-----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, Tabast0lx7pw3OpRdj1On+P46IpN84IHZUC1RL/Sirc+EvTw/4+UUVsr4WG46Wdf Zu6pOWD7tBj0CiiloFI0mg== 0000931731-02-000345.txt : 20021017 0000931731-02-000345.hdr.sgml : 20021017 20021017111325 ACCESSION NUMBER: 0000931731-02-000345 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 20021017 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/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-92042 FILM NUMBER: 02791095 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/A 1 revvideo.txt VIDEOLOCITY SB-2A As Filed with the Securities and Exchange Commission on Ocober 17 ,2002 Registration No. 333-92042 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO.1 to 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) 1762-A Prospector Avenue, Park City, Utah 84060 (435) 615-8338 (Address and telephone number of principal executive offices) 1762-A Prospector Avenue, Park City, Utah 84060 (Address of principal place of business or intended principal place of business) Larry R. McNeill Videolocity International, Inc. 1762-A Prospector Avenue Park City, Utah 84060 (435) 615-8338 (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 70,200,000 $ .35 $ 24,570,00 $ 2,260.44 line of credit shares(2) per share(3) ========================================= ================== ================== ==================== ================= Additional common stock offered by 290,000 $ .35 $ 101,500 $ 9.34 Cornell Capital Partners L.P. shares per share(3) ========================================= ================== ================== ==================== ================= Common stock offered by Westrock 10,000 $ .35 $ 3,500 $ 0.33 Advisors, Inc. shares per share(3) ========================================= ================== ================== ==================== ================= TOTAL FEE $ 2,270,11 (4)
(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 70,200,000 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 October 11, 2002. (4) Previously paid $2,571.41. 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 October 17, 2002 PROSPECTUS VIDEOLOCITY INTERNATIONAL, INC. 70,500,000 Shares of Common Stock This prospectus relates to the sale of up to 70,500,000 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 19. 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 70.2 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 October 11, 2002 was $0.35. 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 7 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 October __, 2002 -1- (This page intentionally left blank) -2-
TABLE OF CONTENTS Page PROSPECTUS SUMMARY........................................................................... 3 RISK FACTORS................................................................................. 7 USE OF PROCEEDS.............................................................................. 14 DILUTION..................................................................................... 14 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY.............................................. 15 CAPITALIZATION............................................................................... 16 EQUITY LINE OF CREDIT........................................................................ 17 PLAN OF DISTRIBUTION......................................................................... 18 SELLING STOCKHOLDERS......................................................................... 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS................................... 20 BUSINESS..................................................................................... 24 MANAGEMENT................................................................................... 34 STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................. 39 RELATIONSHIPS AND RELATED PARTY TRANSACTIONS................................................. 40 DESCRIPTION OF CAPITAL STOCK................................................................. 41 SHARES ELIGIBLE FOR FUTURE SALE.............................................................. 42 LEGAL MATTERS................................................................................ 43 EXPERTS...................................................................................... 44 WHERE YOU CAN FIND MORE INFORMATION.......................................................... 44 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- 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, or DES, and other advanced digital information and entertainment systems. 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 PDAs (personal digital systems). 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 1762-A Prospector Avenue, Park City, Utah 84060, telephone number (435) 615-8338. Although we use the word International in our name, we are not currently operating outside the U.S., except for limited marketing activities in Canada. However, as we expand operations and as our business warrants, we fully intend to operate and market our products wherever prudent, including internationally. 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 systems to build an increased and ongoing revenue stream. We provide a wireless system and also offer a parallel system over wire using 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. SELLING STOCKHOLDERS This prospectus relates to the sale of our common stock by certain persons who are, or will become, stockholders of Videolocity. The selling stockholders consist of Cornell Capital Partners, L.P. and Westrock Advisors, Inc. who intend to sell up to 70.2 million shares of common stock. Pursuant to the equity line of credit, we may, at our discretion, periodically issue and sell to Cornell Capital shares of common stock for a total purchase price of $20 million. We are permitted to draw 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 to Cornell Capital at 95% of the current market price at the time of sale. 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. 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. -4- Investor's Number Current Price(1) Price(2) of Shares(3) ---------------- -------- ------------ $ 0.30 $ 0.285 70,175,438 0.35 0.3325 60,150,375 0.50 0.475 42,105,263 0.75 0.7125 28,070,175 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 (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. This prospectus relates only to 70.5 million shares of our common stock. Thus, if we were to issue more than this amount under the equity line of credit agreement, we would have to file a new registration statement to accommodate the additional shares.
THE OFFERING Securities offered by selling stockholders .... 70.5 million shares of our common stock Offering price................................. Determined at the time of sale by the selling stockholders Common stock outstanding before offering:...... 5,826,596 shares(1) Common stock outstanding after offering:....... 76,026,596 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. 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 August 31, 2002 and includes: o 290,000 shares issued to Cornell Capital under the equity line of credit agreement; and o 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 256,800 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 70.2 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. If we issue shares under the equity line that results in more than an aggregate of 50 million shares outstanding, we will have to amend our articles of incorporation to increase our authorized capitalization. USE OF PROCEEDS We will not receive any proceeds from shares offered by the selling stockholders. Any proceeds realized from the sale of our stock under the equity line of credit will be used for general corporate purposes. -5- SUMMARY FINANCIAL INFORMATION The following information was taken from our financial statements for the nine months ended July 31, 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 Nine Months Years Ended Ended July 31, Ended October 31, 2002 2001 2001 2000 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) Revenues: $ -- $ -- $ -- $ -- ----------- ----------- ----------- ----------- Expenses: Administrative 1,389,642 951,351 1,353,710 129,778 Loss of good will -- -- (958,628) -- Loss on transfer of license agreement, net 150,000 -- 135, 491 -- Depreciation and amortization 12,300 76,003 69,260 -- ----------- ----------- ----------- ----------- Total expenses 1,551,942 1,027,354 (2,517,089) (129,778) ----------- ----------- ----------- ----------- Net loss - from operations (1,551,942) (1,027,354) (2,517,089) (129,778) Other income (loss) Minority interests 73 6.859 (4,712) -- Interest income -- 5,334 5,578 -- Interest expense (325,070) (163,900) (201,449) -- ----------- ----------- ----------- ----------- Net gain from sale of investment stock -- 312,075 338,049 -- Net loss $ 1,876,939) $ (866,986) $(2,379,623) $ (129,778) =========== =========== =========== ============ Loss per common share - Basic $ (.38) $ (.20) $ (.15) $ (.02) ----------- ----------- ----------- ----------- Average outstanding common shares (stated in 1000's) 4,900 4,299 43,087 6,406
Consolidated Balance Sheet Data July 31, 2002 October 31, 2001, ------------- ----------------- (Unaudited) Assets Current assets Cash $ 154,538 $ 411 Notes receivable - net or provision of for doubtful accounts 200,000 350,000 ---------- ---------- Total current assets 354,538 350,411 ---------- ---------- Equipment - net of accumulated depreciation 86,182 73,012 ---------- ---------- Other assets Advance deposits 5,292 4,732 ---------- ---------- Total assets $ 446,012 $ 428,1155 ========== ========== Liabilities and stockholders equity Current Liabilities Notes payable - related parties $ 627,800 450,000 Notes payable 1,072,000 300,000 Accrued interest - notes payable -- 13,949 Accounts payable 51,897 143,123 Total current liabilities 1,751,697 907,072 Redeemable preferred capital stock Series A issued -- 950 Capital in excess of par value -- 3,957,380 -- 3,958,330 Minority interest 4,965 5,038 ---------- ---------- Stockholders' equity - (deficiency) Common stock 5,827 43,187 Capital in excess of par value 3,069,863 (1,976,071) ---------- ---------- Deficit accumulated during development stage (4,386,340) (2,509,401) ---------- ---------- Total stockholders; equity (deficiency) (1,310,650) (4,442,155) ---------- ---------- Total liabilities and stockholders deficiency$ 446,012 $ 428,155 ========== ==========
-6- 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 for you 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. Thus, you may not have adequate information with which to make an informed investment decision. We have a history of losses and anticipate future losses that may cause our stock price to decline. 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 July 31, 2002, our accumulated deficit was approximately $4,386,340. 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. The current economic downturn has resulted in reduced entertainment spending in many of the markets that we serve worldwide. Any of these factors could cause our stock price to decline and result in you losing a portion or all of your investment. 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 which could cause our stock price to decline. 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. In this event, our stock price could decline and you could lose a portion or all of your investment. -7- If our technology is not accepted by the marketplace, our revenues will decline which will most likely cause our stock price to decline. Our technology is 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 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. This would likely cause our stock price to decline. 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 existing technology and any new products that may supplement or enhance our DES or other products we may develop; * 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 including movies, music, educational and medical material; * changes in costs of hardware components and software applications; 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. These fluctuations could cause our stock price to be volatile. -8- We currently depend on a single family of products and our future success could depend on enhancement of our current products or development of new products. If demand for our products declined or we fail to develop and market new products in a timely manner, our business could be adversely affected and our stock price would decline. We expect that initially most of our revenues will be derived from the recently developed DES. If there is not an immediate demand for DES and we are unable to develop and market new or enhanced products, our business and revenues will be adversely affected. Our 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. There can be no assurance that we will be successful in developing and marketing new or enhanced products. Failure to successfully market DES or to develop new products could result is significant operating losses which will have a negative effect on your investment in our stock. 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, reputation and financial results. 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 or are unable to attract new qualified personnel, we may be unable to successfully operate our business which would adversely affect your investment. 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 materially harm our business because of the cost and time necessary to replace and train replacements. Such a loss would also divert managements' attention away from operational issues. There is intense competition amongst employers to attract certain technical specialties. We may not be able to attract and retain the necessary personnel to accomplish our business objectives as our business develops and grows. This would adversely affect our ability to satisfy future customer demand in a timely fashion or to support our customers and operations. The resulting adverse effect on our business could lead to a decline in our stock price and a loss of a portion or all of your investment. Some of our directors and executive officers have outside business interests which may reduce the amount of time they can devote to our business which could negatively affect the management of our business and be a detriment to our ongoing operations. Although we expect most of our directors and executive officers to devote at least 50% of their time to the affairs and operations of our business, some of these persons have other outside business interests to which they must devote a portion of their time. If some of these persons spend more time with their other business interests and less time to our business, it may negatively affect the ability of our management personnel to effectively manage our operations. In this event, our operations would most likely suffer which would negatively affect our operating results. Although we have not finalized any of our provisional applications for patents, we will ultimately rely on the protections afforded to our technology and intellectual property rights by the issuance of patents. Our inability to protect our rights could impair our business, and cause us to incur substantial expense to enforce our rights. Third party claims against our intellectual property rights can harm our reputation and ability to sell our products and would be costly to defend. -9- Our business, future success and ability to compete are partially dependent upon our proprietary technology. We rely primarily on a combination of copyright, patent, trade secret and trademark laws to protect our proprietary rights, which laws provide only limited protection. To date, we have filed six provisional applications for patents, none of which have been finalized. In addition, patents may not be issued on our current or future technologies. Also, it may be possible for unauthorized third parties to copy or reverse engineer aspects of our products, develop similar technology independently, or obtain and use information that we regard as proprietary. In particular, we may provide our customers or licensees with access to proprietary information which they may improperly appropriate. Policing unauthorized use of our technology is difficult and some foreign laws do not provide the same level of protection as U.S. laws. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or patents that we may obtain, or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and have a material adverse effect on our future operating results. We expect that digital video and software providers, such as ourselves, will increasingly be subject to patent infringement claims as the number of products and competitors grow and the functionality of products is enhanced and overlaps with products of other industries. If third parties assert claims that our products infringe their proprietary rights, we could incur substantial costs associated with defending these claims, whether the claim have merit or not. Such claims 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, which may not be available on acceptable terms or at all. Additional required capital may not be available at attractive terms which would have a material negative effect on our operating results and our stock price. To date, we have financed much of our operations through cash from the private sale of our securities, loans from our officers and directors, and by borrowing funds from third parties. We cannot assure you that future financing, whether from external sources or related parties, will be available at 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. If we are unable to obtain adequate financing, we may have to curtail business operations which would have a material negative effect on operating results and most likely result in a lower stock price. We are a new business, significantly smaller than most of our competitors, and we may lack financial resources required to capture an increased market share or to compete successfully against our competitors which would adversely affect our ability to generate income. The market for our DES technologies and products is highly competitive and rapidly changing. Given the 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 which will make it difficult for us to compete in most markets. Also, if we develop new products, we will most likely encounter additional competition in new markets. Although we believe our technology and products are better than those offered by competitors, that difference may be narrowed or eliminated in the future. If we are unable to compete successfully with other in our market, our business will most likely fail resulting in a decline in our stock price and a loss of your investment. 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 If we do not manage our anticipated business growth, our ability to manage our business effectively and continue to grow could be negatively impacted. 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 -10- require an effective planning and management process. We must also continue to improve our management and marketing efforts and recruit, hire and train new personnel. 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 expenses increase which will have a negative impact on our ability to operate profitably. Future acquisitions, alliances, joint ventures or divestitures that we may possibly undertake could be difficult to integrate, 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 Implementing DES is complex, time consuming and expensive and we may experience long sales and implementation cycles; this may cause our quarterly revenues, expenses and operating results to vary significantly in future, period-to-period comparisons. Our 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. Customers purchasing our products must coordinate financing, planning and implementing the products which can take considerable time. 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. Delays could cause us to recognize revenues from sales in a later period which could negatively impact our quarterly results on period-to-period comparisons and make it more difficult for investors to evaluate our business. 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 limit our potential sales of our products. Video-on-demand is a new and emerging technology and we cannot assure you that it will attract widespread demand or market acceptance. Our success in this 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. If this market experiences slow growth or lack of broad customer acceptance, our sales will be negatively impacted which will adversely affect your investment in our stock. 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, customers will be less likely to use our video-on-demand products. 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 or content in digital format. We do not produce or provide digital video-on-demand content. Accordingly, we are 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. -11- In addition, we believe that the ultimate success of our video-on-demand products 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 our video-on-demand products 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. Distribution channels are determined solely by the studio releasing the movie. If cable operators and content aggregators with whom we contract with are unable to acquire movies and other content in a timely manner, consumers will be less likely to use our products which will have a material adverse effect on our revenues. We cannot assure you that our products and services will keep pace with technological developments, emerging industry standards and the changing needs of our customers or achieve market acceptance, any of which could materially adversely affect our ability to market our products and services. The video-on-demand market is characterized by rapidly changing technology, evolving industry standards and new product introductions and enhancements. We cannot give you any 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 that our products will achieve market acceptance. Also, competitors may introduce new products and technologies that may render one or more of our products obsolete. New technologies in the real- time, television and video industries may result in new products and services that could successfully compete with our products and 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. If we fail to successfully respond to changing technology, we will be at a competitive disadvantage which will have a material adverse effect on our revenues. We are subject to certain governmental regulations and thus, new laws or changes in existing laws, or any finding that we have been, or are in noncompliance with such laws, could result in, among other things, governmental penalties. 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 ability to generate revenues. 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 revenues. 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, we could be subject to governmental penalties and our ability to generate business revenues could be harmed. Risks Relating to Ownership of Our Common Stock Our common stock price has been volatile and, following this offering, you may not be able to sell your shares at or above the price that you pay for the shares. Our stock is currently traded on the OTC Bulletin Board. If you purchase shares of our common stock in this offering, you will pay a price established by the current market place. 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 price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay. Certain factors, some of which are beyond are control, that may cause our share price to fluctuate significantly include, but are not limited to, the following: -12- * 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 technology stocks in particular, have experienced extreme price and volume fluctuations. In some cases, these fluctuations are unrelated or disproportionate to the operating performance of the underlying company. 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, which could have a further negative effect on your investment in our stock.. 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 $ 0.35 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 its 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 which could negatively affect the price of our stock. 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 which may have a negative effect on the price of our stock. 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 3.3% 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 76,026,596 shares of common stock outstanding, premised on the maximum number of shares being offered under the equity line. Approximately 4,975,742 shares, or 7%, of our outstanding common stock will be subject to restrictions on resale under United States securities laws. As these restrictions on resale expire, 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. -13- In order to fulfill the maximum dollar amount of the equity line based on the current market price of our shares, we will have to amend our articles of incorporation to increase the total authorize common stock in order to accommodate the maximum number of shares issuable to Cornell Capital, which could cause undue delay in securing financing. Pursuant to our articles of incorporation, presently we are authorized to issue a maximum of 50 million shares of common stock. In the event we draw the maximum amount under the equity line at the current price of our common stock, or less, we would have to issue more shares than we currently have authorized. Accordingly, we would have to amend our articles of incorporation to increase the authorized common stock, which could be timely and result in delays in obtaining advances under the equity line. This delay may impede our securing adequate capital and have a negative effect on the value of your investment. Possible "Penny Stock" Regulation may have an adverse effect on the market for our stock. Trading of our common stock on the OTC Bulletin Board may be subject to certain provisions of the Securities Exchange Act of 1934, commonly referred to as the "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 our shares; o receive the purchaser's written consent to the transaction prior to the purchase; and o deliver to a prospective purchaser of our 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. 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 This prospectus relates only to shares of our common stock that may be offered and sold from time-to-time by certain selling stockholders. We will not receive any proceeds from the sale of shares by the selling stockholders. You should note that we will receive proceeds from the sale of shares to Cornell Capital under the equity line of credit. However, we cannot predict the number of draws we may make under the equity line or the amount of funds that we might realize. DILUTION As of July 31, 2002, our net tangible book value was ($1,305,685), or ($0.22) 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. -14- 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 $0.35 per share. For illustration purposes, we will assume that at July 31, 2002 we had issued 70.2 million shares of common stock under the equity line of credit at an assumed sale price of $0.35 per share, less commitment fees of $1.0 million and $50,000 of other offering expenses. At a price of $$0.35 per share, we would receive net revenues of approximately $18.95 million. Accordingly, our net tangible book value at July 31, 2002 would have been $17,644,315 or $0.23 per share. Such an offering would represent an immediate increase in net tangible book value to our existing shareholders of $0.45 per share and an immediate dilution to new stockholders of $0.12 per share, or 34%. The following table illustrates the per share dilution: Assumed sale price per share $ 0.35 Net tangible book value per share before the sale (0.22) Increase attributable to new investor 0.45 Net tangible book value per share after this offering 0.23 Dilution per share to new investor 0.12 ______________________ 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 $ 0.30 70,175,438 $ 0.07 - (23%) 0.35 60,150,375 0.12 - (34%) 0.50 42,105,263 0.13 - (26%) 1.00 21,052,631 0.30 - (30%) 1.50 14,035,087 0.61 - (41%) 2.00 10,526,315 0.92 - (46%) _____________________ (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. 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 October 11, 2002, the last reported sales price of our common stock on the OTC-BB was $ 0.35 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 1.75 1.05 Third Quarter(1) 1.30 0.35 ______________________ -15- (1) Through October 11, 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 August 30, 2002, there were approximately 118 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- 738,412 (1) plans approved by security holders
_____________________ (1) The number of shares available for future issuance does not include 256,800 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. CAPITALIZATION The following table sets forth our capitalization as of July 31, 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.
July 31, 2002 (Unaudited) Cash....................................................................... $ 154,538 Long-term debt............................................................. 0 Minority interest.......................................................... 4,965 Stockholders' equity (deficit) Common stock: 50,000,000 shares authorized of $0.001 par value, 5,826,596 shares issued and outstanding............................... 5,827 Capital in excess of par value............................................. 3,069,863 Deficit accumulated during development state............................... (4,386,340) Total stockholders' equity (deficiency) .............................. $ (1,310,650) Total capitalization.................................................. $ (1,310,650)
-16- 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 no event will the number of shares issuable pursuant to an advance cause Cornell Capital to own in excess of 9.9% of the then outstanding Videolocity common stock. 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: 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 -17- 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 draws 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 $0.35 per share, then we would issue approximately 70 million shares of common stock to Cornell Capital. These shares would represent approximately 92% 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. 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 -18- 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. This prospectus relates to the offer of common stock, received by the selling stockholders under the equity line of credit agreement, 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 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. -19-
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............... 70,490,000(3) 92.0% 70,490,000 Westrock Advisors, Inc...................... 10,000 0%(4) 10,000 Totals............................ 70,500,000 92.0% 70,500,000
(1) Total outstanding shares includes 5,826,596 shares issued and outstanding as of August 30, 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 70.2 million 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 systems. 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 nine months of fiscal 2002 ended July 31, 2002, we were a research and development company and received no revenues from operations. During this period we did realize minimal interest income. 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 in the U.S. such as hospitality (hotels and resorts) and healthcare (hospitals, long-term care facilities and retirement centers) industries. 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. We anticipate funding payroll expenses with proceeds from the equity line of credit. 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 from future financing. Our subsidiary, Videolocity, Inc., has executed a non-exclusive agreement dated May 11, 2002 with Tech Flex Funding Inc. of Mission Viejo, California. Pursuant to this relationship, Tech Flex will provide funding for production and installation of the DES and other products on a lease back program without recourse to us. 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 -20- fully approved to be included in the financing package. Additionally, the companies have agreed in writing to represent each other as business partners. No other affiliation or contract between the two parties currently exist and no revenues have been generated to date. Currently, we do not intend to sell any hardware or software. Our business plan is to manufacture or purchase hardware and software and deploy our systems at no cost to the customer. It is anticipated that we will finance the system equipment and realize the majority of the revenue stream created by the end users. Presently, we do not anticipate any significant purchase or sale of plant or equipment. Additionally, we do not anticipate the addition of large numbers of employees because our business model calls for outsourcing any and all functions that would be directly related to the number of deployments. We are, and intend to remain, a technology company. 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 that we will begin to realize revenues by December 31, 2002 from contracts currently being negotiated with hotel and healthcare properties. We will charge a fee for each movie or other item of content viewed through our system and/or high-speed Internet access and we will remit a portion of each fee to the studio or other content provider. 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. Although we have not finalized our structure for content fees, the following is an estimate of content fees that we will charge end users: Internet access: $ 6.95 to $ 11.95 for each 12 or 24 hour period Video-on-demand: $ 5.95 to $ 12.95 per viewing Games: $ 2.95 to $ 6.94 for each 1 to 4 hour period Please note that all prices are subject to change and may vary depending upon property location, usage volume and response to competition. During the next twelve months, we plan to seek additional debt funding in the form of credit lines for up to approximately $50 million. This would permit us to cover our minimum expenses described above and accelerate deployment of our DES. As of the date hereof, we have not formalized any new funding except for the equity line of credit with Cornell Capital. We can not give you any assurance that we will be able to secure such additional funding on favorable terms to us, or otherwise. 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 nine month period ended July 31, 2002, we have received an aggregate of $949,800 in loans from various individuals, including $178,000 from related parties. An additional $285,000 in loans during this period were subsequently converted into shares of our common stock. These loans are evidenced by 6% to 8% notes with 90 day maturities and the funds are being used for general operational expenses. The notes have been extended with maturities through October 2002. 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. Healthcare Concierge is 94% owned by Videolocity International, Inc. and the 1 million shares to be sold are currently issued and outstanding. Although we still intend to follow through with the sale of Healthcare Concierge shares, to date we have not taken any action to proceed with such a sale. 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. -21- 60 Day Secured Notes On July 30, 2001 our Board of Directors authorized the borrowing of $750,000 in 60 day secured notes bearing 6% 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 six Provisional Patent Applications. An aggregate of $750,000 of the secured Notes had been placed by August 1, 2001, and have been extended until November 2002 under the UCC-1 financing statement. A total of $450,000 of the notes are with affiliated parties including Larry McNeill ($135,000), Bennie L. Williams ($100,000) and ISOZ, LC ($215,000). 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. Millennium initially agreed to arrange for a $1 million loan to us. However, due to overall market conditions created by the tragic events of September 11, 2001, Millennium informed us that it would be unable to fulfil its commitment. By mutual agreement, we terminated our arrangement with Millennium on December 31, 2001. 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 November 2002 under the UCC-1 financing statement. 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. In connection with the transaction, On April 30, 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. The financing statement extends, without penalty, certain promissory notes totaling $1,050,000 to September 1, 2002. The 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. 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. Under the terms of the loan, we must repay the principal plus 8% interest on or before October 1, 2002. Greenwood did not fulfil its total commitment and we have agreed to mutually terminate 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. On April 1, 2002, WAJ entered into an agreement rescinding its interest in the collateral assignment of the Merit License Repurchase Agreements, wherein Merit was to repurchase its technology. In exchange for rescinding its interest, WAJ accepted a 20% interest in the UCC-1 filing of the Provisional Patent -22- Applications for the total amount of its outstanding $300,000 note and all interest earned to date, thus extending the due date until November 2000. The 20% interest represents WAJ's prorata share of the UCC-1, under which WAJ would have a claim against our assets only if we were unable to repay the secured notes. Results of Operations To date, we have not realized revenues from our operations, although we did realize interest income of $5,334 for the nine months ended July 31, 2002 from interest earned in our bank accounts. For the nine months ended July 31, 2002, total expenses increased 51% from the comparable 2001 period. This is attributed primarily to the 46% 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 $325,070 for the nine months ended July 31, 2002, compared to $163,900 for the same 2001 period, reflecting increased financing activities in 2002. Management anticipates that as we scale up the installation of the DES, our expenses will increase proportionately. During our fiscal year ended October 31, 2001, we acquired through Videolocity Direct (now Healthcare Concierge), a second Wormhole license from Merit Studios, Inc. for the packing (compression) of all data. The first license was acquired during October 2000. We paid approximately $225,000 for the license and incurred additional other costs totaling approximately $39,000. After months of delays, the promised Wormhole technology was never demonstrated or received by the Company. Merit agreed to repurchase the two Wormhole licenses by returning for cancellation the 2.5 million shares of Videolocity Direct stock it had received for the first license and executed a $600,000 note receivable, due March 1, 2002, in favor of Videolocity. We have retained 1million shares of Merit Studios common stock as collateral for the note. Through the year ended October 31, 2001, we recorded an allowance against the note receivable totaling $250,000. Also, during the fiscal year ended October 31, 2001, we purchased 5th Digit Technologies, LLC in exchange for 950,000 shares of our Series "A" preferred stock. We acquired 5th Digit in order to acquire certain patent applications on proprietary technologies. In the transaction, $950,000 of goodwill was recorded. Subsequently, we determined that 5th Digit did not own the patent applications and the proprietary technology was not ready to deploy as had been represented. We subsequently wrote off the goodwill. Also in fiscal 2001, we sold 425,000 shares of Videolocity Direct common stock to unrelated parties resulting in a gain of approximately $338,000. Liquidity and Capital Resources During the first nine months of fiscal 2002 our total current assets increased from approximately $350,000 at October 31, 2001 to approximately $355,000 at July 31, 2002. During this same period, cash increased from approximately $400 to approximately $155,000. Total assets increased from approximately $428,000 at October 31, 2001 to approximately $446,000 at July 31, 2002, due primarily to the increase in cash received from short-term borrowings combined with the reduction in notes receivable. Total current liabilities increased from approximately $907,000 on October 31, 2001 to approximately $1,752,000 at July 31, 2002. The change is attributed to the increase from $750,000 in notes payable to approximately $1,670,000 during the nine months ended July 31,2002 due to additional borrowing. Accounts payable decreased during the nine months ended July 31, 2002 from approximately $143,000 to $52,000 due to the Company making payments toward accounts payable using cash received from the increase in short-term borrowings. 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 July 31, 2002, Videolocity and its subsidiaries had accumulated a net operating loss carryforward of approximately $4.315 million, with a tax benefit of approximately $1.295 million. 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. -23- 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. 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 Historical Information We originally incorporated in Nevada on November 5, 1985 as Pine View Technologies, Inc. In 1987, we completed a public offering 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 initially created as Moviesonline, Inc. to develop and market systems and products 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, -24- 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. 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 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. Overview We are presently 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 systems. Our DES delivers to the end user true video-on-demand in near DVD quality over Ethernet (connection protocol), DSL, or Wireless WAN (Wide Area Network) and LAN (Local Area Network) network architectures, combined with Wireless High Speed Internet Access. Although we use the word International in our name, we are not currently operating outside the U.S., except for limited marketing activities in Canada. However, as we expand operations and as our business warrants, we fully intend to operate and market our products wherever prudent, including internationally. DES is designed to deliver specific digital content including, but not limited to video on-demand, music on- demand, server based or Internet based games, high-speed Internet access 512 kilobits per second (kbps), E- commerce applications, medical information, informational and educational material. The target market is to individuals, hotel guests, and patients and attendants in the hospitality and healthcare industry as well as communities. DES offers streaming video-on-demand technologies that permit viewers to select from an extensive library of movie titles or informational/educational content using an easily navigated user interface. 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. We have five subsidiaries which perform various functions of our business. One of our subsidiaries, Videolocity Technologies, Inc., holds six Provisional Patent Applications listed below and encompassing and protecting our proprietary technology. o Videolocity's Digital Entertainment Solution Application No. 60/297,79 Filed: June 14, 2001 - Assignment Date: August 24, 2001 Utility Patent Application No. 10/172, 175 Utility Patent Filed: June 13, 2002 - Assignment Date: June 13, 2002 o Videolocity's Video Encoding & Compression Process Application No. 60/336,703 Filed: December 7, 2001 - Assignment Date: January 12, 2002 -25- o Videolocity's Graphical User Interface Application No. 60/336,701 Filed: December 7, 2001 - Assignment Date: January 12, 2002 o Videolocity's Embedded Software Image Application No. 60/336,702 Filed: December 7, 2001 - Assignment Date: January 12, 2002 o Videolocity's Proprietary PCI Video Card Application No. 60/338,773 Filed: December 4, 2001 - Assignment Date: January 12, 2002 o Videolocity's Linux Solution Application filed No. 60/370,663 Filed: April 8, 2002 - Assignment Date: May 24,2002 Please Note: A provisional application for patent is a U.S. national application for patent that allows for filing without a formal patent claim, oath or declaration, or any information disclosure statement. It provides the means to establish an early effective filing date and allows the term "patent pending" to be applied. A provisional application lasts for 12 months from the filing date and cannot be extended. In order to benefit from the earlier filing date, we must file a corresponding non-provisional application for patent during the 12- month period. To date we have focused on the acquisition and development of our technology and we are now positioned to commence the initial marketing of DES and related technology and products. We tailor the user interfaces and content offering specifically to each market segment and to each customer within that market segment. Our overall delivery system design, hardware components and software applications remain identical, or only slightly modified to accommodate larger user bases and/or infrastructures. This gives us the ability to customize the feature settings and tailor the local content offering to the specific audiences for each market segment. 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. Videolocity Technologies, Inc. (Licensing: internal and external) A wholly owned subsidiary that we created to research and develop systems 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 and products for the delivery of video and other digital content, to include high-speed Internet, to end users on demand. Hospitality Concierge is focused entirely on the hospitality industry. Healthcare Concierge, Inc. (Healthcare: hospital, rehabilitation and assisted living) A 94% owned subsidiary that we created to develop and market technology systems for the healthcare industry for the delivery of specific digital content, including video, medical information and educational information, to patients, families and attendants. The remaining 6% of Healthcare Concierge shares is owned by 30 persons, including Larry R. McNeill and Bennie L. Williams, each an officer and director our company. Healthcare Concierge was originally formed under the name of Videolocity Direct, Inc., but changed its name in December 2001 to the current name. Videolocity Direct, Inc. (Residential: intelligent communities) A wholly owned subsidiary that we created to develop and distribute competitive last mile digital entertainment systems to the residential community. -26- 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 trend 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. Management further believes that we can serve the existing market in video rentals through alliances with existing video distribution channels. We intend to explore potential strategic alliances and partnerships with network and content providers such as telecommunications companies, cable companies, and Internet/Broadband based content providers. Strategic Partnerships ONSAT Network Communications, Inc. Videolocity has entered into a written strategic relationship agreement dated January 18, 2002 with ONSAT Network Communications, Inc. The relationship is designed to enhance our products with a satellite bandwidth backbone that can connect with most terrestrial network infrastructures for high speed bandwidth delivery to even remote and underdeveloped area. The complimenting technologies enable the deployment of the DES virtually anywhere in North and South America. Additionally, we have agreed with ONSAT to represent each other as technology partners. No other affiliation or contracts with ONSAT currently exist and no revenues have been generated to date. TechFlex Funding, Inc. Videolocity, Inc., our wholly owned subsidiary, has executed a written non-exclusive contract dated May 11, 2002 with Tech Flex Funding Inc., of Mission Viejo, Calif., for the financing of 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. Additionally, we have agreed with Tech Flex to represent each other as business partners. No other affiliation or contracts with Tech Flex currently exist and no revenues have been generated to date. Foundry Networks, Inc. Videolocity has selected Foundry Networks, Inc. as the vendor of its intelligent Fast Iron switch as the core switch for our network infrastructure. Additionally, we have an understanding with Foundry to represent each other as technology partners. No other affiliation or contracts currently exist and no revenues have been generated to date. VenturCom We have selected VenturCom as the vendor for two technology products; the user licenses for Embedded Windows NT, and the user licenses of VenturCom's BootNIC product, a proprietary program that allows for remote loading of a software boot image. Additionally, we have agreed with VenturCom in writing to represent each other as technology partners. No other affiliation or contracts currently exist and no revenues have been generated to date. Viator Networks, Inc. We have selected Viator Networks, Inc. As the vendor of the billing and reporting server product for our network infrastructure. Additionally, we have agreed with Viator in writing to represent each other as technology partners. No other affiliation or contracts currently exist and no revenues have been generated to date. 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. 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 -27- represented. The Provisional Patent Applications mentioned above are not, and were never part of, any of our filings and are not part of any Provisional Patent Applications currently held by Videolocity Technologies, Inc. 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. Market Segments Healthcare - 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. Management intends to focus on providing these services to hospitals and assisted living centers. In November 2001 we decided to change the corporate name of our 90% + owned subsidiary, Videolocity Direct, Inc., to Healthcare Concierge, Inc. The amendment for the name change was filed with the State of Nevada on December 31, 2001. We have transferred the healthcare technology and our healthcare business division to Healthcare Concierge. Subsequently on April 30, 2002, we created in Nevada a new, wholly owned corporate subsidiary under the name Videolocity Direct, Inc. Healthcare Concierge develops total systems 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. -28- 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 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. 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. This information was obtained from the 2001 Lodging Industry Profile from he American Hotel & Motel Association. Residential - Videolocity Direct, Inc. Management believes that, to date, broadband has made little impact into the home marketplace and the implementation of DSL has been slow. Both fiber and cable systems have limited reach due to the need to have cable hardware in place. However, management anticipates that the use of radio technology is capable of reaching markets not otherwise served by fiber or cable. As wireless deployments become more prevalent in the marketplace, we believe that our products using low bandwidth will be ideally suited for this environment. Research and Development - Videolocity Technologies, Inc. Videolocity Technologies, Inc. our wholly owned research and development subsidiary, holds our six Provisional Patent Applications, which encompass the proprietary technology and intellectual property of our company. In addition to the 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 All of the above applications are currently pending, with the exception of Videolocity Technologies, which mark was published August 20, 2002. 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. Our Technology We provide a pay-per-view system that delivers video-on demand in near DVD quality. 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. By using a 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 server software on the caching server improves overall network capacity, and improves video quality of service on the network. 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. We provide an entirely software based design, thus eliminating the need for hard drives in our digital set top box devices. -29- 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 current version of HTML and JavaScript, ensuring proper web page display. 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, the DES allows for 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 900 kbps (kilobits per second) or less achieving near DVD quality over most wired or wireless network architectures. We will use existing networks where feasible and/or deploy new networks where necessary. 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 technologies we have developed. We will initially market our products to those market segments that management has identified as having significant revenue and growth potential. 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 systems to build an increased and ongoing revenue stream. We provide a quality wireless solution and a parallel 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. The $2.5 million was raised as part of the overall initial capital contribution and by borrowed funds and short term financings. Manufacturing To date, we have engineered and selected 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. -30- Our vendors 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. We are currently negotiating a vendor agreement covering the engineering, manufacturing, testing and shipping for our turnkey set top box device with IWSsales. The agreement will cover all aspects of the production of our set top box device and should be finalized by approximately late October 2002. Any and all other hardware components are readily commercially available and have been sourced from a variety of vendors. No special manufacturing agreements are needed at this time in order to start ordering the commercially available products. Several large companies market the variety of components we will require such as the following DELL Computer Corp, Foundry Networks, Inc., SMC, CISCO Systems, Inc., Solitek, Pairlink and BroMax. 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 in the U.S. We are using existing channels to pursue the hospitality and healthcare markets. We also intend to pursue strategic alliances and partnerships with network and content providers to further our efforts and impact residential applications. The sales and distribution will focus on the following primary channels: * Traditional distribution channels for target markets * Strategic alliances and partnerships * Trade shows and conferences * Leverage existing contacts of management team and investors * Website and hyperlinks to trade sites * Advertising in trade publications * Direct mailing campaign and telemarketing efforts Our sales and channel support is headquartered in Park City, Utah with additional regional support organizations planned throughout the country. 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. To date we have marketed our products to the hospitality and healthcare industries as well as some telecommunications companies and cable TV companies. Marketing efforts have been limited to the United States and Canada. Our marketing includes live demonstrations on site and presentations at conference and trade show exhibits. For the nine months ended July 30, 2002, we have expended approximately $135,000 for marketing expenses. 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 systems. 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 -31- 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. Our pricing advantage is based on using commercially available servers using our software based technologies versus having to deploy expensive proprietary hardware based server systems. Additionally, our higher compression ratios reduce storage requirements. 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 ATT; video stores, supermarkets, mass merchandisers, club stores, and other retail outlets that sell video cassettes; web-based video channels; and movie theaters, live theater, sporting events, and other similar businesses that compete for the general public's entertainment dollar. In addition, numerous companies including Blockbuster Video, Microsoft WebTV, EchoStar, and TIVO, all of which have substantially greater resources and name recognition than us, have announced their intent to deliver state of the art video-on-demand systems in the near future, 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 November 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 -32- 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 November 2002. 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. We offer wireless delivery of content using equipment complying with Part 15 of the FCC rules in the unlicensed band. All radiating components used by Videolocity are compliant with applicable FCC rules by the vendors of the components. Properties Our principal executive offices are located at 1762-A Prospector Avenue, Park City, Utah 84060, and our telephone number is (435) 615-8338. This facility consists of approximately 2800 square feet of office space and is subject to a lease that expires December 31, 2002 with a monthly rental payment of $3,000. This facility also houses our technical and marketing offices. We are currently evaluating the need for additional space and may relocate our corporate offices in the near future. 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. The defendant has filed an appeal of the Court's final order, however we have not been required to take any responsive action to date. On August 26, 2002 our subsidiary, Healthcare Concierge, Inc., filed an action in the Third District Court of Salt Lake County, Utah against Merit Studios, Inc. The action seeks $600,000 that is owed by Merit Studios to Healthcare Concierge pursuant to a promissory note executed in consideration for the reconveyance to Merit Studios of two license agreements. The action is in the initial stages and the defendant has not yet been served and, accordingly, we are not able to assess our likelihood of success at this time. -33- MANAGEMENT Executive Officers and Directors Our executive officers and directors, their ages and positions held as of September 30, 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 and Director Dan Driscoll..................... 45 Vice President Corporate Development and Director Cortney Taylor................... 41 Chief Financial Officer
On September 5, 2002, the Board of Directors accepted the resignation of George Norman, chairman of and a director of four of our subsidiaries, Videolocity, Inc., Videolocity Technologies, Inc. Hospitality Concierge, Inc., Videolocity Direct, Inc. Mr. Norman cited health reasons for his resignation. Concurrent with Mr. Norman's resignation, the Board also accepted the resignation of D. T. Norman, wife of Mr. Norman, as a director and secretary / treasurer of Videolocity International for personal reasons related to Mr. Norman's health. Ms. Norman also resigned as a director and secretary / treasurer of Videolocity, Inc., Videolocity Technologies, Inc., Healthcare Concierge, Inc., Hospitality Concierge, Inc. and Videolocity Direct, Inc. Also on September 5, Dr. James P. Hill resigned as vice chairman and director of Videolocity International, citing time and travel constraints as his reason. Effective September 1, 2002, Cortney Taylor became our new chief financial officer. Mr. Taylor replaces Larry R. McNeill, who resigned as our CFO and the CFO of Videolocity, Inc., Healthcare Concierge, Inc., Hospitality Concierge, Inc. and Videolocity Technologies, Inc. Mr. McNeill remains a director. All of our directors will devote more than 50% of their time to the business of VCTY, except for Mr. Driscoll. 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 June 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 1970 to 1987, he was Vice President of sales for Communications Investment Corporation's twelve owned and operated stations in Utah, Idaho and Montana. In addition he was general manager of KALL AM and KLCY FM until his retirement in 1988. At that time he founded his own company, a sole proprietorship named Business Idea Company of America, which was an investment portfolio management firm that also provided marketing, advertising and consulting services to select clients. Business Idea Company became inactive in the fourth quarter of 2001and never had any business relationship with Videolocity. 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 January 2002 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. from May 1997 to September 2001, where he was head of the Wireless Campus Group, overseeing product development, marketing, and technology introduction. Mr. Holt served as a Director of 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 October 1998 to the present, Mr. McNeill has been the Chief Financial Officer of Theatre Candy Distributing Company, Inc. of Salt Lake City, Utah. In February 1996, Mr. McNeill retired from Salt Lake City based Smith's Food & Drug Centers, Inc. after 17 years as an executive officer of that company, most recently Senior Vice President of Corporate Development. 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 -34- 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. Effective September 1, 2002, Mr. McNeill resigned as our CFO, but remained as a director. He also resigned as CFO of Videolocity, Inc., Healthcare Concierge, Inc., Hospitality Concierge, Inc. and Videolocity Technologies, Inc. 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. On September 5, Dr. Hill resigned as vice chairman and director of VCTY. 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. On September 5, 2002, Ms. Norman resigned as a director and secretary / treasurer of Videolocity International, Videolocity, Inc., Videolocity Technologies, Inc., Healthcare Concierge, Inc., Hospitality Concierge, Inc. and Videolocity Direct, Inc. Cortney Taylor. Mr. Taylor became our new chief financial officer effective September 1, 2002. Mr. Taylor is a CPA, a member of the UACPA and AICPA, and a member of the Utah State University, School of Accountancy Advisory Board. From November 1994 to August 2002, he was employed in the Utah offices of Grant Thornton, LLP. as an assurance senior manager. Mr. Taylor holds B.S. and Masters of Accounting degrees from Utah State University. 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. -35- 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 325,000 under our 2002 Stock Incentive and Stock Award Plan to our directors for past service rendered in 2000 and 2001. Those current and former directors receiving shares were: Robert Holt 100,000 shares Dan Driscoll 100,000 shares Bennie L. Williams 25,000 shares Larry R. McNeill 25,000 shares D. T. Norman (former director) 25,000 shares James P. Hill (former director) 25,000 shares Lawrence Turel (former director) 25,000 shares 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 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. On September 5, 2002, Mr. Norman resigned as chairman of and a director of four of our subsidiaries, Videolocity, Inc., Videolocity Technologies, Inc. Hospitality Concierge, Inc., Videolocity Direct, Inc. Martin P. Senn. From June 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 May 1995 to June 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 November 1993 to May 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. -36- 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 94% 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 Director
The resumes for 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 ---- --- -------- Robert E. Holt................... 38 President / CEO / Director Bennie L. Williams............... 65 Director Martin P. Senn................... 39 Vice President / COO / Director Larry R. McNeill................. 60 Director The resumes for 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. In September 2002, we employed Jay Muse as Vice President of technology. Mr. Muse was formerly senior technologist at Iomega, Inc., where he advised that company on technical issues regarding product roadmap, competitive intelligence, patent applications and market strategy. Prior to joining Iomega, Mr. Muse worked at General Electric Corporate Research. 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 - ------------------ ---- ------ ----- ------------ ------------ Robert E. Holt 2002(1) $130,000 $ -0- $ -0- $ 85,000(2) President and C.E.O Martin P. Senn, 2002(1) 79,917 -0- -0- 7,750(3) C.O.O 2001 128,000 -0- -0- -0- 2000 -0- -0- -0- -0- Jerry E. Romney, Jr, 2001 150,000 -0- -0- 5,000(4) President 2000 -0- -0- -0- -0- ________
(1) Through nine month period ended July 31, 2002. (2) Received 110,000 shares of VCTY common stock valued at $85,000. (3) Received 8,750 shares of VCTY common stock valued at $7,750. (4) Vested 5,000 shares of common stock under our 2000 Stock Incentive Plan. 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: -37- 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. -38- 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 July 31, 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 September 30, 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 September 30, 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. 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. -39-
Beneficial Ownership Name of Beneficial Owner Shares Percent ------------------------ ------ ------- Directors and Executive Officers: Dan Driscoll............................................. 225,122 3.9 % Robert E. Holt........................................... 105,000 1.8 % Larry R. McNeill......................................... 236,000 4.1 % Martin P. Senn(1)........................................ 43,125 .8 % Bennie L. Williams....................................... 335,000 5.8 % 5% Owners Dr. James P. Hill, Ph.D(2)............................... 650,001 11.2 % D. T. Norman............................................. 300,000 5.1 % Kirk Schneider(3)........................................ 372,000 6.4 % Cornell Capital Partners, L.P............................ 290,000 5.0 % All executive officers and directors as a group (5 persons) 944,247 16.2 %
(1) Includes 31,250 shares held of record by Sweetspot Communications, LLC, a Utah limited liability company of which Mr. Senn is the manager. (2) Includes 650,001 shares held of record by a G.I.N., LLC, of which Dr. Hill is the manager. (3) Includes 250,000 shares held of record by Joss Investments, LC, of which Kirk Schneider is the manager. Kirk Schneider's address is 1201 S. Main Street, Salt Lake City, Utah 84111. 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 our company $135,000 and $100,000, respectively, pursuant to certain 60-day secured notes issued by us bearing interest at 6%. The notes have been extended through October 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, 2001, 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 former 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 60 day 6% 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 in November 2002. 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. -40- 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 August 30, 2002, there were 5,826,596 shares of common stock outstanding and held of record by approximately 118 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. 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 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. -41- 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. 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. -42- Upon completion of this offering, we will have outstanding approximately 76,026,596 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 4,975,742 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 1,189,117 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 760,266 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 July 31, 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. 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. -43- 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 July 31, 2002. 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." -44- 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 July 31, 2002 (Unaudited) F-15
Videolocity International Inc. and Subsidiaries (A Development Stage Company) UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS ASSETS July 31, October 31, 2002 2001 ----------- ----------- CURRENT ASSETS Cash $ 154,538 $ 411 Note receivable, net 200,000 350,000 ----------- ----------- Total current assets 354,538 350,411 PROPERTY AND Equipment, at cost, net 86,182 73,012 Other assets 5,292 4,732 ----------- ----------- $ 446,012 $ 428,155 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable and accrued liabilities $ 51,897 $ 143,123 Accrued interest payable -- 13,949 Notes payable 1,699,800 750,000 ----------- ----------- Total current liabilities 1,751,697 907,072 COMMITMENTS AND CONTINGENCIES -- -- REDEEMABLE PREFERRED CAPITAL STOCK 12,500,000 shares authorized, $0.001 par value, none outstanding at July 31, 2002, 950,000 series A issued and outstanding at October 31, 2001 -- 950 Capital in excess of par value -- 3,957,380 ----------- ----------- -- 3,958,330 MINORITY INTERESTS 4,965 5,038 STOCKHOLDERS' DEFICIT Common stock, $0.001 par value; 12,500,000 shares authorized, 5,826,596 issued and outstanding at July 31, 2002 (4,318,686 at October 31, 2001) 5,827 4,319 Additional paid-in capital 3,069,863 (1,937,203) Deficit accumulated during the development stage (4,386,340) (2,509,401) ----------- ----------- Total stockholders' deficit (1,310,650) (4,442,285) ----------- ----------- $ 446,012 $ 428,155 =========== ===========
The accompanying notes are an integral part of these statements. F-16
Videolocity International Inc. and Subsidiaries (A Development Stage Company) UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS Three months ended Nine months ended From July 31, July 31, May 26, 2000 -------------------------- -------------------------- through 2002 2001 2002 2001 July 31, 2002 ----------- ----------- ----------- ----------- ----------- Revenue $ -- $ -- $ -- $ -- $ -- ----------- ----------- ----------- ----------- ----------- Operating expenses Administrative expenses 512,915 356,613 1,389,642 951,351 2,873,130 Write off of good will -- -- -- -- 958,628 Loss on transfer of license agreement, net -- -- 150,000 -- 285,491 Depreciation and amortization 4,100 29,815 12,300 76,003 81,560 ----------- ----------- ----------- ----------- ----------- 517,015 386,428 1,551,942 1,027,354 3,576,893 ----------- ----------- ----------- ----------- ----------- Operating loss (517,015) (386,428) (1,551,942) (1,027,354) (3,576,893) Gain on sale of stock, net -- 112,275 -- 312,075 338,049 Interest income -- -- 5,334 5,578 Other expense - interest (132,271) (163,900) (325,070) (163,900) (526,519) Minority interests 39 6,859 73 6,859 (4,639) ----------- ----------- ----------- ----------- ----------- Loss before income taxes (649,247) (431,194) (1,876,939) (866,986) (4,386,340) Income taxes -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- NET LOSS $ (649,247) $ (431,194) $(1,876,939) $ (866,986) $(4,386,340) =========== =========== =========== =========== =========== Loss per common share Basic and Diluted $ (0.12) $ (0.10) $ (0.38) $ (0.20) Weighted-average common and dilutive common equivalent shares outstanding Basic and Diluted 5,477,835 4,298,700 4,900,399 4,298,700
The accompanying notes are an integral part of these statements. F-17
Videolocity International Inc. and Subsidiaries (A Development Stage Company) UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT For the period May 26, 2000 (inception) through October 31, 2000, the year ended October 31, 2001, and for the nine months ended July 31, 2002 Deficit accumulated Preferred stock Common stock Additional during the -------------------------- -------------------------- paid-in development Shares Amount Shares Amount capital stage ----------- ----------- ----------- ----------- ----------- ----------- Balance at May 26, 2000 (inception) -- -- -- $ -- $ -- $ -- Issuance of common stock -- -- 640,610 641 85,685 -- Net loss for the period -- -- -- -- -- (129,778) ----------- ----------- ----------- ----------- ----------- ----------- Balance at October 31, 2000 -- -- 640,610 641 85,685 (129,778) Issuance of Series A preferred stock 950,000 950 -- -- 949,050 -- Provision for redemption value of preferred stock -- -- -- -- (3,957,380) -- Issuance of common stock -- -- 3,678,076 3,678 985,442 -- Net loss for the year -- -- -- -- -- (2,379,623) ----------- ----------- ----------- ----------- ----------- ----------- Balance at October 31, 2001 950,000 950 4,318,686 4,319 (1,937,203) (2,509,401) Redemption of preferred stock (600,000) (600) 180,000 180 2,208,320 Cancellation of preferred stock (350,000) (350) -- -- 1,748,880 -- Cancellation of common stock -- -- (50,000) (50) 50 -- Issuance of common stock for compensation and incentive stock plan -- -- 798,559 799 471,045 -- Issuance of common stock on conversion -- -- 579,351 579 578,771 -- of debt and interest Net loss for the period -- -- -- -- -- (1,876,939) ----------- ----------- ----------- ----------- ----------- ----------- Balance at July 31, 2002 -- -- 5,826,596 $ 5,827 $ 3,069,863 $(4,386,340) =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements. F-18
Videolocity International Inc. and Subsidiaries (A Development Stage Company) UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS For the nine months ended From July 31, May 26, 2000 -------------------------- through 2002 2001 July 31, 2002 ----------- ----------- ----------- Increase (decrease) in cash Cash flows from operating activities Net loss $(1,876,939) $ (873,845) $(4,386,340) Adjustments to reconcile net loss to net cash used in operating activities Minority interests (73) -- 4,965 Loss from transfer of license agreement 150,000 -- 285,491 Depreciation and amortization 12,300 76,003 81,560 Write off of goodwill -- -- 940,059 Issuance of common stock for services and interest 690,888 182,500 1,267,284 Changes in assets and liabilities Other assets (560) -- (68,800) Accounts payable and accrued liabilities (91,226) 366,389 51,897 ----------- ----------- ----------- Total adjustments 761,329 624,892 2,562,456 ----------- ----------- ----------- Net cash used in operating activities (1,115,610) (248,953) (1,823,884) ----------- ----------- ----------- Net cash flows from investing activities - Purchase of license agreement -- (476,500) (476,500) Advance deposits -- (31,407) Purchase of property and equipment (25,470) (30,782) (104,234) ----------- ----------- ----------- Net cash flows used in investing activities (25,470) (538,689) (580,734) ----------- ----------- ----------- Cash flows from financing activities Increase in notes payable 1,295,207 -- 2,059,156 Proceeds from issuance of common stock -- 500,000 500,000 ----------- ----------- ----------- Net cash provided by financing activities 1,295,207 500,000 2,559,156 ----------- ----------- ----------- Net increase (decrease) in cash 154,127 (287,642) 154,538 Cash at beginning of period 411 402,934 ----------- ----------- ----------- Cash at end of period $ 154,538 $ 115,292 $ 154,538 Supplemental disclosures of cash flow information Cash paid during the period for Interest $ -- $ -- $ -- Income taxes -- -- --
Noncash investing and financing activities - ------------------------------------------ During the nine months ended July 31, 2002, the Company issued 180,000 shares of common stock on conversion of 600,000 shares of preferred stock resulting in a reclassification from redeemable preferred capital stock totaling $2,208,480. The Company also cancelled 350,000 shares of preferred stock resulting in a reclassification from redeemable preferred capital stock totalling $1,748,880. The Company converted loans and accrued interest totaling $359,356 to common stock. The accompanying notes are an integral part of these statements. F-19 Videolocity International Inc. and Subsidiaries (A Development Stage Company) NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES The information for Videolocity International Inc. (VII) at July 31, 2002 and for the three months ended July 31, 2002 and 2001 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) which in the opinion of management, are necessary to state fairly the financial information set forth therein in accordance with accounting principles generally accepted in the United States of America. NOTE B - UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited condensed financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such regulations. This report on Form 10-QSB for the three months ended July 31, 2002 should be read in conjunction with the Company's annual report on Form 10-KSB for the fiscal year ended October 31, 2001. The results of operations for the three months ended July 31, 2002, may not be indicative of the results that may be expected for the year ending October 31, 2002. NOTE C - ORGANIZATION AND BUSINESS ACTIVITY The Company is a Nevada corporation organized on November 5, 1985 under the name Pine View Technologies. On November 27, 2000 the Company's name was changed to Videolocity International Inc. On December 4, 2000, the Company acquired Videolocity Inc. in a transaction recorded as a recapitalization of VII with the Company being the legal survivor and Videolocity Inc. being the accounting survivor and the operating entity. Videolocity, Inc., the accounting survivor was founded on May 26, 2000. The Company and its subsidiaries were established to develop and market systems, products, and solutions for the delivery of video, high speed internet access, and other content to end users such as hotels, hospitals, and condominiums on demand. At July 31, 2002 and October 31, 2001, the Company was considered a development stage company as its activities had principally been related to market analysis, capital raising, development and other business planning activities and as such the Company had no revenue from its planned principal operations. On March 1, 2002 the Company completed a reverse common stock split of one share for ten outstanding shares. This report has been completed showing after stock split shares from inception. F-20 Videolocity International Inc. and Subsidiaries (A Development Stage Company) NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE D - PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts and operations of the Company and its wholly owned subsidiaries, Videolocity, Inc., Videolocity Technologies Inc., Hospitality Concierge, Inc., Videolocity Direct Inc., Fifth Digit Technologies, LLC. and its 93.5 percent owned subsidiary Healthcare Concierge, Inc. All material intercompany accounts and transactions have been eliminated in consolidation. NOTE E - NET EARNINGS (LOSS) PER SHARE Basic Earnings Per Share (EPS) are calculated by dividing net earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding during each period. Diluted EPS are similarly calculated, except that the weighted-average number of common shares outstanding includes common shares that may be issued subject to existing rights with dilutive potential. All common shares with dilutive potential described in Note M are not included in the computation of diluted loss per share for periods of net loss because to do so would be anti-dilutive. NOTE F - INCOME TAXES On July 31, 2002, the Company and its subsidiaries had an accumulated net operating loss available for carryforward of approximately $4,315,000. The tax benefit of approximately $1,295,000 has been fully offset by a valuation reserve because the use of the future tax benefit is doubtful since the Company is in the development stage and has not began its intended operations. The net operating loss will expire through 2023. NOTE G - NOTE RECEIVABLE The Company has a $600,000 non-interest bearing note receivable (Note H) due on or before February 28, 2002. The Company holds 1,000,000 shares of Merit Studios, Inc. common stock as security valued at approximately $300,000 at July 31, 2002. The Company has recorded an allowance for bad debt totaling $400,000 against the note. NOTE H - ACQUISITION OF LICENSE AGREEMENTS 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. F-21 Videolocity International Inc. and Subsidiaries (A Development Stage Company) NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE H - ACQUISITION OF LICENSE AGREEMENTS - CONTINUED On October 31, 2001 (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 G). Videolocity Direct, Inc. changed its name to Healthcare Concierge Inc. on December 31, 2001. NOTE I - ACQUISITION OF PATENTS On April 6, 2002 a Provisional Patent Application was filed with the United States Patent and Trademark Office for the "Videolocity Digital Entertainment System - Linux Version", which as given an Application No. 60/370,663. On May 20, 2002 an Assignment of Provisional Patent Application No. 60/370,663 was filed on behalf of Videolocity Technologies, Inc. NOTE J - NOTES PAYABLE The Company has notes payable totaling $1,699,800, to various individuals and companies including related parties (Note P), with extended maturities from September 2002 through November 2002 and interest rates ranging from 6% through 20 %. 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. in favor of certain promissory note holders, as security, in exchange for an extension of maturity dates to September 2002 on promissory notes totaling $1,050,000. NOTE K - RECAPITALIZATION On December 4, 2000, the Company (formerly Pine View Technologies, Inc.) acquired Videolocity Inc. The combination of Videolocity Inc. and the Company was recorded as a recapitalization of Videolocity Inc. with the Company being the legal survivor and Videolocity Inc. being the accounting survivor. Videolocity, Inc. the accounting survivor, was founded on May 26, 2000. After the recapitalization, approximately 82 percent of the outstanding shares of the Company were held by former stockholders of Videolocity, Inc. F-22 Videolocity International Inc. and Subsidiaries (A Development Stage Company) NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE L - 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 for the purchase of 5th Digit Technologies, LLC. During March 2001 the sale of the series B preferred stock was rescinded and all monies paid were returned. During 2002, the Company exchanged 600,000 of the outstanding series A preferred shares for 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 purchase of 5th Digit Technologies, LLC. On January 24, 2002 the outstanding 350,000 preferred shares were tendered for liquidation at $5.00 per share and were subsequently deposited with the court pending the outcome of the legal action. On April 11, 2002 the Third Judicial District Court, Salt Lake County, signed a Default Judgment against the holder of the outstanding 350,000 preferred shares ordering cancellation of the shares. It was further 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. NOTE M - 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. As of July 31, 2002, the Company has 301,234 outstanding plan units subject to vesting requirements. During the nine months ended July 31, 2002 the Company issued 24,959 shares of common stock in exchange for vested plan units resulting in compensation expense of approximately $25,000. The Company has issued 29,959 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. 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 417,855 shares under the Plan. F-23 Videolocity International Inc. and Subsidiaries (A Development Stage Company) NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE N - COMMITMENTS AND CONTINGENCIES 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 a 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. NOTE O - EQUITY LINE OF CREDIT AGREEMENT On May 28, 2002 Videolocity International, Inc. finalized an Equity Line of Credit Agreement, with Cornell Capital Partners, LP, 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 Partners. The 24-month term commences on the effective date of the registration statement. The Company is currently working toward completion of the registration. 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 Partners and the Placement Agent in connection with the execution of the Equity Line. F-24 Videolocity International Inc. and Subsidiaries (A Development Stage Company) NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE P - 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 totaling approximately $628,000 with interest rates ranging from 6.0% to 8.0%. A director of the Company caused the voluntary contribution and cancellation of 50,000 shares as manager of ISOZ, LC. NOTE Q - 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 NOTE R - GOING CONCERN The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has incurred losses since its inception and has not yet been successful in establishing profitable operations. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this regard, management is proposing to raise necessary additional funds not provided by its planned operations through loans and/or through additional sales of its common stock. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. 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 offer to buy any securities of Videolocity International, Inc.: * except the common stock offered by this prospectus; 70,500,000 Shares of Common Stock * in any jurisdiction in which the offer or solicitation is not authorized; * in any jurisdiction where the dealer or other salesperson is not qualified to make the offer or --------------------- solicitation; PROSPECTUS --------------------- * to any person to whom it is unlawful to make the offer or solicitation; or * to any person who is not a United States resident or who is outside the jurisdiction of the United States. October _,2002 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.
F-26 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 08-1-2001 6 persons in private placement, (c) $750,000 Cash including three affiliates, Larry McNeill, Bennie L. Williams and ISOZ, LC 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 Alpay Kasal, Daniel Osorio & (a) 180,000 Exchange and retirement of Series Collette Horrell 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 Frank Divito, Art Duran, Mike Evans, (a) 17,000 Consideration for loans, valued at Mark Barnhart & Mike Black $17,000
S-2
06-11-2002 Dan Driscoll (a) 125,122 Conversion of promissory note and interest, valued at $125,122 06-14-2002 Greenwood Technology Group (a) 183,124 Conversion of promissory note and interest, valued at $183,124 06-17-2002 Arnold Y. Kapiloff (a) 17,855 Consideration of services valued at $17,855 06-19-2002 Richard H. McCullough (a) 10,000 Consideration for loan, valued at $10,000 07-15-2002 Timothy E, Perschke, KMA, Inc. & (a) 8,000 Additional consideration for Bruno A. Muscatello UCC-1 loan valued at $8,000 07-25-2002 Frank Divito & Richard Ehnot (a) 1,000 Additional consideration for UCC-1 loan valued at $8,000 Healthcare Concierge, Inc. Securities 07-30-2001 to 27 persons including affiliates McNeill, (a) 425,000 Cash and exchange of debt, 07-23-2002 Williams and ISOZ, LC (d) valued at $338,000 - -----------------
(a) Common Stock. (b) Preferred Stock (c) 6% Secured 60 day Notes (d) A total of 425,000 shares were issued by VCTY to 27 persons. Of the original shares, 129,000 shares have been canceled, leaving 296,000 shares outstanding. 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. Each issuance made in reliance on Section 4(2) was made pursuant to individual agreements and are made only with persons who were sophisticated in such transactions. Each person had knowledge of and access to sufficient information about Videolocity to make an informed investment decision, including the fact that the securities were deemed restricted securities. 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. S-3 3.4(6) 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(6) Employment Agreement with Robert E. Holt 10.9(6) Employment Agreement with Martin P. Senn 10.10(6) Lease of Prospector Square Facility and Extension 10.11(6) UCC-1 Security Agreement 10.12(6) Amendment to Agreement of Purchase and Reassignment with Merit Studios, Inc. 10.13 Employment Agreement with Cortney Taylor 10.14 Settlement Agreement with 5th Digit, LLC and Istream TV 10.15 Strategic Alliance Agreement with OnSat Network Communications 10.16 Tech Flex Funding Dealer Marketing Agreement 10.17 Value Added Reseller Agreement with Vistor Networks, Inc. 10.18 Specimen promissory note 21.1(6) 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. S-4 (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. (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 17th day of October 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: October 17, 2002 By: /s/BENNIE L. WILLIAMS Bennie L. Williams, Chairman and Director Date: October 17, 2002 By: /s/LARRY R. MCNEILL --------------------------------- Larry R. McNeill, Vice President and Director Date: October 17, 2002 By: /s/DAN DRISCOLL --------------------------------------- Dan Driscoll, Vice President Corporate Development and Director Date: October 17, 2002 By: /s/ CORTNEY TAYLOR ---------------------------- Cortney Taylor, Chief Financial Officer Date: October 17, 2002 S-6 EX-5.1 3 ex5no1.txt L NEILSON OPINION 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 October 17, 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 70,500,000 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 5.1 thereof. Yours truly, /S/ Leonard E. Neilson ------------------------ Leonard E. Neilson :ae EX-10.4 4 ex10no4.txt EQUITY LINE OF CREDIT EQUITY LINE OF CREDIT AGREEMENT ------------------------------- AGREEMENT dated as of the 28th 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 5 ex10no5.txt REGISTRATION RIGHTS AGREE - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT ----------------------------- REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May 28, 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 6 ex10no6.txt ESCROW AGREE ESCROW AGREEMENT ---------------- THIS ESCROW AGREEMENT (this "Agreement") is made and entered into as of May 28, 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 7 ex10no7.txt PLACEMENT AGENT AGREE VIDEOLOCITY INTERNATIONAL INC. PLACEMENT AGENT AGREEMENT Dated as of: May 28, 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 15 EX-10.13 8 ex10no13.txt EMPLOYMENT AGREEMENT - C. TAYLOR EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into this 4th day of August, 2002, by and between Videolocity, Inc., a Nevada corporation (the "Company") and Cortney Taylor (the "Employee") and will become effective the 1st day of September 2002. 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 as Chief Financial Officer of the Company, its parent and other subsidiaries, 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 September 1, 2002, and expire at midnight on the last day of August 2005, unless earlier terminated in accordance with the provisions of this Agreement. 3. Duties. Employee shall perform the duties assigned to Employee by the parent Company's Executive Committee (the "Executive Committee") and or the parents Board of Directors (the "Board") from time to time. Employee shall hold such offices and serve in such positions with the Company, its parent and/or other subsidiaries as shall from time to time be requested by the "Executive Committee" and or the "Board." Employee shall not receive any additional compensation for service as an officer of the parent or its other subsidiaries, of the company unless as otherwise established by the "Board." Employee shall devote substantially all of his working time and efforts to the business of Company and its parent or other subsidiaries and shall not during the term of this Agreement be engaged in any other substantial business activities which will interfere or conflict with the reasonable performance of his duties hereunder, except where approved by the "Executive Committee" and 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 "Executive Committee" or the "Board," will not present any conflict of interest with the company, its parent or any of its other subsidiaries which could 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 $90,000.00 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. 1 (b) Participation in Stock Incentive Program. The Company shall grant Employee 40,000 plan units under the Videolocity, 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. 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 Informaiton 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. (a) 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 2 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 therefore 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 invention. (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 jurisdiction. (e) 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. (f) 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. 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, 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 3 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 marketing 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 for 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. (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 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; 4 (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 Executive Committee and or Board of Directors of the parent 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 an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof 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 provisions 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 circumstances in enforcing the Employee's or the Company's rights hereunder. (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. Obligation 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: 5 (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 Employer'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. (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 6 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 13-d3 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. (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 7 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 addresses as follows. If to Employee, to: Cortney Taylor If to the Company, to: Videolocity, Inc. ATTN: Chief Executive Officer 358 S. 700 E. Suite B-604 Salt Lake City, Utah 84104 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 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 8 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. 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, Inc. By /s/ Larry R. McNeill, CFO -------------------------- Duly Authorized Officer Employee: /s/ Cortney L. Taylor --------------------------- (Signature) Cortney L. Taylor --------------------------- (Print Name) --------------------------- SS# 9 EX-10.14 9 ex10no14.txt SETTLEMENT AGREE EXHIBIT 10.14 SETTLEMENT AGREEMENT This Settlement Agreement is entered into as of May 10, 2001 between iStreamTV, Inc., a New York corporation with its principal place of business at 135 West 20th Street, New York 10011 ("ISTV"), Videolocity, Inc. formerly known as Moviesonline, Inc., a Nevada corporation with its principal place of business at 358 S. 700 East, Salt Lake City, UT 84102 (collectively with its parent, subsidiary and affiliate companies, "MOL"), 5th Digit, LLC, a/k/a 5th Digit Technologies, a New York LLC with its principal place of business at 34 Watts Street, #5, New York, NY 10013 ("5th Digit"), Daniel Osorio, residing at 900 West Bitner, I-11, Park City, UT 84098 ("Osorio") and Alpay Kasal, residing at 6975 N. 2200 West #9D, Park City, UT 84098 ("Kasal"). WHEREAS, MOL brought an action against ISTV in the Utah State Court entitled Moviesonline, Inc. v. iStreamTV (Third Judicial Court for Salt Lake County, Utah, Civil No. 000907601) (the "Utah Action"); and WHEREAS, ISTV commenced an action against MOL, 5th Digit, Osorio, Kasal and others in the New York State Court entitled iStreamTV, Inc. v. Moviesonline, Inc., et al, (New York State Supreme Court, New York County Index No. 605628/00) (the "New York Action"); and WHEREAS, Osorio and Kasal were formerly employed by ISTV, up to and including September 19, 2000, and from on or about January 5, 2001 until February 28, 2001 they were both employed by 5th Digit, which is now controlled by Videolocity International, Inc., the parent corporation of MOL; and WHEREAS, during the time that Osorio and Kasal were employed by ISTV three provisional patent applications were filed with the United States Patent and Trademark Office ("USPTO") in the names of one or the other of them with respect to certain inventions, namely, applications given U.S. serial numbers 60/218,528 (Kasal, "Enhanced Video Compression Method"), 60/226,575 (Kasal, "Open-Architectures Set Top Box Providing Full and Upgradable Multi-Media Functionality") and 60/233,447 (Osorio, "Webcaster") (collectively, the "Provisional Patent Applications"); and WHEREAS, on October 19, 2000 Osorio and Kasal executed Assignments whereby they assigned the Provisional Patent Applications to 5th Digit (the "Kasal and Osorio Assignments"), and copies of such assignments, along with Patent Recordation Form Cover Sheets submitted to the USPTO on Forms PTO-1595 dated October 26, 2000 and USPTO Notices of Recordation of Assignment Documents dated January 16, 2001, indicating the filing of the Kasal and Osorio Assignments on November 2, 2000, are attached hereto as Exhibit A; and WHEREAS, the parties hereto seek to resolve the disputes in the Utah Action and the New York Action and all other disputes among them, including without limitation, all disputes with respect to (a) ownership of the Provisional Patent Applications, (b) the Kasal and Osorio Assignments and (c) the enforceability of a so-called "Binding Letter of Intent" dated as of July 25, 2000 signed by representatives of MOL and ISTV; NOW, THEREFORE, IT IS HEREBY AGREED by and among the undersigned, as follows: 1. 5th Digit shall execute and deliver to ISTV, simultaneously herewith, the instruments of assignment attached as Exhibit B, assigning to ISTV all of 5th Digit's right, title and interest in the Provisional Patent Applications, and agreeing to execute any additional document reasonably required by ISTV or the USPTO to effect such assignments, provided that 5th Digit shall not be required to incur any out-of-pocket cost or expense in connection with execution of any such additional document (including, without limitation, any reasonable attorney's fees that might be incurred in reviewing such document. 2 2. Osorio and Kasal acknowledge the assignments provided for in paragraph 1 above; confirm that they executed the instruments of assignment to 5th Digit, attached as Exhibit A; relinquish any and all right or claim of ownership in the Provisional Patent Applications; acknowledge the right and ownership therein of ISTV by virtue of said assignments by 5th Digit; and agree to execute any additional document reasonably required by ISTV or the USPTO to effect such assignments, provided that Osorio and Kasal shall not be required to incur any out-of-pocket cost or expense in connection with execution of any such additional document (including, without limitation, any reasonable attorneys' fees that might be incurred in reviewing such document). 3. MOL, on behalf of itself and any affiliated company, represents that it has no right, title or interest in the Provisional Patent Applications. 4. Each of MOL, 5th Digit, Osorio and Kasal makes no representation or warranty, express or implied, regarding the viability or patentability of any inventions or rights set forth in the Provisional Patent Application being assigned pursuant to this Agreement and the Assignments being executed herewith. 5. The parties agree to dismissal with prejudice of the Utah Action and the New York Action, without costs or expenses to any party, by filing of stipulations of dismissal in the forms attached as Exhibit C. 6. ISTV agrees that, except with respect to the subject matter as described in the Provisional Patent Applications that are the subject of this agreement and the assignments thereof by 5th Digit, it will not assert any claim against Kasal, Osorio, MOL or 5th Digit to the effect that ISTV owns rights to any other invention or intellectual property for which either Kasal or Osorio 3 claims inventorship, by virtue of the fact that Kasal or Osorio were employed by ISTV to develop any such other invention or intellectual property, or used ISTV resources to develop any such other invention or intellectual property. 7. MOL, 5th Digit, Kasal and Osorio agree that they will not assert any claim against ISTV that MOL, 5th Digit, Kasal, Osorio or any of them owns any right, title or interest in the Provisional Patent Applications. 8. Simultaneously with the execution of this agreement the parties will execute mutual releases in the forms attached as Exhibit D. 9. Upon execution of this Agreement ISTV shall pay to MOL the sum of $1,500. 10. This agreement shall be governed by the laws of the State of New York applicable to contracts made and to be performed in New York, and any disputes arising hereunder shall be determined by a federal or state court sitting in New York County. 11. There are no oral understandings between the parties, and no amendment hereto may be made except in a writing signed by all parties affected by any such amendment. 12. The parties hereto acknowledge that they have been represented by counsel of their choice in connection with this Agreement. 13. The parties agree to keep confidential the specific terms and conditions of this Agreement and not to disclose or describe the same to any third party (other than their respective counsel, accounts or other consultants) or to the public in general, except to the extent disclosure is (a) required by applicable law or regulation, including, without limitation, those of the SEC and the U.S. Patent Office, (b) necessary to enforce the terms of this agreement or (c) necessary to any pending or future litigation that any party hereto may bring or defend. 4 14. This agreement may be executed in counterpart, and fax copies may be treated as originals. Dated: New York, New York May 10, 2001 iStreamTV, Inc. By: /s/ Morrey S. Halfen ---------------------- Name: Morrey S. Halfen Title: CFO: Videolocity, Inc., formerly known as Moviesonline, Inc. (for itself and its parent, subsidiary and affiliate companies) By: /s/ Jerry Romney ----------------------- Name: Jerry Romney Title: President 5th Digit By: /s/ Collette Horrell ------------------------ Name: Collette Horrell Title: Manager /s/ Daniel Osorio ------------------------ Daniel Osorio /s/ Alpay Kasal ------------------------- Alpay Kasal By: /s/ Donald A. Pitofsky, Esq. By: /s/ Brian C. Wille, Esq. ---------------------------------- -------------------------- Donald A. Pitofsky, Esq. Brian C. Wille, Esq. Shaw Pittman Attorneys for Plaintiff 335 Madison Avenue New York, New York 10017 (telephone number illegible) 5 EX-10.15 10 ex10no15.txt STRATEGIC ALLIANCE AGREE OnSat EXHIBIT 10.15 Network Communications VIDEOLOCITY STRATEGIC ALLIANCE AGREEMENT The parties to this OnSat Strategic Alliance Agreement ("Agreement") are OnSat Network Communications, Inc., a Utah corporation, having a principal place of business at 2749 East Parley's Way, Salt Lake City, UT 84109 ("OnSat") and Videolocity Inc., a Utah corporation, having a principal place of business at 358 South 700 East, Salt Lake City, UT 84102. BACKGROUND a. Business Purpose. Videolocity is in the business of providing digital content and delivery systems ("Content"), including video, through the use of proprietary set-top devices, software and servers to end users, including businesses, both real time and on demand; OnSat Network Communications, Inc. is in the business of providing wireless delivery of high speed Internet access and digital content such as video via, satellite bandwidth, backhaul services ("Transport") and has the Technical Operating Center to provide such services; Therefore, OnSat and Videolocity wish to combine services and offer wireless Internet connections, video-on-demand and telephony products ("Product") to residences and businesses, including hotels/condos, schools, and churches. The parties with to develop this as a test model that can be extended to future areas. b. Terms and Conditions/Statements of Work. These terms and conditions will govern each party's rights and obligations relating to the provision of general services hereunder. These terms and conditions, by and of themselves, do not implement any transaction. OnSat and Videolocity, Inc. intend that all services provided by OnSat and/or Videolocity, Inc. one to the other hereunder shall be implemented through individual Statements of Work under this Agreement, which Statements of Work shall be deemed to incorporate the terms and conditions of this Agreement unless the Statement of Work explicitly states otherwise. c. Administration of Statements of Work. In the event a party wishes to engage the other party under this Agreement, and in the event such other party wishes to provide services to the other party, the parties shall enter into one or more Statement(s) of Work which will be made a part of this Agreement; the terms and conditions of this Agreement will apply to and govern all such Statements of Work and their subject matter notwithstanding to the contrary. (A Statement of Work is referred to herein as a "SOW," and the services to be provided pursuant to a SOW under this Agreement are referred to herein as the "Services.") Each SOW under this Agreement shall become effective only upon execution by authorized representatives of both parties, and will include at least the following information, together with any additional terms and conditions as the parties may deem necessary or desirable with respect to the Services to be perfomed under each such SOW. i. Description of the Services ii. Name, address, email address, telephone and fax number of the end user. iii. Description of each party's responsibilities; iv. Detailed description of equipment, services and associated costs. 1 v. Identification of the authorizing individuals. d. Order of Precedence. A SOW may contain terms and conditions that are inconsistent with this Agreement. In such case, the terms and conditions of the SOW shall prevail (but only with respect to that particular SOW). TERMS AND CONDITIONS 1. PARTIES AND RESPONSIBILITIES. OnSat shall engineer, order equipment and perform installation services to provide transport services to the area ("Area") as defined in the applicable SOW. Both parties agree to work together to use best efforts to provide the optimum success for the delivery of products and/or services as defined in the applicable SOW to the Area. 2. USE OF TRADENAMES AND MARKS. Each party is hereby granted a limited license and permission to use, during the term of this Agreement and within the Area, the trademarks and trade names used by OnSat or Videolocity in connection with their respective products and services. Such permission is expressly limited to uses necessary for the sales of the products and services and to the performance by both parties of the obligations under this Agreement. Videolocity acknowledges and agrees that OnSat is the exclusive owner of the OnSat trademarks and trade names and Videolocity agrees not to take any action inconsistent with OnSat's exclusive ownership of same. OnSat acknowledges and agrees that Videolocity is the exclusive owner of the Videolocity trademarks and trade names and OnSat agrees not to take any action inconsistent with Videolocity's exclusive ownership of same. All use shall be subject to an in accordance with the parties published trademark policies, as the same may from time to tome be modified. Neither party shall use such trademarks or trade names in such a fashion as to jeopardize the rights and proprietary interests of the other party therein. 3. INTELLECTUAL PROPERTY. Each party and/or its licensors retain on an exclusive basis for itself all right, title and interest in and to any intellectual property developed, delivered and/or used by such party in the performance of this Agreement. 4. INDEMNIFICATION. Each party agrees to indemnify, defend, and hold the other harmless from and against any and all damages, liabilities, costs, and expenses it incurs as a result of any claim, judgment, or adjudication against either party arising out of or related to breach or failure to comply with the terms and conditions of this Agreement. However, in the event that provisions are breached pursuant to an applicable SOW, indemnifications and/or remedies of said breached conditions provisions shall be controlled by the specific agreements in the applicable SOW. In the event that either party receives notice of such a claim based upon the other party's breach, it will promptly notify the other in writing of the claim and will permit the other to have the sole control of the defense of the claim and all negotiations for its settlement and compromise. CONFIDENTIAL INFORMATION. Neither party shall use or disclose any Confidential Informaition supplied by the other party relating to any products or services to this Agreement except as authorized in writing by the other party in advance of such disclosure and shall safeguard all Confidential Information provided under this Agreement in the same or more restrictive manner as either party safeguards its own Confidential Information. Confidential Information shall mean information disclosed by one party ("Discloser") to another party ("Recipient") in oral, visual, or written form (including magnetic, optical, or other media) this is source code, the terms and conditions of this agreement, marked as confidential at the time of disclosure, or that is unmarked (e.g., orally disclosed) but is treated as confidential at the time of disclosure. Nevertheless, each party shall provide the other party with a full description of any and all confidential information within 30 days of such disclosure. Confidential Information shall not include information that: (a) was in Recipient's possession before receipt from the disclosing party; (b) is or becomes a matter of public knowledge through no fault of Recipient; (c) is rightfully received by the Recipient from a third party without a duty of confidentiality; (d) is disclosed by the Discloser to a third party without a duty of confidentiality on the third party; or, (e) is disclosed by the Recipient with Discloser's prior written approval. 2 6. TERM AND TERMINATION. a. The initial term hereof shall be for one (1) year from the Effective Date. Unless earlier terminated for breach as provided herein, or unless either party notifies the other in writing, not later that thirty (30) days prior to expiration of the initial term, of its intention to terminate the Agreement upon said expiration, this Agreement shall automatically renew at the end of the initial term for consecutive periods of one (1) year. b. Termination. Either party may terminate this Agreement upon sixty (60) days written notice. However, any SOW executed under this agreement shall survive anything to the contrary, notwithstanding anything in this agreement. c. Termination for Cause. Either party may terminate this Agreement for the substantial breach by the other party of a material term of this Agreement, attempted assignment of this Agreement or duties under the Agreement without prior consent of both parties, making misrepresentations about either party to this Agreement, the attempted sale of unauthorized services or unauthorized rates, or conduct by an employee or representative of either party which results in any legal action. The terminating party will first give the other party written notice of the breach and a reasonable period of at least thirty (30) days in which to cure the alleged breach. If a cure is not achieved during the cure period then the non-breaching party may terminate this Agreement upon written notice. d. Insolvency, Assignment or Bankruptcy. Either party may, at its option, immediately terminate this Agreement upon written notice to the other party if the other party (i) admits in writing its inability to pay its debts generally as they become due; (ii) makes a general assignment for the benefit of creditors; (iii) institutes proceedings to be adjudicated a voluntary bankrupt or consents to the filing of a petition of bankruptcy against it; (iv) is adjudicated by a court of competent jurisdiction as being bankrupt or insolvent; (v) seeks reorganization under any bankruptcy act or consents to the filing of a petition seeking such reorganization; or (vi) is the subject of a decree by a court of competent jurisdiction appointing a receiver, liquidator, trustee or assignee in bankruptcy or in insolvency covering all or substantially all of such party's property or providing for the liquidation of such party's property or business affairs. 7. LIMITATION OF LIABILITY. THE REMEDIES PROVIDED IN THIS AGREEMENT ARE THE SOLE AND EXCLUSIVE REMEDIES OF THE PARTIES. NEITHER PARTY SHALL IN ANY EVENT BE LIABLE TO THE OTHER, OR TO ANY LICENSEE, SUBLICENSEE, OR CUSTOMER OF THE OTHER PARTY UNDER THIS AGREEMENT FOR LOSS OF PROFITS, LOSS OF BUSINESS, LOSS OF USE OR OF DATA, OR FOR ANY INTERRUPTION OF BUSINESS. NEITHER PARTY SHALL IN ANY EVENT BE LIABLE FOR INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL LOSS OR DAMAGE OF ANY KIND ARISING UNDER AND OUT OF THIS AGREEMENT, WHETHER IN A CONTRACT, TORT OR OTHER ACTION FOR OR ARISING OUT OF ALLEGED BREACH OF WARRANTY, ALLEGED BREACH OF CONTRACT, DELAY, NEGLIGENCE, STRICT LIABILITY OR OTHERWISE. EXCEPT AS TO THE OBLIGATIONS OF CONFIDENTIALITY, IN NO EVENT SHALL EITHER PARTY BE LIABLE UNDER THIS AGREEMENT TO THE OTHER, ITS SUCCESSORS AND ASSIGNS FOR ANY DAMAGES EXCEEDING TOTAL PAYMENTS PAID BY VIRTUE OF THIS AGREEMENT. 3 8. GENERAL PROVISIONS. a. Public Announcements and Promotional Materials. OnSat and Videolocity may wish to issue a joint press release. OnSat and Videolocity shall cooperate with each other either to issue a joint press release and/or to enable each party to issue and post to its web site an announcement concerning this Agreement, provided that each party must approve any such public announcement prior to its release. Any separate release shall be subject to approval prior to its release by the authorized representatives of both parties. Additionally, the parties hereto shall work together to create marketing and promotional materials for this endeavor which shall be jointly approved prior to publication. b. Force Majeure. If either party is prevented from performing any portion of this Agreement (except the payment of money) by causes beyond its control, including labor disputes, civil commotion, war, governmental regulations or controls, casualty, inability to obtain materials or services or acts of God, such defaulting party will be excused from performance for the period of the delay and for a reasonable time thereafter. c. Limitation of Actions. No action arising or resulting from this Agreement, regardless of its form, may be brought by either party against the other more than two (2) years after termination of this Agreement. d. Third Party Claims. Neither party shall be liable for any claim by the other based on any third party claim, except as stated in Section 8 of this Agreement. e. Assignment. This Agreement, use of Equipment, or any other right granted either party may have under this Agreement, is not assignable, in whole or in part, without prior written consent. Notwithstanding, neither will unreasonably withhold consent to an assignment of this Agreement or any part of this Agreement to a parent, subsidiary or affiliate, provided that such entity is at least as capable of satisfying the responsibilities provided hereunder. Any attempted assignment without the other parties written consent will be null and void.. f. Arbitration. The parties will attempt in good faith to resolve any controversy or claim arising out of or relating to this Agreement promptly through discussions between themselves at the operational level. In the event a resolution cannot be reached, such controversy or claim shall be negotiated between appointed counsel or senior counsel or senior executives of the parties who have authority to settle the controversy. The disputing party shall give the other party written notice of the dispute. If the parties fail to resolve such controversy or claim within thirty (30) days of the disputing party's notice, either party may seek arbitration as set forth herein. Any controversy or claim arising out of or relating to this Agreement, or a breach of this Agreement, shall be finally settled by binding arbitration in Salt Lake City, Utah and shall be resolved under the laws of the State of Utah without regard to its choice of law principles. The arbitration shall be conducted before a single arbitrator in accordance with the commercial rules and practices of the American Arbitration Association then in effect. Any award, order, or judgment pursuant to such arbitration shall be deemed final and binding and may be enforced in any court of competent jurisdiction. The parties agree the arbitrator shall have no power or authority to make awards or issue orders of any kind except expressly permitted by this Agreement and in accordance with Section 13. All arbitration proceedings shall be conducted on a confidential basis. g. Attorneys' Fees. Should either party institute any action or proceeding to enforce this Agreement or any related agreement, the prevailing party shall be entitled to receive from the other party all reasonable out-of-pocket costs and expenses, including, without limitation, reasonable attorney fees and costs. h. Waiver. No waiver of any right or reedy on one occasion by either party will be deemed a waiver of that right or remedy on any other occasion. i. 4 j. Notice. Unless otherwise agreed to by the parties, all notices required under this Agreement (except those relating to product pricing, changes and upgrades) will be deemed effective when received and made in writing by either (i) registered mail, (ii) certified mail, return receipt requested, (iii) overnight mail, addressed and sent to the address indicated herein, to the attention of the person designated as the responsible representative or to that person's successor; or (iv) by telephone facsimile transfer appropriately directed to the attention of the person designated as the responsible representative or to that person's successor. k. Severability. If any term, provision, covenant or condition of this Agreement is held invalid or unenforceable for any reason, the remainder of the provisions will continue in full force and effect as if this Agreement had been executed with the invalid portion eliminated. The parties further agree to substitute for the invalid provision a valid provision that most closely approximates the intent and economic effect of the invalid provision. l. Independent Contractors. Each party acknowledges that the parties to this Agreement are independent contractors and that it will not, except in accordance with this Agreement, represent itself as an agent or legal representative of the other. m. Compliance with Laws. Each party represents and warrants that it shall comply at its own expense with all applicable laws, rules and regulations of governmental bodies and agencies, including all laws, rules and regulations affecting or governing exports, in its performance under this Agreement. n. Headings. The heading provided in this Agreement are for convenience only and will not be used in interpreting or construing this Agreement. Scope of Agreement. Each of the parties hereto acknowledges that it has read this Agreement, understand it and agrees to be bound by its terms. The parties further agree that this Agreement is the complete and exclusive statement of agreement regarding the subject matter and supersedes all proposals (oral or written), understandings, representations, conditions, warranties, covenants and all other communications between the parties relating thereto. This Agreement may be amended only by a writing that refers specifically to this Agreement and it is signed by both parties. IN WITNESS WHEREOF, the parties have executed this Agreement and affixed their signatures and thereby acknowledge their agreement with the terms and conditions of this Agreement, and each signatory represents and certified that he/she is authorized to sign on behalf of and to bind each of the respective signatories to all of the terms and conditions of this Agreement. ONSAT NETWORK COMMUNICATIONS, INC. By: /s/ David Stephens ---------------------------------- David Stephens President/CEO VIDEOLOCITY, INC. By: /s/ Martin Senn ---------------------------------- Martin Senn Chief Operating Officer END OF STANDARD TERMS AND CONDITIONS 5 ONSAT STRATEGIC ALLIANCE AGREEMENT SCHEDULE A TRADE NAMES AND MARKS - -------------------------------------------------------------------------------- This Schedule A supplements and is included and incorporated into the OnSat Alliance Agreement of even date herewith, between OnSat Network Communications ("OnSat") and Videolocity, Inc. ("Videolocity"). Trade Names and Marks: 1. Videolocity shall have licensed rights to use the following OnSat Trade Names and Marks, subject to the terms and conditions and restrictions set forth in this Agreement. OnSat OnSat Network Communications 1. OnSat shall have licensed rights to use the following Videolocity Trade Names and Marks, subject to the terms and conditions and restrictions set forth in this Agreement. Videolocity Videolocity, Inc. 6 EX-10.16 11 ex10no16.txt TECH FLEX AGREE TECH FLEX FUNDING DEALER MARKETING AGREEMENT AGREEMENT dated as of May ll, 2001 between Tech Flex Funding, Inc. (TFF), a California corporation located at 27285 Las Ramblas, Suite 280, Mission Viejo, California 92691, and Videolocity, Inc. (TFF Dealer), a NV state corporation located at 358 S. 700 E. Suite 8604, Salt Lake City UT, 84102. WHEREAS, TFF is in the business of, among other things, the sale and marketing of a telecommunications equipment leasing program to end user customers, as offered by independent financial entities. WHEREAS, TFF Dealer is in the business of, among other things, the sale, installation of, training on and maintenance of telecommunications equipment; and WHEREAS, TFF Dealer wants to promote the telecommunications equipment leasing program being offered by TFF, and TFF wants TFF Dealer to promote the aforesaid leasing program. NOW THEREFORE, for good and valuable consideration, the parties agree as follows: 1. Obligation/Term. 1.1 TFF Dealer hereby agrees to perform the services specified in Section 2 below in consideration of the payment of the fees specified in Section 3 below. 1.2 This Agreement shall remain in effect until TFF or Dealer terminates it by giving 90 days advance written notice to the other party or until terminated pursuant to Section 4 below. 1 2. Services/Obligations of TFF Dealer. 2.2 TFF Dealer shall provide at least one qualified, trained salesperson to market TFF's leasing program. TFF Dealer shall designate one employee to be the point of contact for TFF in connection with the activities to be carried out under this Agreement. 2.2 When any TFF Dealer salesperson obtains an order to lease telecommunications equipment through TFF's leasing program, the lease agreement used shall be the standard lease agreement, as supplied by TFF to TFF Dealer, without modification (unless agreed to otherwise by TFF in writing). TFF Dealer shall make sure that any lease agreement is completed in its entirety, is executed by an individual authorized to sign on behalf of and user customer, and contains a fully itemized list of each and every component that comprises the telecommunications equipment being leased. TFF Dealer shall collect requisite credit information in accordance with the policies and procedures in effect at that time. TFF Dealer shall also collect any requisite upfront lease payments in accordance with the policies and procedures in effect at that time. TFF Dealer shall fax a copy of such lease agreement and credit information to TFF for overall approval including credit, along with an itemized breakdown by each component of the installed price per component which installed price shall include any relevant training and warranty charges. TFF Dealer shall mail to TFF any upfront lease payments collected by TFF Dealer from the lease customer. 2.3 TFF Dealer shall install and maintain all telecommunications equipment in a good, workmanlike manner, in accordance with manufacturers specifications and to the reasonable satisfaction of each end user. Such maintenance and service shall be provided in accordance with TFF Dealer's standard policies and procedures, as set forth in the attached Exhibit A, as provided and prepared by TFF Dealer. TFF Dealer shall make reasonable efforts to label each component of the telecommunications equipment to indicate ownership of leasing company and the month and year of first installation. 2.4 TFF Dealer shall train all of end user's employees in the use of the telecommunications equipment being leased by such end user. 2 2.5 TFF Dealer shall have at least one (1) fully certified technician per product line leased by TFF. TFF Dealer shall be a fully authorized dealer for any product line leased by TFF. 2.6 TFF Dealer shall perform all maintenance against normal wear and tear (as defined in the attached Exhibit A) for any end user under this Agreement without any charge to such end user. See Section 3.5 as to recurrent maintenance fee to be earned by TFF Dealer under this Agreement. 2.7 At the end of each lease term (if the end user does not elect to purchase the equipment), or earlier (in the case of a switch out, early lease cancellation, or delinquent account situation), TFF Dealer shall, upon TFF's written request, remove the leased equipment from the end user's business location and dispose of such equipment as so instructed by TFF, or in accordance with the terms of this Agreement, as the case may be. In connection with the foregoing, TFF shall pay TFF Dealer on a time and materials basis including shipping costs. 2.8 Notwithstanding, anything to the contrary contained herein, in the event an end user customer elects to upgrade its then leased equipment due to growth or obsolescence, prior to the expiration of the then existing term of the lease, TFF Dealer shall grant TFF a trade-in allowance on any equipment coming into inventory according to the following schedule: -50% of initial equivalent sales price during year 1, -40% of initial equivalent sales price during year 2, -30% of initial equivalent sales price during year 3, -20% of initial equivalent sales price during year 4, and -10% of initial equivalent sales price during year 5. All trade-in allowances shall be deducted from the funding on the upgrade transaction. See Section 3.3(b) for a definition of equivalent sales price. 3 2.9 Upon the completion of installation of and training on any equipment deal for TFF, TFF Dealer shall obtain an executed delivery and acceptance from the end user the delivery of which to TFF shall be one of the conditions precedent to TFF paying TFF Dealer the fees discussed in Section 3 below. 2.10 Should TFF Dealer also be an authorized sub agent of PSI Network, Inc. (PSI) for Network Services through Lightyear, and should TFF Dealer sign up a lease customer for Lightyear network services, then TFF Dealer my elect to direct some or all of the long distance commissions, paid by PSI to TFF Dealer on such account, directly back to the end user in the form of a rebate paid out by PSI. To do so, TFF Dealer must instruct PSI in writing as to the amount to re-directed to the end user by PSI in the form of a rebate. TFF Dealer acknowledges that PSI shall send such rebate to the end user provided the end user is current on its Lightyear network services bill. 2.11 TFF Dealer shall at all times maintain or cause to maintained, at its own cost and expense: (a) worker's compensation insurance covering all statutory liability plus common law liability; (b) errors and omission insurance with coverage amounts satisfactory to TFF; (c) comprehensive general liability coverage against liability for injuries to persons or property and product liability insurance with a single limit amount of not less than $1,000,000 per occurrence; and (e) hazard and liability insurance covering all equipment leased by TFF to end users. All of said insurance shall name TFF (and any lease financing company disignated by TFF) as an additional insured and contain such other terms and shall be placed with such insurance companies, as shall be satisfactory to TFF. Each policy shall provide that TFF shall be notified in writing at least (30) days prior to any cancellation thereof. Upon TFF's written request, TFF Dealer shall provide TFF with copies of any such insurance policies. 4 2.12 Upon TFF's written request, TFF Dealer shall provide TFF with copies of any and all financial statements of TFF Dealer on an unaudited basis (or audited, if available), as well as any other reasonable information requested by TFF, including but not limited to TFF Dealer's compliance with its commitment to employing certified technicians and maintaining its authorized dealerships with the product manufacturers, as described in Section 2.5 above. 3.3 An example of a Rental Fee computation, as hereinafter provided, is attached as Schedule 11. The following words and terms, when used in this Agreement, shall have the following meanings: (a) The term Rental Fee shall mean an amount equal to the Equivalent Sales Price. (b) The term Equivalent Sales Price shall mean the monthly lease before sales tax stated in the lease agreement with the customer divided by the monthly rental factor as listed on Schedule 1-A, 1-B, 1-C attached hereto, which factor varies depending upon the term of the lease agreement. 3.4 Within three business days after receipt by TFF of (a) the signed lease agreement, (b) any applicable upfront monthly lease payments, (c) signed delivery and acceptance, (d) itemized invoice referred to in Section 2.2 above, (e) verbal confirmation by customer as to the validity of the delivery and acceptance, and (f)lease funding from TFF's funding source, TFF shall pay TFF Dealer the Rental Fee on any given transaction. 5 3.5 TFF shall pay TFF Dealer a recurrent maintenance fee equal to: 10% (Schedule 1-B) of the monthly lease payment (before applicable sales taxes) collected under each lease agreement. No recurrent maintenance fee shall be due until 10 business days after the end of the first calendar quarter in which the delivery and acceptance was signed by the lease customer. The recurrent maintenance fee shall be paid each quarter thereafter within 10 business days of each such quarter. 4. Non Disclosure and Non Circumvention 4.1 TFF Dealer agrees that during the term of this Agreement and thereafter, TFF Dealer will not, directly or indirectly, disclose to any third party, or use or authorize any third party to us, any information relating to the organization, structure, contract, method of marketing, method of financing, financing terms, rebate terms or related matters concerning TFF's lease program all of which TFF Dealer hereby acknowledges as confidential and valuable to TFF. 4.2 During the term of the Agreement and thereafter, TFF Dealer shall not deal directly or indirectly with any TFF's lease funding sources as to the subject matter of this Agreement or any matter relating to the subject matter of the Agreement. TFF acknowledges that TFF Dealer may, at the time of execution of this Agreement, have its own traditional third party lease program with one or more of TFF's lease funding sources which existing relationships, to the extent they exist, shall be exempt from the covenants of the foregoing sentence only as to traditional third party lease arrangements but not as to the structure of TFF's leasing program. 4.3 During the term of this Agreement, TFF Dealer shall not, directly or indirectly, whether as an individual office, director, shareholder, partner, employee, agent, representative, consultant or otherwise, become or be interested in, or associated with, any other person, corporation, firm, partnership or other entity whatsoever engaged in the business promoted by TFF or in connection herewith. 6 4.4 TFF Dealer hereby acknowledges that any violation of Sections 4.1, 4.2, or 4.3 will cause damage to TFF in an amount or amounts difficult to ascertain. Accordingly, notwithstanding Section 8 below, TFF shall be entitled to temporary and / or permanent injunctive relief for any breach or threatened breach by TFF Dealer of the terms of Sections 4.1, 4.2, 4.3 above without proof of actual damages that have been or may be caused to TFF by such breach. 5. Performance Bonus. In the event TFF (or an assignee of all the rights and obligations hereunder) voluntarily sells its leasing related business or, makes an initial public offering regarding its leasing related business, whichever first occurs (the Event), TFF will distribute a Performance Bonus to Dealer provided the total Equivalent Sales Prices (as defined in Section 3.3 (b) hereof and as sometimes referred to as ESP) for TFF Dealer's leasing customers under TFF's program are at least $100,000 at the time of such distribution. The Performance Bonus shall be equivalent fifteen percent (15%) of the consideration attributable to the Event and further allocable to TFF Dealer's leasing customers under the TFF program. For example, assuming at the time of such distribution TFF Dealer is determined to have done 10% of TFF's total leasing related business and assuming the consideration attributable to the Event is $5,000,000 then the amount of the Performance Bonus for TFF Dealer would be equivalent to $75,000 ($5,000,000 X 15% X 10). Any distribution of a Performance Bonus by TFF Dealer shall be subject to any and all reasonable restrictions and methods of calculation placed upon such distribution by TFF and / or its outside financial or legal advisors at the time, and shall also be subject to all state and federal securities laws in effect at the time of distribution to the extent any portion of the Performance Bonus is comprised of TFF stock. TFF Dealer hereby recognizes and acknowledges that it is very difficult to predict if and when an Event may occur; that this is an area of speculation; that TFF Dealer has the expertise or can obtain the expertise to make its own evaluation of the likelihood and timing of an Event; that the TFF Dealer is not relying on TFF, or any of its employees, officers, directors, shareholders or agents to make any such evaluation; and that the likely occurrence of an Event within the reasonably foreseeable future is not a material inducement for TFF Dealer to enter into a contractual relationship with TFF. TFF Dealer shall be responsible for any and all taxes, charges or the like that may be levied with respect to the distribution of any Performance Bonus. 7 6. Default. If any party is in default under any provision (including any promise or covenant contained herein) of this Agreement for more than 10 calendar days for any reason, the non defaulting party of such default and the defaulting party shall have 10 calendar days from receipt of such notice to cure such default. If the default is not cured within the 10 day period, or for a default which cannot be cured within the 10 day period, a good faith effort is not begun within the 10 day period and diligently and consistently pursued to cure such default, the non defaulting party shall have the right to terminate this Agreement without further notice. TFF's right to termination shall include but not be limited to the replacement of TFF Dealer with another service and maintenance company. 7. Force Majeure. Neither party shall be liable for its failure to perform due to contingencies beyond its reasonable control or beyond reasonable foreseeability including, but not limited to, strikes or other labor disturbances, riots, wars, fires, acts of God, the inability to obtain equipment or materials through no fault of the party unable to so obtain equipment or materials, or acts in compliance with any law, regulation or order, whether valid or invalid, of the United States of America or any other governmental body or sovereign thereof. 8. Governing Law / Venue / Arbitration. This Agreement shall be governed by the laws of the state of California. VENUE FOR ANY DISPUTE ARISING OUT OF OR RELATING TO THE AGREEMENT (CONTRACT, TORT OR OTHERWISE) SHALL BE IN ORANGE COUNTY, CALIFORNIA. IN THE EVENT OF ANY DISPUTE ARISING OUT OF OR RELATING TO THE AGREEMENT CONTRACT, TORT OR OTHERWISE) BETWEEN TFF (INCLUDING ANY OF ITS SHAREHOLDERS, DIRECTORS, OFFICERS, EMPLOYEES OR THE LIKE) AND TFF DEALER (INCLUDING ANY OF ITS SHAREHOLDERS, DIRECTORS, OFFICERS, EMPLOYEES OR THE LIKE), TFF AND TFF DEALER AGREE TO SUBMIT SUCH DISPUTE TO THE EXCLUSIVE AND BINDING JURISDICTION OF THE AMERICAN ARBITRATION ASSOCIATION IN ORANGE COUNTY, 8 CALIFORNIA. TFF AND TFF DEALER AGREE TO BE BOUND BY ANY DECISION ISSUED BY SUCH ASSOCIATION AND EACH PARTY HEREBY WAIVES ANY AND ALL RIGHTS TO A JURY TRIAL OR TO PURSUE ANY LEGAL REMEDY THROUGH ANY FORUM OTHER THAN THE AMERICAN ARBITRATION ASSOCIATION. TFF and TFF Dealer shall each be responsible for its own initial attorney's fees and costs in connection with any proceeding before such association; however, the prevailing party in such action shall be awarded, in addition to any damages, injunctions, or other relief, its cost and expenses, including reasonable attorney's fees. 9. Notices. Any notice, request, demand or other communication give pursuant to the terms of this Agreement shall be deemed given upon delivery, if hand delivered, or 3 days after deposit in the United States mail, postage prepaid, and sent certified or registered mail, return receipt requested, addressed to the addresses of the party being notified or at such other address as such party shall in writing have advised the other party. Notices shall be sent to: Tech Flex Funding, Inc. 27285 Las Ramblas, Suite 280 Mission Viejo, CA 92691 Attention: Larney Fowler Tel:949-367-1552 Fax:949-367-9791 Attention Martin Senn, COO ------------------------------------------- Tel: (801) 521-2808 / (435) 615-8338 ------------------------------------------- Fax: (801) 521-2844 ------------------------------------------- 10. Assignability. This Agreement shall be binding upon and shall inure to the benefit of the successors and permitted assignees. Neither party may assign this Agreement, or any part of it, without the prior written consent of the other party which consent shall not be unreasonably withheld; however, TFF may withhold its consent unreasonably to any request to assign this Agreement to another service company. 9 11. Entire Agreement / Amendment. This Agreement contains the entire understanding of the parties concerning the subject matter hereof and supersedes all prior or existing agreements, verbal or written, concerning the subject matter hereof. This Agreement may only be amended by the mutual written consent of both parties. 12. Negotiation / Counsel. This Agreement was freely negotiated by both parties. Each party had access to legal counsel in the negotiation and preparation of this Agreement to the extent so desired by each party. 13. Miscellaneous. This Agreement may be executed in any number of counterparts (including facsimile copies), each of which shall be an original, and all of which together shall constitute one and the same instrument. The waiver of any party of any breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by any party. Each party warrant and represent that the execution, delivery and performance of this Agreement have been duly authorized and that no further action is necessary to make this Agreement valid and binding upon them and legally enforceable against them. In WITNESS WHEREOF, the parties have executed this Agreement in the place and on the date written next to each party's name. Executed at: Tech Flex Funding, Inc. ----------------------- ----------------------- Larney Fowler On: ____________ , 200_ Its: EVP & General Counsel Executed at: TFF Dealer Salt Lake City, UT. /s/ Larry R. McNeill ----------------------- ----------------------- Larry R. McNeill On: May 11, 2001 Its: CFO ----------------------- ----------------------- 10 EX-10.17 12 ex10no17.txt VIATOR VAR AGREE VIATOR NETWORKS VALUE ADDED RESELLER AGREEMENT This agreement ("Agreement") is made between Viator Networks, Inc., a corporation duly organized and existing under the laws of the State of Delaware, ("Viator Networks") and Videolocity, Inc., an organization having its principal place of business at 1762A Prospector Avenue, Park City, UT 84060 ("VAR"). W I T N E S S E T H ------------------- WHEREAS, Viator is in the business of providing the Egress(TM) product and service suite as more particularly described in Attachment A (the "Product") to the hospitality and multi-tenant unit markets for high-speed Internet connectivity pursuant to this Agreement; and WHEREAS, VAR desires to license the Product from Viator and sublicense the Product in conjunction with VAR's own product, as more particularly described in Attachment (the "Enhanced Product"), to Enduser(s) and Distributor(s), as these terms are more fully defined in Article I, below, in accordance with the terms and conditions of this Agreement. NOW, THEREFORE, in consideration hereof and the mutual promises and covenants herein set forth, and intending to be legally bound by this Agreement, the parties do hereby agree as follows: Article I - Definitions 1.1 Definitions. For purposes of this Agreement, the following definitions will apply: (a) "Product" shall mean Viator's hardware and software as more particularly described in Attachment A. (b) "Enhanced Product" shall mean the Product together with the product(s) and/or service(s) of VAR as more particularly described in Attachment A. (c) "Enduser(s)" shall mean purchaser(s) of licenses from VAR or Distributor(s) to use the Enhanced Product for their own use, not with the intent for resale thereof by said Enduser(s). (d) "Distributor(s)" shall mean a third party selected by VAR to distribute the Enhanced Product to Enduser(s). (e) "Effective Date" shall mean the latest date Viator or VAR signed this Agreement. (f) "Territory" shall have the meaning given to such term in Attachment A. (g) "Term" of this agreement shall be as stated in Article 17.1. Article 2 - VAR Appointment 2.1 Appointments. Subject to the terms and conditions in this Agreement, Viator Networks hereby appoints VAR as a value added reseller to promote, market and sell the Products in the Territory during the Term. 2.2 Sales Efforts. During the Term, VAR shall use its commercially reasonable efforts to promote, market and sell the Products in the Territory during the Terms. Without the prior written consent of Viator Networks, VAR shall not directly or indirectly (i) solicit sales of the 1 Products outside of the Territory, or (ii) sell to any person which VAR understands or reasonably expects will resell the Products. 2.3 No Limit on Price. Although Viator Networks may from time to time publish suggested end-user list prices for the Products, VAR has the unrestricted right to unilaterally determine the prices at which it resells the Products which it purchases hereunder. No Viator representative has the authority to require or suggest that VAR charge a particular resale price for the Products which it purchases hereunder. 2.4 Non-Exclusive Right. VAR's right to resell the Products shall be non-exclusive and Viator shall continue to have the right to promote, market and sell the Products in the Territory and elsewhere, and any other products which are similar and/or competitive with the Products, through any other means, including but not limited to directly, through other resellers, distributors and/or through any agent or representative. 2.5 Compliance with Authorization and Certification Requirements. VAR's right to remain a value added reseller hereunder or to sell various Products or Product lines shall be subject to VAR's continuing compliance with the authorization and certification requirements set forth in Attachment B, as amended from time to time by Viator on notice to VAR. If VAR fails to maintain compliance with such requirements as then in effect, then Viator may terminate this Agreement in accordance with Article 17.3 or terminate VAR's right to sell certain Products, as appropriate. Article 3 - Terms of Purchase of Products by VAR 3.1 Terms and Conditions. All purchases of Products by VAR from Viator during the term of this Agreement shall be subject to the terms and conditions of this Agreement. 3.2 Prices. All prices are F.O.B. Viator's plant currently located at the address listed for Viator at the beginning of this Agreement. The purchase price to VAR for each of the Products ("Purchase Price") shall be as set forth in the VAR Price List. The difference between VAR's Purchase Price and VAR's selling price to its customers shall be VAR's sole remuneration for sale of the Products. Viator has the right at any time to revise the prices in the VAR Price List with thirty (30) days advance written notice to VAR. Such revisions shall apply to all orders received after the effective date of revision. 3.3 Price Protection. In the event of a price increase, Viator will honor orders or portions thereof already accepted and acknowledged by Viator at the prices in effect previous to the effective date of the price increase and orders scheduled by Viator for delivery within thirty (30) days after the effective date of the price increase. Orders scheduled by Viator for delivery after (30) days from effective date of the price increase shall automatically be adjusted by Viator. After the effective date of the price increase, orders will be accepted at the increased price. In the event of a price reduction, unshipped orders already scheduled by Viator for product affected by the price reduction shall be automatically adjusted by Viator to reflect the price decrease. Viator will provide VAR with written notice of any decrease no later than fifteen (15) days after the effective date of such decrease. Product in transit and product in VAR's inventory purchased not more than sixty (60) days prior to the effective date of such price decrease shall be subject to the price reduction; provided, however that : (A) VAR applies in writing to Viator for the price reduction within sixty (60) days after the effective date of the announced price reduction and (B)VAR forwards an inventory report to Viator that indicates model and quantity of inventory in stock. Viator reserves the right to verify the inventory report and conduct and audit of VAR's inventory. Viator shall issue a credit for the price reduction to VAR within thirty (30)days after receipt and verification of VAR inventory report. The credit shall be equal to the difference between the price at the time of the sale of the Product to VAR and the new reduced price. Viator shall have no obligations pursuant to this Article 3.3 unless VAR has timely performed all of its obligations pursuant to Article 6.1(a) hereof during the previous six months. 2 3.4 Taxes. VAR agrees to report and pay all taxes, customs, duties and assessments imposed on VAR or Viator in connection with the distribution and sale of Viator product hereunder including any sales, use, excise, and other taxes and duties, except for taxes imposed on Viator income. To the extent that Viator is required by status or regulation to collect and report taxes, duties, customs, or any other costs to various authorities (both foreign and domestic), such taxes, duties, customs, or any other costs will be billed directly to VAR. 3.5 Order and Acceptance. All orders for Products submitted by VAR shall be initiated by written purchase orders sent to Viator and requesting a delivery date during the term of this Agreement; provided, however, that an order may initially be placed orally if a confirmational written purchase order is received by Viator within five (5) days after said oral order. No order shall be binding upon Viator until accepted by Viator in writing, or by shipping product in accordance with the order. Professional Service orders are to be accompanied by a non-refundable payment of 50% (fifty percent) of the cost of the services to be provided Product orders should be accompanied by either full payment, or a 25% (twenty five percent) non-refundable pre-payment with the balance due at time of shipment. Viator will use reasonable efforts to notify VAR of the acceptance of an order within five (5) business days of its receipt of an order, or at Viator's sole discretion, deliver the ordered products. Viator shall use its reasonable best efforts to deliver Products at the times specified either in its quotation or in its written acceptance of VAR's purchase orders. However, Viator shall not be liable for any damages resulting from its failure to meet such shipment dates, even if Viator has been advised of the possibility of such damages. partial shipments may be made upon written approval of VAR. No partial shipment of an order shall constitute the acceptance of the entire order, absent the written acceptance of such order. 3.6 Purchase Orders Terms. VAR's purchase orders submitted to Viator from time with respect to Products to be purchased hereunder shall be governed by the terms of this Agreement, and nothing contained in any such purchase order shall in any way modify such terms of purchase or add any additional terms or conditions. 3.7 Payment. For the initial order full payment of VAR's Purchase Price for the Product (including any freight, taxes or other applicable costs initially paid by Viator but to be borne by VAR) shall be due prior to product shipment. Future payment terms and conditions will be negotiated. Payment shall be made by wire transfer, check, or other instrument approved by Viator, payable in U.S. Dollars. Any invoiced amount not paid when due shall be subject to a service charge of one and one-half percent (1.5%) per month and Viator, at its option, may revoke any previously granted terms of credit. Except for credits issued under Article 3.3 or 9, VAR agrees to no rights of set off for amounts it owes for particular Products against amounts owed to it by Viator. Viator may withhold or suspend its performance under this Agreement in the event that VAR fails to make timely payments of outstanding invoices. VAR shall pay all of Viator costs and expenses (including reasonable attorneys' fees) to enforce and preserve Viator rights under this Subsection 3.8. 3.8 Shipping. All Products delivered pursuant to the terms of this Agreement shall be suitably packed for air freight shipment in Viator standard shipping cartons, marked for shipment at VAR's address set forth above, and delivered to VAR or its carrier agent F.O.B. Viator manufacturing plant or warehouse, at which time title to such Products and risk of loss shall pass to VAR. Unless otherwise instructed in writing by VAR, Viator shall select the carrier. All freight, insurance, and other shipping expenses, as well as any special packing expense, for shipments to VAR shall be paid by VAR. All freight, insurance, and other shipping expenses, as well as any other special packing expenses for defective goods or those returned under warranty shall be paid by Viator. VAR also agrees that no delivery pursuant to this Agreement shall be construed as a single lot contract under the Uniform Commercial Code. In addition, remedies provided under a single lot contract shall not apply to any shipment under the agreement. 3.9 Product Acceptance. VAR shall be deemed to have accepted delivery of Viator Products, unless rejected upon inspection at the time of delivery. The reason for rejection must be submitted in writing to Viator within thirty (30) business days from the date of delivery (Rejection Period). VAR agrees that its remedies are limited to the 3 remedies contained in the warranty provisions of this Agreement under articles 8 (Warranty and Disclaimer), and 9 (Rejection and Warranty Procedures). 3.10 Return of Products after Rejection Period. After the Rejection Period, VAR may not return a Product to Viator for any reason without Viator's prior written consent. For any Product for which Viator gives such consent, Viator may charge VAR a restocking fee equal to ten percent (10%) of VAR's Purchase Price for that Product and shall credit the balance of the Purchase Price to VAR's account. VAR shall be responsible for all shipping charges. 3.11 Product Changes. Viator shall have the right, in its absolute discretion, without liability to VAR, to change the design or to discontinue the manufacture or sale of any Product covered by this Agreement. Viator shall attempt to notify VAR at least thirty (30) days prior to the delivery of any Product which incorporates a change in design that shall, in Viator's reasonable opinion, affect the marketability of any Product in VAR's inventory. Viator shall also endeavor to notify VAR at least thirty (30) days prior to the discontinuance of manufacture of any Product. Viator, however, shall not incur any liability to VAR for its failure to so notify VAR. Article 4 - Grant and Acceptance of License 4.1 Grant of License. Subject to the provisions contained in this Agreement, Viator hereby grants to VAR and VAR hereby accepts a non-exclusive, non-transferable license: (a) to use and copy the Product solely for purposes of demonstrating the Product to potential Distributor(s) and Enduser(s), and incorporating the Product without modification, enhancement, derivation into the Enhanced Product; and (b) to sublicense the Product, as incorporated in the Enhanced Product, to Enduser(s), and Distributor(s) pursuant to Article 5 below. 4.2 Restrictions on VAR. VAR shall use the Product only for the purpose set forth in Article 4.1 above. Without limiting the generality of the foregoing, VAR expressly agrees that it shall not: (a) permit others to disassemble, decompile or otherwise modify or prepare derivative works of Product; or (b) allow Enduser(s) to resell or lease the Product or a derivation of the Product or to resell (part of the) Data or Services that are derived from the Product; or (c) use any Viator Products described in Attachment A, to create new Enhanced Products, other products or derivations thereof, other than those delineated explicitly in Attachment A, without the prior written consent from Viator; or (d) use Product or allow others to use Product in any manner that infringes the intellectual property or other rights of Viator or another party or non-party; or (e) use Product in an on-line database system, without the prior written consent of Viator; or (f) export Product to any country in contravention of any law of the United States or any other country, including the Export Administration Act and regulations relating thereto. (g) disassemble, decompile or otherwise modify Product in anyway, without the prior written consent from Viator. 4.3 Obligations of VAR. As a condition to Viator's obligations under this Agreement, VAR shall at all times: (a) promptly notify Viator of any change in ownership of VAR, or any sale or transfer of any substantial portion of its property or assets; and (b) represent, display and demonstrate the Product, as incorporated in the Enhanced Product, prominently and fairly at all times in comparison with other competitive products; and 4 (c) display the Viator logo and copyright notice pursuant to Article 15.2 on all collateral, advertisements, and product packaging of the Enhanced Product where the Product is included as a part of the Enhanced Product. The Viator logo will be provided to VAR by Viator within ten (10) days upon request by VAR in a mutually agreed upon industry standard format; and (d) protect the product in the Enhanced Product in a technical sense, in order to avoid the possibility of decompiling and retrieving the Product by third parties; (e) refrain from making any knowingly false or misleading statements, claims or representatiions with respect to Viator or the Product; and (f) conduct its business in such a way so as not to damage the valuable reputation of Viator; and 4.4 Obligations of Viator. As a condition of VAR's obligations under this Agreement, Viator shall at all times: (a) reasonably devote its best efforts, to develop and maintain the Product and the accuracy and desirability of its contents and features; and (b) conduct its business in such a way so as not to damage the valuable reputation of VAR; and (c) refrain from making any knowingly false or misleading claims or representations with respect to the Product, the VAR or the Enhanced Product. Article 5 - Sublicense to Enduser(s) 5.1 Sublicenses by VAR. Sublicenses to Enduser(s) granted by VAR pursuant to Article 4.1(b), herein above, shall include the Restrictions on License as set forth in Article 4.2(a) and (b) of this Agreement. Sublicenses to Distributor(s), granted under Article 4.1 (b), hereof, requires compliance by said Distributor of provisions entitled "Restrictions on VAR," Article 4.2, and "Obligations of VAR," Article 4.3, hereof. Distributor may not make any changes in the Product except as is mutually agreed upon in writing by both Viator and VAR. VAR shall and hereby agrees to require Enduser(s) and Distributor(s) to comply with the terms of this paragraph, Article 5.1. 5.2 Enforcement of Restrictions. VAR shall aggressively enforce the restrictions contained in this Agreement at VAR's sole expense and promptly notify Viator when VAR acquires actual knowledge of any violations of such restrictions by Enduser(s) or Distributor(s). If Viator wishes to commence proceedings against the infringer of Viator's (property) rights, VAR shall undertake its best efforts to assist Viator. Article 6 - VAR's Obligations 6.1 VAR shall: (a) Furnish Viator, upon request by Viator from time to time, a rolling three (3) month forecast of VAR's projected requirements for each customer by month in electronic (machine readable) format. The format and content of such forecast will be as set forth in Attachment C hereto, as such schedule may be modified from time to time by Viator. (b) Not remove, obscure or modify any label or other indication of copyright or other intellectual property rights on the Products. (c) Agree to the terms and conditions of any software license or product warranty terms enclosed with the Products. (d) Not sell Products other than in original, unmodified, unused condition, except that the unmodified Products may be bundled or packaged with other goods to comprise a system. 6.2 Software. VAR acknowledges that all software Products or Products, which include software, are proprietary to Viator or its licensors and are subject to copyrights and trade secrets owned by Viator or its licensors. All references in this Agreement to "purchases," "sales," or 5 words of similar import, of software Products or Products which include software signify only the acquisition of a license for VAR to transfer such software to its end-users in accordance with the terms of this Agreement. 6.3 Suitability. VAR hereby understands that it is solely responsible for determining the suitability of Products for the purpose for which Products are purchased or sold by VAR. 6.4 Hardware. VAR acknowledges it is solely responsible for ensuring that the network in which the Products are installed is in good working order and that any third-party hardware connected to the Products have passed Viator interoperability tests and are properly installed and configured according to the manufacturer's specifications and instructions. 6.5 Network Reliability. VAR acknowledges that it is solely responsible for all technical issues related to third-party hardware (including property management systems and network switches, DSL concentrators and the like), network design and configuration, and for the reliability of the network in which the Products are installed and it is solely responsible for any issues or problems that may adversely affect the performance or features of the Products. Viator may, at its sole discretion, assist in the determination of the problem. 6.6 Technical Support. Provision of end-user technical support is the sole responsibility of the VAR. VAR shall provide 24-hour technical support to end-users through its own employees, under contract with a professional technical support or help desk provider, or under contract through Viator. At no time shall any end-user be without access to technical support. Technical support fees for service contracted through Viator are indicated on Attachment A. 6.7 Limitation on VAR's Rights to the Products. VAR shall have no access to, or rights in, the source codes of any software included in the Products. VAR shall have no right to copy, modify or remanufacture any Product or part thereof, nor reproduce any written material supplied by Viator without the explicit written consent of Viator. Article 7 - Viator Obligations 7.1 Viator shall: (a) Provide VAR with sales support through its national and field sales offices and affiliated companies; (b) Allow VAR to participate in such cooperative marketing programs and other sales incentive programs as Viator may make generally available to similarly situated resellers of Products; provided, however, that Viator reserves the right to alter or eliminate any such cooperative marketing programs or other sales incentive programs at any time; and, (c) Furnish VAR with a reasonable quantity of its standard sales promotion literature, such as brochures and specification sheets; provided that Viator reserves the right to charge VAR if it requests large quantities of such materials. 7.2 Services by Viator. Additional customer service and technical support is available by phone in the United States at (877) 468-3546, or via email at support@viatornetworks.com. Extended warranty, contract service, repair and other services are available for purchase at Viator published standard rates. 6 Article 8 - Warranties and Disclaimer (a) Limited Warranty. Viator warrants that it owns or has the full right and authority to license the Product and agrees that the Product is delivered on an "as is" basis and should not be considered as error free. VAR will determine within sixty (60) days of initial delivery of the Product and thirty (30) days thereafter following delivery of any updates, whether the information carrier on which the Product or update is delivered contains major defects. Viator's sole liability and VAR's sole remedy with respect to defective Products is limited to the replacement or repair of the defective information carrier, provided that: (i) End-user complies with the rejection and warranty procedures herein and returns the Viator Product that the end-user considers defective for examination and testing. (ii) Viator shall not be liable under this warranty if testing and examination by Viator discloses that the Viator Product has been modified or altered in any manner after it was shipped by Viator. (iii) Viator shall not be liable under this warranty if testing and examination by Viator discloses that the alleged defect in the Viator Product does not exist or was caused by end-user or any third person's misuse, neglect, improper installation or testing, unauthorized attempts to repair or any other cause beyond the range of intended user, or by accident, fire or other hazard. (iv) Viator shall not be liable under any warranty under this Agreement with respect to any Viator Product that is not returned in its original shipping container or a functionally equivalent container. (a) Viator shall so advise VAR and dispose of such Viator Product in accordance with VAR's instructions on behalf of end-user and at VAR's cost; and (b) AR shall reimburse Viator for its expense in testing and examining such Viator Product calculated at Viator standard rates. (vi) Disclaimer of Warranties. VIATOR DISCLAIMS ANY AND ALL OTHER WARRANTIES EXCEPT THOSE EXPRESSLY STATED IN THIS ARTICLE 8, EXPRESS OR IMPLIED REGARDING THE PRODUCT INCLUDING, BUT NOT LIMITED TO, ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 8.2 By VAR: (a) Indemnification. VAR agrees to indemnify Viator and hold Viator harmless from and against any and all claims, losses, liabilities damages, expenses and costs (including reasonable attorney fees and court costs) which result from any claims based on misrepresentations made by VAR regarding the Product or the Enhanced Product. Additionally, VAR agrees to indemnify Viator and hold Viator harmless from any claim that the Product or the Enhanced Product infringes any patent, copyright, trademark or other proprietary right of any third party or misappropriates any trade secret of a third party that is based on VAR's misrepresentation of the Product or Enhanced Product. Further, VAR shall indemnify and hold harmless Viator from and against any loss, liability, cost or expense (including reasonable attorney fees and courts costs), which result from any claim by any person based upon (i) any willful misconduct or negligence of VAR, its employees or agents, (ii) the breach by VAR of any of its obligations under this Agreement or the Sublicense Agreement, or (iii) any defect in the Enhanced Product. Article 9 - Rejection and Warranty Procedures 9.1 In the event of rejection of Viator Product within the Rejection Period or a Viator Product fails to perform as warranted within the Warranty Period, VAR or end-user, as relevant, will give notice to Viator or VAR, respectively, within the relevant limitation period, which notice will request a Return Material Authorization ("RMA") number. Viator will provide the RMA number to VAR within five (5) days after the giving of notice and the request. Within thirty (30) days after its receipt of the RMA number, VAR or end-user will return to Viator or its designee the rejected or defective Viator Product, freight or postage prepaid in the original shipping carton or a functionally equivalent container. Viator reserves the right to refuse to accept any rejected or defective Viator Product not bearing an RMA number on the outside of the carton and/or documentation accompanying the shipment such as packing slips. If the Viator Product is determined to be defective in accordance with Article 8 (Warranty and Disclaimer), Viator will, at 7 its sole option and expense, either repair, replace the Viator Product and ship it in accordance with VAR's instruction, to VAR or end-user, or credit to VAR an amount not to exceed the VAR's purchase price of each good found to be defective. Viator will use all reasonable efforts to ship the repaired or replaced Viator Product within thirty (30) days of its receipt of such Viator Product. Article 10 - Intellectual Property Infringement 10.1 Intellectual Property Infringement. Viator Networks will defend, at its own expense, any claim, suit, or proceeding brought against VAR to the extent it was based upon a claim that any product under normal use sold pursuant to this Agreement infringes upon any presently issued U.S. patent or any copyright, or misappropriates any trade secret, of any third party. VAR agrees that it shall promptly notify Viator Networks in writing of any such claim or action and give Viator Networks full information and assistance in connection therewith. Viator networks shall have the sole right to control the defense of any such claim or action and the sole right to settle or compromise any such claim or action. If VAR complies with the provisions hereof, Viator Networks will pay all damages, costs and expenses finally awarded to third parties against VAR in such action. If a Product is, or in Viator Networks opinion might be, held to infringe as set forth above Viator Networks may, at its option replace or modify such Product so as to avoid infringement, or procure the right for VAR to continue the use and resale of such Product. If neither of such alternatives is, in Viator Networks opinion, commercially reasonable, the infringing Product shall be returned to Viator Networks and Viator Networks sole liability, in addition to its obligation to reimburse awarded damages, costs and expenses as set forth above, shall be to refund the amounts paid for such Products less depreciation measured equally over a sixty (60) month period from the date of purchase by VAR. 10.2 Limitations. Viator will have no liability for any claim of infringement arising as a result of VAR's use or sale of a Product in combination with any items not supplied by Viator Networks, Inc., any modification of a Product by VAR or third parties, or the failure to use the latest version of any software provided for such Product if infringement would have been avoided with such use. 10.3 Entire Liability. THE FOREGOING CONSTITUTES VIATOR'S SOLE AND EXCLUSIVE LIABILITY FOR INTELLECTUAL PROPERTY INFRINGEMENT. Article 11 - Ownership, Confidentiality 11.1 Ownership. VAR acknowledges that Viator is the owner of all rights, titles and interests including, without limitation, copyrights and other intellectual property rights in and to the Product. VAR acknowledges that the Product is a valuable asset of Viator, and VAR agrees to abide by the restrictions set forth in this Agreement and by applicable Copyright law, in any and all uses of the Product by VAR. 11.2 Terms of Agreement. Viator and VAR and their respective employees and agents shall not disclose the terms and conditions of this agreement to any third party unless required to do so by a court of competent jurisdiction, and only after prior written notice to the other party. 11.3 Confidential and Proprietary Information. Viator, VAR and their respective employees and agents shall hold in confidence all confidential and proprietary information of the other which is disclosed to each party in connection with this Agreement and the transactions contemplated hereby, and which is so designated in writing by the disclosing party including, without limitation, information concerning Enduser(s) and prospective Enduser(s), and financial and technical information. The provisions of this Article 11.3 shall survive the termination of this Agreement. Each party shall use reasonable diligence, and in no event less than the degree of care which such party uses in respect to its own confidential and proprietary information or other information of like nature, to prevent the unauthorized disclosure or reproduction of such information. Confidential and proprietary information shall exclude: 8 (a) information in the public domain; and (b) information known to the recipient party as of the Effective Date, unless the recipient party agreed to keep such information in confidence at the time of its receipt; and (c) information hereafter obtained by the recipient party from a source not under an obligation of confidentiality to the other party. Article 12 - Support and Maintenance 12.1 Support and Maintenance. Viator agrees to provide the following support and maintenance of its Product during the term of this Agreement. However, if VAR is in default or has otherwise breached this Agreement, Viator shall have no obligation for Support and Maintenance, hereunder. VAR shall promptly give Viator written notice and any documentation of discovered defects and, thereafter, shall provide such additional information as Viator may reasonably request. Viator shall: (a) use its best efforts to promptly correct major defects that are discovered by VAR in the Product, provided that Viator can replicate the alleged defect; and (b) correct minor or ordinary defects by the next general commercial release of the Product. Viator's obligations to provide corrections to the Product shall immediately terminate in the event that VAR materially misuses the Product and fails to correct or undertake a plan to correct within ten (10) days after written notice specifying the misuse. Article 13 - Limitations on Liability and Remedies 13.1 GENERAL LIMITATION OF LIABILITY CONCERNING PRODUCT. VIATOR, AND ANY COMPANY AFFILIATED WITH VIATOR, OR ANY OFFICER DIRECTOR EMPLOYEE, AGENT, SUBCONTRACTOR, SUCCESSOR OR ASSIGN OF VIATOR OR ANY SUCH COMPANY SHALL NOT BE LIABLE TO VAR FOR ANY LOSS, INJURY, CLAIM, LIABILITY OR DAMAGE RESULTING FROM OR CONNECTED WITH (A) INACCURACY OF THE PRODUCT, (B) ANY ERRORS OR OMISSIONS IN PRODUCT, OR (C) THE USE OF PRODUCT, EVEN WHERE THE CLAIM, LIABILITY OR DAMAGE RESULTING FROM ANY OF THE FOREGOING IS CAUSED IN WHOLE OR IN PART BY VIATOR AND REGARDLESS OF WHETHER SUCH CLAIM OR LIABILITY ARISES IN CONTRACT (INCLUDING BREACH OF WARRANTY), TORT (INCLUDING STRICT LIABILITY), INTELLECTUAL PROPERTY INFRINGEMENT, INDEMNITY OR OTHERWISE. 13.2 DOLLAR LIMITATION OF LIABILITY OF VIATOR. IF THE LIMITATIONS OF LIABILITY SET FORTH IN ARTICLE 8.1 OR ELSEWHERE IN THIS AGREEMENT OR ANY LIMITED REMEDY ARE HELD TO BE UNENFORCEABLE, OR IN THE ABSENCE OF A LIMITED REMEDY OR LIMITATION OF LIABILITY, THE LIABILITY OF VIATOR AND ANY COMPANY AFFILIATED WITH VIATOR, OR ANY OFFICER, DIRECTOR, EMPLOYEE, AGENT, SUBCONTRACTOR, SUCCESSOR OR ASSIGN OF VIATOR OR ANY SUCH COMPANY, TO VAR FOR DAMAGES OR ALLEGED DAMAGES, WHETHER IN CONTRACT (INCLUDING BREACH OF WARRANTY), TORT (INCLUDING STRICT LIABILITY), INTELLECTUAL PROPERTY INFRINGEMENT, INDEMNITY OR OTHERWISE, RELATED TO THIS AGREEMENT SHALL NOT EXCEED THE AMOUNTS RECEIVED BY VIATOR FROM VAR DURING THE TWELVE MONTHS PRECEDING THE ACTS GIVING RISE TO THE DAMAGES. 13.3 CONSEQUENTIAL AND PUNITIVE DAMAGE LIMITATION. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY EXEMPLARY, PUNITIVE, INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL (INCLUDING LOST PROFITS) DAMAGES ARISING FROM OR IN ANY WAY CONNECTED WITH ITS PERFORMANCE OR FAILURE TO PERFORM UNDER THIS AGREEMENT, WHETHER IN CONTRACT (INCLUDING BREACH OF WARRANTY), TORT (INCLUDING STRICT LIABILITY AND NEGLIGENCE), INTELLECTUAL PROPERTY INFRINGEMENT, INDEMNITY OR OTHERWISE, EVEN IF SUCH PARTY HAS KNOWLEDGE OF THE POSSIBILITY OF SUCH DAMAGES. 9 13.4 Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, other than any controversy or claim relating to either party's confidentiality obligations under this Agreement, shall be settled by binding arbitration conducted before a single arbitrator, pursuant to the rules of the American Arbitration Association (AAA), who is knowledgeable in the field of law as it pertains to computer software and databases. If the parties are unable to agree to one arbitrator, such arbitrator shall be selected by the AAA. the site of any such arbitration will be Alexandria, Virginia, U.S.A. any judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Each party will bear its own costs and expenses, including fees and expenses of counsel, associated with the arbitration. The arbitrator shall not be entitled to award punitive damages to either Party. 13.5 SOLE AND EXCLUSIVE REMEDIES. THE LIMITED REMEDIES OF THE PARTIES SET FORTH IN THIS AGREEMENT ARE THE SOLE AND EXCLUSIVE REMEDIES OF A PARTY AGAINST THE OTHER PARTY. Article 14 - Import and Export Controls 15.1 Regulations. VAR understands and acknowledges that Viator is subject to regulation by agencies of the United States government including, without limitation the U.S. Department of Commerce, which agency prohibits export or diversion of certain products and technology to certain countries. Any and all obligations of Viator to provide Viator Products as well as any technical assistance will be subject in all respects to such United States laws and regulations as from time to time govern the delivery and license of technology and products abroad by persons subject to the jurisdiction of the United States including, without limitation, the Export Administration Act of 1979, as amended, any successor legislation and the Export Administration Regulations issued by the Department of Commerce, Bureau of Export Administration. VAR agrees to cooperate with Viator in order to obtain export licenses or exemptions therefrom by, among other things, providing required documentation. VAR warrants that it will comply with the Export Administration Regulations and other United States laws and regulations governing exports in effect from time to time. Article 15 - Trademarks and Logo Usage 15.1 Limited Trademark License. Viator grants to VAR a non-exclusive, limited license to use, during the term of this Agreement, Viator's name, logo and other trademarks used by Viator in the Territory from time to time with respect to the Products (the "Trademarks") for proper purposes in connection with the promotion and sale of the Products. 15.2 VAR's Use. VAR's use of the Trademarks shall be in accordance with applicable trademark law and Viator's policies regarding advertising and trademark usage as established and amended from time to time. VAR shall include all applicable Viator Trademarks in any literature, promotion or advertising, which it produces or distributes concerning the Products. VAR will not use any such Trademarks other than with respect to the direct promotion of the Products. VAR may add identification marks (e.g. serial or part numbers) for its own internal inventory records. 15.3 Viator Designations. VAR will not remove, deface or alter any Viator trademarks, model numbers or other designations affixed to the Products by Viator. VAR will not alter any other trademarks, trade names, model designations or nameplates to the Products. 15.4 Ownership of Trademarks. VAR agrees that the Trademarks are and will remain the sole property of Viator and agrees not to do anything inconsistent with that ownership or to contest ownership of such Trademarks. 10 VAR agrees to always identify the Trademarks as being the property of Viator. VAR also agrees that all use of the Trademarks by VAR will inure to the benefit of, and be on behalf of, Viator. 15.5 Trademark Quality Standards. VAR agrees that any system or service sold by VAR which contains the Products and displays the Trademarks must conform to Viator's quality standards for the use of its Trademarks, and VAR agrees to cooperate with Viator in monitoring the nature and quality of such systems and services for purposes of VAR's use of such Trademarks. Article 16 - Fees: Payment and Collection 16.1 License/Royalty Fees. In consideration for the license granted above, VAR shall pay Viator the fees specified in Attachment A. 16.2 License/Royalty Fees Report: Payment of Fees. VAR shall deliver to Viator, within thirty calendar (30) days after the end of each quarter, a report in the form of Attachment C, hereto, providing certain information, as requested by Viator, regarding Enhanced Product sales to include any and all (other) information necessary for the exact determination of amounts owed to Viator by VAR pursuant to Article 16.1 above, and identification of any Product delivered in any third party proprietary format. Together with such report, VAR shall remit all amounts due. All information supplied to Viator under this Agreement will be held in strict confidence by Viator. 16.3 Late Payment Fees. Any unpaid amounts due Viator by VAR, when due under Article 16.2 herein, shall be subject to a late payment fee calculated from the date due at the rate of one and one-half percent (1.5%) per month (18% per annum) or the highest rate allowable by applicable, law, whichever rate is less. Said late payment fee shall accrue daily and be compounded annually, until paid in full. 16.4 Impact on Fees Due Viator. Failure of VAR to address issues related to Section 6.2 through 6.6 shall have no bearing on any fees due Viator under the terms of this agreement. Article 17 - Term, Termination, Expiration and effect Thereof 17.1 Term. This Agreement shall become effective on the date executed by both parties ("Effective Date") and shall remain in full force and effect until terminated as set forth in this Agreement. The term of this Agreement is more particularly set forth in Attachment D. 17.2 Termination Without Cause. Either party shall have the right to terminate this Agreement with 90 days written notice to the other party. 17.3 Termination For Cause. This Agreement may be terminated forthwith by the non-offending party in the event that: (a) except as provided in Article 17.30(b) below, Viator or VAR commits a material breach of any material obligation hereunder which is not remedied to the reasonable satisfaction of the other party within thirty (30) days after receipt of written notice thereof from the non-breaching party specifying such breach; or (b) either party engages in a course of conduct that has injured or is likely in the opinion of the other party to injure the reputation of the other party, the Product or the Enhanced Product as the case may be and the offending party does not discontinue said conduct within ten (10) days after receipt of written notice thereof; or (c) VAR assigns this Agreement or any of its rights or obligations hereunder, including, but not limited to, a transfer of a majority of the stock or assets of VAR without the prior written consent of Viator; or (d) either party ceases to function as a legitimate going concern or to conduct its operations in the normal course of business; or 11 (e) receivership, bankruptcy or insolvency proceedings are commenced by or against either of the parties hereto, or an assignment for the benefit of creditors occurs, or upon the voluntary winding up or liquidation of its business by either of the parties hereto, whether or not with the aid and assistance of any court. 17.4 Obligations of VAR upon Termination or Expiration. Upon termination or expiration of this Agreement under this Article 17, VAR shall: (a) return to Viator all copies of the Product in its possession or destroy all such copies, at Viator's discretion; and (b) pay to Viator all fees due and owing under this Agreement; and (c) furnish to Viator the names and addresses of all Enduser(s) and Distributor(s); and (d) immediately discontinue all use and sublicensing of the Product and immediately discontinue the] producing, marketing and selling of the Enhanced product(s) containing the Product; and (e) immediately refrain from any use of the (trade)names and (trade)marks of Viator; (f) provide an affidavit signed by an officer, or other authorized individual, attesting to the performance of items 17.4(a)-(e) and acknowledging the continuing obligations of confidentially under Article 11. 17.5 Upon early termination of this agreement, all amounts owed by VAR to Viator become immediately due and payable and VAR shall arrange immediate payment thereof on the day of termination. If termination is due to a breach of VAR or the termination is for any reason attributable to VAR, all agreed annual license fees for the full term of the contract becomes immediately due and payable and VAR shall arrange immediate payment thereof on the day of termination. 17.6 Enduser's Rights upon Termination. Unless (early) termination or expiration of the Agreement is caused by VAR (for instance due to breach of contract by VAR), Viator will, in those situations where Endusers have entered into a valid maintenance agreement with respect to receiving updates of the product, continue to provide the available updates up to a maximum period of two (2) years after the date of termination or expiration, for the sole purpose of providing these updates to these Endusers. VAR agrees and guarantees that VAR will not use the updates outside the scope of this provision. All terms and conditions with respect to the rights into the updates, the limited warranties and liabilities and all other applicable terms and conditions will remain in force between Viator and VAR with respect to providing these updates. Article 18 - Miscellaneous Provisions 18.1 Applicable Law. This agreement will be governed by and construed in accordance with the laws of the Commonwealth of Virginia and the United States of America as applicable to agreements made and wholly performed within the Commonwealth of Virginia regardless of the place, time, or sequence of its execution. The parties agree that the laws of the Commonwealth of Virginia will apply despite any choice of law statute, rule, or precedent that would apply the law of any other jurisdiction. Both parties consent to the jurisdiction of such courts and agree that process may be served in the manner provided herein for giving notice or otherwise as allowed by state or federal law. In the event a claim or cause of action arises under the exclusive jurisdiction of the Federal Court that exercises jurisdiction over claims arising in Virginia, that court shall have jurisdiction. Both parties agree that venue shall be proper in said Federal Court. 18.2 Equitable Relief. Each party agrees that any breach of this Agreement by the other would cause irreparable damage. In the event of such breach, in addition to any and all remedies at law, the damaged party shall have the right to an injunction, specific performance or other equitable relief to prevent the continuous violation of terms contained herein. 18.3 Sales and Use Taxes. VAR shall be responsible for any sale sand use taxes arising from the transactions contemplated by this Agreement. 12 18.4 Employees. Neither VAR nor Viator shall hire nor seek to engage the services of, nor offer to pay commission, compensation or any other form of incentives to, the employees of the other for any purpose whatsoever, without the express written consent of such other party. This provision shall expire six (6) months after the termination of this Agreement. 18.5 Ownership; Rights Reserved. title and all ownership, proprietary and intellectual property rights to the Product, including, but not limited to, all trade secrets, copyrights, and patents, and all derivatives thereof, shall remain with Viator. Any right or license not expressly granted to VAR by Viator under this Agreement is expressly reserved. 18.6 Future Cooperation. Viator and VAR agree, from time to time at the request of the other party to discuss in good faith with the other party proposed modifications and enhancements of the Product and the Enhanced Product, and proposals for other services, if any, which may be marketed by VAR on behalf of Viator. The parties further agree to make available such management and support personnel as may be reasonably necessary for the good faith evaluation and discussion of such proposals. 18.7 Relationship of the Parties. This Agreement does not constitute a partnership, joint venture or employment contract and nothing herein contained is intended to constitute, nor shall it be deemed to constitute, either party as an agent, employee, partner, or joint venturer of the other. Neither party's employees shall, under any circumstances, be deemed to be the employee of the other party for any purpose. Except as expressly provided in this Agreement, neither party shall have any power or authority to act in the name or on behalf of the other party except with the express prior written consent of such other party. 18.8 Consents. Any consent required under this Agreement shall not be unreasonably withheld or delayed. 18.9 Waivers. No failure or delay by either party in enforcing any right or remedy under this Agreement shall be construed as a waiver of any future or other exercise of such right or remedy, or of any other right or remedy by such party. 18.10 Entire Agreement. This Agreement, including all Attachments herein, constitutes the sole and entire agreement between the parties concerning the matter set forth herein and supersedes and cancels in their entirety any previous agreements, understandings, negotiations, arrangements both oral or in writing between the parties hereto. Except as otherwise expressly provided herein, any amendment to this Agreement must be in writing and signed by an authorized representative of each party. 18.11 Successors and Assigns. The Agreement shall be binding upon the parties hereto and their respective successors and assigns, and shall not be construed to confer any right, interest or benefit in favor of any other person. Notwithstanding the foregoing, VAR may not assign or transfer its rights and interests under this Agreement, in whole or in part, without Viator's prior written consent. 18.12 Captions and Headings. Captions and headings contained in this Agreement are intended only for convenient reference, and in no way define or limit the scope or intent of this Agreement or any provisions hereof. 18.13 Counterparts. This Agreement may be executed in any number of duplicate counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 18.14 Severability. If any provision of this Agreement is adjudged to be invalid, void or unenforceable, the parties agree the validity of all remaining provision of this Agreement shall not be affected thereby and that this Agreement shall otherwise remain valid and enforceable. 18.15 Further Action. Each party hereto agrees to perform all further acts and to execute, acknowledge, and deliver any documents, which may be reasonable, necessary, appropriate, or desirable to carry out the provisions of this Agreement. Each party undertakes to keep the other party promptly informed of anything that may be reasonably deemed to be of material relevance to the other party in the framework of the Agreement. 13 18.16 Notices. All notices authorized or required under this Agreement shall be in writing and shall be sent by registered or certified mail, fax, postage prepaid, or return receipt requested to the parties at their respective addresses set forth below or to such other address as either party may from time to time specify by notice to the other given as provided in this Article. All notices shall be deemed given on the third business day following deposit by certified or registered mail. Viator Networks, Inc. 2390 East Camelback Road, Suite 250 Phoenix, Arizona 85016 Videolocity, Inc. Address: City, State, ZIP: Authorized Representative: IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed instrument by their duly authorized officers as of the date below. Viator Networks, Inc. VAR: /s/Rodney J. Puleo ----------------------------- Name: Rodney J. Puleo Name: Martin Senn Title: COO Title: COO Date: 8/16/01 Date: 8/15/01 14 ATTACHMENT A GENERAL PRICING SCHEDULE For the purposes of this contract, the following outlines pricing for hardware and server software, ongoing technical and software support, portal, training fees, and other miscellaneous items. Viator retains all rights to modify all pricing as contained in this AGreement. Pricing for items not contained or described herein shall be negotiated by Viator and VAR. 1. Preferred VAR Status -------------------- VAR shall have preferred VAR status and shall be among the first to receive new product offerings, including but not limited to beta hardware and software, during the life of this agreement. 2. General Development Fees ------------------------ All customized software development fees are based upon the level of effort required to complete a development project. These fees may vary or be waived at Viator's sole discretion. (a) Hourly customized software development $125 (discounted from $200) (b) Hourly Server feature development $150 (discounted from $250) (c) Custom hardware certification $10,000. 3. VAR Discount Sales Quantities and Associated License Fees Paid by VAR --------------------------------------------------------------------- LICENSE FEES: Egress(TM) Server 3.5X 1-50 $3,250 every 11th license (e.g., 22, 32, etc.) $2,500 AVERAGE PRICE FOR 50 $3,190 51> $3,000 every 10th license, (e.g., 61, 71, etc.) $1,750 AVERAGE PRICE FOR 100 $2,865 Egress(TM) Port Pricing: Egress(TM) 1 Port $65.00 Egress(TM) 2 Port $75.00 Confidential Page i
4. Training Fees Paid by VAR ------------------------- End User Staff VAR Technical Staff Service Initial Follow-up Initial Follow-up - ------------------------------------------------------------------------------------------------------------------ Instructor Fee $2,500 per day $2,000 per session $2,000 per day $1,500 per session Materials $150/student $150/student Included Included Class size limit 10 per session 10 per session 10 per session 10 per session Expenses Actual Actual Actual Actual Training Space Provided by property Provided by property On-site On-site Lead time 30 days 21 days 30 days 30 days - ------------------------------------------------------------------------------------------------------------------
Special training fees can be negotiated outside of these parameters. 5. Toll-free Technical Support Fees -------------------------------- Viator-provided technical support is optional in cases where VAR provides such services to the end-user. In cases where VAR does not provide direct technical support to the end-user, the following table sets the fees VAR is required to pay Viator to provide front-line technical support to the end-user. At no time shall the end-user be without access to technical support. Installed Property Base Per-Property Fee - ----------------------- ---------------- 1-20 $150/month 20-99 $110/month 100 or more $95/month 6. Collateral and other Printed Materials -------------------------------------- Viator agrees to license marketing and technical support materials, including but not limited to promotional tent cards, instruction sheets and placards, promotional mailing post cards, product information sheets to VAR for no charge. If VAR decides to customize these materials, orders must be placed through Viator and must conform to guidelines in Article 15 above. VAR agrees to reimburse Viator for actual production and printing costs. Page ii Confidential ATTACHMENT B VALUE ADDED RESELLER AGREEMENT Authorization and Certification Requirements Authorization VAR agrees to sell an annualized sales volume of TO BE DETERMINED WITHIN 60 DAYS of SIGNING THIS VAR AGREEMENT (the "Minimum Sales Requirement") of Products purchased under this Agreement. The Minimum Sales Requirement is based on the total number of product paid for by VAR or Viator's authorized VAR of Products for the Territory, to Viator Networks, Inc. for Products purchased under this Agreement in the relevant year, less discounts, returns and other adjustments. If VAR fails to maintain the Minimum Sales Requirement, VAR may be terminated for breach of this Agreement. The Minimum Sales Requirement shall be prorated for the first year of this Agreement based on the number of months (or portions thereof) remaining in such year, if the Term commences after the beginning of any calendar year. Viator Networks also prefers that VAR have access to e-mail at its corporate and branch levels. However, Viator Networks will not terminate a VAR for breach of this Agreement if it fails to have or maintain such e-mail capabilities. Certification VAR must comply with Viator Network's training programs, post sales service and support programs and procedures, including warranty support, with respect to each Product line, as such programs and procedures exist from time to time. Page iii Confidential ATTACHMENT C VALUE ADDED RESELLER AGREEMENT
POS REPORT FORM --------------- Date: VAR:_________________________ Contact:_____________________ Phone Number:________________ Fax Number:__________________ Invoice Customer Ship to City Zip Viator Part Description Qty. Unit Extended Name Address # Cost Cost - ------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------
Forecast Form ------------- Customer Percent 30 Days 60 Days 90 Days Product Comments /End User Probability - ------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
Page iv Confidential ATTACHMENT D VALUE ADDED RESELLER AGREEMENT This Value Added Reseller Agreement is made, as of the Effective Date set forth below, between: (1) Viator Networks, Inc., a Delaware corporation ("Viator"), with principal offices as 2390 East Camelback Road, Suite 250, Phoenix, Arizona 85016 and (2) VIDEOLOCITY, Inc., a Nevada Corporation ("VAR") VAR Address: 1762A Prospector Ave, Park City, UT 84060 Authorized Representative: Martin Senn Telephone: 435 615 8838 Facsimile: 435 615 9979 Email: msenn@videolocity.com Agreement No.___________________________________ Effective Date:_________________________________ Term: In perpetuity or until terminated under the terms stated herein Territory: ____________________ The Value Added Reseller Agreement consists of the VAR Terms and Conditions attached hereto and the Attachments set forth herein (together this "Agreement"): Attachment A General Pricing Schedule Attachment B Certification and Authorization Requirements Attachment C POS Report Form/Forecast Form Value Added Reseller Viator Networks, Inc. /s/ Martin Senn /s/Rodney J. Puleo ------------------------------ ----------------------------- By: Martin Senn By: Rodney J. Puleo Name: Title: COO COO Date: 8/15/01 Date: 8/16/01 EX-10.18 13 ex10no18.txt PROMISSORY NOTE EXHIBIT 10.18 PROMISSORY NOTE $10,000.00 Dated June 25, 2002 Principal Amount State of Utah FOR VALUE RECEIVED, the undersigned hereby promise to pay to the order of ____________ the sum of Ten Thousand Dollars ($10,000.00) together with interest thereon at the rate of 8% per annum, on the unpaid balance. Said sum shall be due and payable 90 days from date in one installment of principal together with interest earned thereon. All payments shall be first applied to interest and the balance to principal. This note may be prepaid, at any time, without penalty. The within note, to be secured by a pro-rata security interest of .6% in that certain UCC-1 filed in the State of Nevada, April 30, 2002, and hereby incorporated as part of a total of $1,500,000 allowable thereunder, as agreed to between the parties in that certain Security Agreement dated April 1, 2002 wherein Videolocity Technologies, Inc., a wholly owned subsidiary of Videolocity International, Inc., assigned all of its rights in and to certain assets as collateral, described in Exhibit "A" to that aforesaid Security Agreement, and attached hereto and by this reference incorporated herein. A UCC-1 Financing statement will be filed in the State of Nevada in the name of the within holder within five (5) days of the date of this note. As additional consideration for the loan set forth in this note, five hundred shares of Healthcare Concierge, Inc. and one thousand shares of Videolocity International, Inc. will be issued forthwith, fully paid, and non-assessable however, all of said shares will bear a restrictive legend, said shares have not been registered with any agency, state or federal and cannot be sold without first being registered, as may be required under the United States Securities Act of 1934 and as amended. In the event this note shall be in default, and placed with an attorney for collection, then the undersigned agree to pay all reasonable attorney fees and costs of collection. Payments not made within fifteen (15) days of due date shall be subject to a late charge of 12% of said payment. All payments hereunder shall be made to such address as may from time to time be designated by the holder hereof. The undersigned and all other parties to this note, whether as endorsers, guarantors or sureties, agree to remain fully bound hereunder until this note shall be fully paid and waive demand, presentment and protest and all notices thereto and further agree to remain bound, notwithstanding any extension, renewal, modification, waiver, or other indulgence by any holder or upon the discharge or release of any obligor hereunder or to this note, or upon the exchange, substitution, or release of any collateral granted as security for this note. No modification or indulgence by any holder hereof shall be binding unless in writing; and any indulgence on any one occasion shall not be an indulgency for any other or future occasion. Any modification or change of terms, hereunder granted by any holder here undersigned, and each of the undersigned does hereby irrevocably grant to each of the others a power of attorney to enter into any such modification on their behalf. The rights of any holder hereof shall be cumulative and not necessarily successive. This note shall take effect as a sealed instrument and shall be construed, governed and forced in accordance with the laws of the State of Utah. The undersigned hereby executes this note as an authorized principal. Signed in the presence of: Videolocity International, Inc. By: /s/ Larry R. McNeill - ----------------------------------- --------------------------- Witness Larry R. McNeill, CFO EX-23.1 14 ex23no1.txt CONSENT - ANDERSEN ANDERSEN & STRONG 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/ October 16, 2002 /s/ ANDERSEN ANDERSEN & STRONG, L.C. ------------------------------------ ANDERSEN ANDERSEN & STRONG, L.C. -----END PRIVACY-ENHANCED MESSAGE-----