT OF PURCHASE AND REASSIGNMENT --------------------------------------------------- That certain agreement entitled "Agreement of Purchase And Reassignment" executed on the 30th day of October 2001 by and between Merit Studios, Inc. and Videolocity Direct, Inc. wherein Merit Studios, Inc. agrees to buy and reacquire and Videolocity Direct, Inc. agrees to sell and reassign those two certain license agreements entitled, "Amended and Restated License Agreement", under date of October 27, 2000, and executed on March 6, 2001 and the "License Agreement" executed on May 29, 2001, said agreement being restated and amended only as follows, to wit; 1). Merit Studios, Inc. will pay $600,000 U.S. to Videolocity Direct, Inc. as follows; a). Merit Studios, Inc. will pay to Videolocity Direct, Inc. 50% of any and all funds received by Merit Studios, Inc., or received by any subsidiary of Merit Studios, Inc. (either borrowed or as paid in capital) until $600,000 U.S. has been paid, however, in any event the entire amount of $600,000 U.S. must be paid in full within 120 days from October 30, 2001. 2). Merit Studios, Inc. will immediately reassign 2,500,000 shares of Videolocity Direct, Inc. stock to Videolocity Direct, Inc., for cancellation to its treasury of unissued shares, 3). Videolocity Direct, Inc. will transfer a 1,000,000 share certificate of Merit Studios, Inc. stock it owns, standing in the name of Michael John to Merit Studios, Inc., or its designated assignee, upon completion of the payments as set forth in sub paragraph (a) above, 1 of 2 AMENDMENT TO AGREEMENT OF PURCHASE AND REASSIGNMENT DATED NOVEMBER 2, 2001 -------------------------------------------------------------------------- 4). Both companies hereto will enter into a mutual release, releasing each other from any and all liabilities, upon the completion by Merit Studios, Inc. of the payments as set forth in sub paragraph (a) above. All of the terms and conditions contained herein are agreed to by and between the arties hereto. Due to the fact that Merit Studios, Inc. and Videolocity International, Inc. (which owns control of Videolocity Direct, Inc.) are publicly owned and traded companies, it is agreed that Merit Studios, Inc. and Videolocity International, Inc. will enter into a joint release to the public through Business Wire, immediately upon the execution of this agreement. Dated: November 2, 2001: Merit Studios, Inc. Videolocity Direct, Inc. By:_______________________________ By:___________________________ Mr. Michael John, CEO George Norman, Chairman Merit Studios, Inc. Videolocity Direct, Inc. 1930 Village Center Circle 358 S. 700 E. Suite B604 PMB #402, Suite 3 Salt Lake City, UT. 84102 Las Vegas, NV. 89134 2 of 2 EX-21.1 15 ex21no1.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 ------------ SUBSIDIARIES 1. Videolocity, Inc. A 100% owned subsidiary, formed in the State of Nevada in May 26, 2000 as Moviesonline, Inc., changing its name to Videolocity, Inc. on November 14, 2001 2. Videolocity Technologies, Inc. A 100% owned subsidiary, formed in the State of Nevada on February 26, 2001. 3. Hospitality Concierge, Inc. A 100% owned subsidiary, formed in the State of Nevada on May 31, 2002. 4. Healthcare Concierge, Inc. A 94% owned subsidiary, formed on February 14, 2001 in the State of Nevada as Videolocity Direct, Inc., changing its name to Healthcare Concierge, Inc. on December 31, 2001. 5. Videolocity Direct, Inc. A 100% owned subsidiary, formed in the State of Nevada on April 30, 2002. 6. 5th Digit Technologies, LLC A wholly owned subsidiary, created as a limited liability company in the State of New York on October 6, 2000. EX-23.1 16 ex23no1.txt CONSENTS OF EXPERTS AND COUNSEL EXHIBIT 23.1 ------------ 941 East 3300 South, Suite 202 Salt Lake City, Utah 84106 Telephone 801-486-0096 Fax 801 486-0098 ANDERSEN ANDERSEN & STRONG, L.C. - -------------------------------- Certified Public Accountants and Business Consultants CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT We have issued our report dated February 8, 2002, accompanying the audited financial statements of Videolocity International, Inc. and Subsidiaries at October 31, 2001, and the related statements of operations, stockholders' equity, and cash flows and for the years ended October 31, 2001 and 2000 and the period May 26, 2000 to October 31, 2001 and hereby consent to the incorporation of such report in a Registration Statement on Form SB-2. /S/ ANDERSEN ANDERSEN & STRONG, L.C. ------------------------------------- June 27, 2002 ANDERSEN ANDERSEN & STRONG, L.C. -----END PRIVACY-ENHANCED MESSAGE-----